Friday, June 10, 2016 / by Kristin & Mark Stampini
What Lenders Look for to Qualify for a Mortgage?
I have been in the real estate industry for over 10 years and have worked with hundreds of buyers, and have closed between 100 – 200 transactions per year. At Florida Platinum Group, we do buyer consultations every time we meet with a new buyer. We feel this is a very important step in the buying process and we can service our clients at a much higher level by doing it. During the buyer consultation, more often than not, the buyer hasn’t been pre-approved for a mortgage. We are here to help assist the buyer and offer options to help them obtain a mortgage pre-approval.
What’s the Difference between Using a Bank or a Mortgage Broker?
1.Bank (Direct lender)
- Offers a “Cookie Cutter type” of loan
- You need to fit the “A” profile (job, credit, income)
- Limited choice of products
- Bank employees review your application
If you as the borrower have excellent credit, long-term employment history and access to all financial documents a bank (a direct lender may be right for you). They usually offer a lower interest rate; the problem is that banks issue pre-approval letters all the time. Then once the loan goes to underwriting they find that you actually don’t fit the “Cookie Cutter” type they are looking for and your loan gets pitched in the reject pile automatically. It’s not that you necessarily don’t have great credit, it’s that you don’t fit the "Cookie Cutter" loan they offer. The problem with this is that you don’t find this out until two weeks before you are supposed to close on your new home and you now aren’t able to do close. I can’t tell you how many buyers this has happened to so that they can save very little on their monthly payment.
2. Mortgage Broker
- Represents multiple lenders and all of their loan products
- Matches the loan product that best meets your needs at the best possible price
- Brokers usually are much more knowledgeable than a bank employee
- Brokers are required to have much higher qualifications than a bank employee
We find the mortgage broker closes a much higher percent of the loans than the bank's (direct lenders). The mortgage lenders offer much more options and the qualifications aren’t usually as hard as a bank or (direct lender). You may save a little by going through a bank (direct lender), but the stress it may cause if you get denied a week or two before closing just may not be worth the potential small savings.
Bankruptcy / Foreclosure
Even if you've filed for bankruptcy or suffered a foreclosure in the past few years doesn't mean you're excluded from qualifying for a loan. As long as you meet other requirements that are satisfied for the loan, such as re-establishment of good credit, solid payment history, etc., you can still qualify.
What Mortgage Lenders and Banks (Direct Lenders) Look at When Qualifying a Buyer for a Loan?
- Credit History (Track record you’ve established while managing credit and making payments over time - credit score)
- Debt-to-Income Ratio – Monthly gross income (before taxes) (43% DTI ratio is usually the highest ratio a borrower can have)
- Collateral (Will be evaluated when applying for secured loans such as a home equity loan)
- Capital (Savings, investments, and other assets)
- Conditions (Environmental and economic conditions may be considered)
A Variety of Things Can Affect Your Credit Score
- Any missed or late payments
- Your amount of credit
- How old your accounts are
- The various accounts that you have
While lenders look at your income, debt and savings when making mortgage decisions. Your credit score is the #1 factor in determining whether you get approved and what your interest rate would be.
What Determines Your Credit Score?
- 35% Payment History – Timely and no missed payments
- 30% Amounts Owed – Balances should be no more than 30% of credit limit
- 15% Length of Credit History – How long have you had credit?
- 10% New Credit – How many accounts have you opened recently?
- 10% Types of Credit Used – Combination of credit cards, installment loans etc.
The standard FICO credit-scoring scale goes from 300 to 850, with higher numbers reflecting better credit.
- Excellent (800-850) – Your credit score will have no impact on your interest rate. You will likely be offered the lowest rate available.
- Very good (750-799) – Your credit score may have a minimal impact on your interest rate. You could be offered interest rates 0.25% higher than the lowest available.
- Good (700-749) – Your credit score may have a small impact on your interest rate. This means rates up to .5% higher than the lowest available are possible.
- Fair (650-699) – Your credit score will affect your interest rate. Be prepared for rates up to 1.5% higher than the lowest available.
- Poor (600-649) – Your credit score is going to seriously affect your interest rates. You may be hit with rates 2-4% higher than the lowest available.
- Very Bad (300-599) – This is trouble. If you are offered a mortgage, you’ll be paying some very high rates.
Your credit is updated on a monthly basis and you should be checking it on a regular basis.
- Look for any possible errors on your report and challenge them (according to Federal Trade Commission 1 in 5 Americans have an error on their credit report)
- Make sure all bills are paid on time
- Pay down your credit balances – low balances raise your credit score
- Pay down existing debt (debt should be no more than 30% of income) – this is one of the fastest ways to improve your credit score
- Only open new credit accounts when you need it – unnecessary credit applications can hurt your credit score.
As a real estate professional, at Florida Platinum Group we can help you with the entire buying process and have recommended lenders and banks that we have had great success with, that we can provide to you.
Dan Sidenberg, VP of Mortgage Lending
We feel consulting our buyers and advising them along the way is of utmost importance to their success with homeownership.
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