Qualifying for a loan has many people confused, upset and nervous. This happens because most borrowers are not familiar with the various ways to qualify for a loan. Unfortunately many in this industry aren't familiar as well which can cause much of the confusion.
Let's start with the newest phenomenon in the industry: automated underwriting (AUS). If you have a high credit score and a very low loan to value, 60% or less, you generally will pass if your loan is within the conforming limits, $417,000 for a single family residence. You will receive an approved eligible rating and few, if any conditions. If you have a jumbo loan up to generally $1 million you can get an accept ineligible (not eligible for a conforming loan). The conditions on these approvals can be as little as a verbal verification of employment (we call your employer and verify you are still an employee), a bank statement showing some small amount of reserves or a verification of the deposit you have in your bank for the down payment if it is a purchase.
The automated systems are the most popular for the loan companies and the borrowers as all that is added to the package is the appraisal (the credit report is in the automated system) and you are ready to close.
Next is full documentation, which is tax information, tax returns, W-2’s, 1099's, etc. Hopefully this type of qualifying is waning in popularity as it is time consuming, cumbersome and frequently adds more conditions that it solves. It is a picture of the past, not the future, and lenders are beginning to believe that credit and reserves show more about the borrower than the past earnings history.
We have stated income and verified assets or stated income and stated assets. Both of these methods rely heavily on the credit report, credit score primarily, and the appraisal for a lower loan to value. The borrower is to state the gross income he or she attains which can be an average or the previous year. Obviously the lender knows you are going to state the figures that make you look the best and that is why credit and loan to value is most important. Lenders have a good idea of what is a reasonable income for the type of work that you are doing. Do not overstate your income!
Our last way of qualifying is a "no doc" program, which means you supply your name and address, a credit report and an appraisal. You do not mention anything about employment, retirement, or the amount of money you have as reserves. The entire loan is based on credit and loan to value and nothing else.
The amazing reality of these ways of qualifying is the pricing of the loans. Some lending institutions will give the very best loan terms and rates to the stated, stated program, while others do better with the automated underwriting systems. There isn't a single formula that works with every lender.
Some quick points about mortgages that should be understood and unfortunately are disguised by advertisers for one reason - to mislead. A one percent mortgage isn't an interest rate but a pay rate. The interest rate is much higher and has more than a potential toward negative amortization (adding to your balance instead of reducing it) it will create negative amortization from the start. In trying to determine whether you are saving money you must add the negative portion added to your balance to the actual cash payment you are going to pay each month to determine whether you are saving money or not. Or not should generally win!
Prepayment penalties are usually on sub prime loans and generally cannot be waived on either sale or refinance. They are tax deductible if you have to pay one as they are prepaid interest. (Subject to income tax rules - check with your tax adviser). These penalties can be bought out up front, but are usually too expensive to the borrower. I usually recommend the shortest fixed loan period, 2,3 or five years that will allow you to fix your problems and get on to a better loan. Prepayment penalties, where they are legal. are 2 or 3 years long and then are over.
When asking me or anyone else a question about finance if you wish a general answer, ask a general question; if you wish a specific answer, ask a specific question with all the details. Ask any question whether you consider it dumb or not before making any move in the field of finance because the answer could save you thousands of dollars. Be sure you know what you are doing before you act.