Not only is that statement true but I keep changing my mind as well. That’s how difficult it is to understand the mortgage business. The four most important items needed to determine both the qualifications and the pricing of a mortgage loan are, in alphabetical order: credit, earnings, loan to value and liquid reserves. Without reading on, try and pick the order of importance. The most important and the least important of the four are set; it is the two in the middle that I keep changing.
The suspense is over. The most important is loan to value and the least important is earnings. Boy has things changed! I have always considered credit the second most important but I am wavering on liquid reserves as more and more borrowers have extremely large reserves which definitely impresses the lenders. Earnings... forget about it!
Allow me to make my case for you on my hierarchy. If you have a low loan to value, 65% being the upper limit, you are in "the cat bird seat". Every lender will have a place for you and a generally a better rate for this loan. It only stands to reason the more equity you have in your house the better you and the lender sleep. This alone is another reason to try and pay your loan down quickly.
For now I choose credit as the second most important factor in getting a loan. It is important in the prime loan market and also in the sub prime loan industry. Anything over 620 credit score is a prime loan, but 680 are where the benefits start. Over 700 you are golden and you can't generally get anything extra over 740. In the sub prime area you need a 500 credit score to get a conventional loan, a 580 to get 100% financing and yes, over 700 you are golden.
With a low loan to value and a high credit score a conforming loan, up to $417,000 can pass an automated underwriting system and be approved without any other documentation (obviously you need some form of an appraisal or valuation to prove the loan to value and a credit report to document the score). How easy is that!
Wrapping up I did state that huge liquid reserves can make lenders waive some underwriting guidelines and I think that will become more in vogue. Earnings on the other hand are yesterday’s news. We now allow minimal documentation, bank statements (where we analyze the deposits not the balances) and last but not least, stated income.
Did you get it right or at least in my order? Feel free to click here for more information.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.