When it comes to credit scores most reports have three bureaus reporting to them and we use the middle of the three scores. Is that your way of gauging credit or would you look for a different method? We generally use the middle score of the borrower who makes the most money and ignore the spouses, or significant other's score, unless that score is too low and would disqualify the loan (generally a score of 620 for a conforming loan and 660 on a jumbo loan). Before credit scoring, about 10 years ago, we looked at the credit and made a determination from that. Perhaps that is still a better idea?
We are now left with earnings and reserves. Earnings can be from a W-2, 1099, K-1 or from the remainder of the monies in a sole proprietorship or from a sub chapter S corporation. The current rules suggest a two year employment history or business history to qualify. What about recent graduates who get employment contracts, athletic contracts or entertainment contracts? Do they need two years? And how do you look at the earnings from a self employed person, or an employed person with a side business? Do tax returns show the potential of the tax payer or just the history of said tax payer?
Last but certainly not least are reserves: the glue that holds the various pieces of the puzzle together. We like to see six months principal, interest, taxes and insurance but is that enough? Do we count retirement money? How about transfer payments: social security, pensions, alimony, child support, notes receivable, disability income, annuities, etc? What about large sums of money such as stock portfolios, mutual funds, commodity accounts and large money market holdings? Do you count any or all of the above? How much weight do you put on the various holdings, or is a mutual fund equal to a money market account? Which of the transfer payments belong under earnings and which under reserves?
I believe it is important for you to see how difficult it is to make rules for the mortgage industry because not only are there four major tools, but a myriad of other factors to consider. There is a need, of course, to standardize this industry because of the ever expanding size. The mortgage industry which funds loans into the trillion dollar range, must be able to identify and classify each and every loan. We have unfortunately seen what happens when rules aren’t standardized, aren’t followed and don’t protect the borrower or the lender. To avoid a replay of the latest credit crisis everyone must have an understanding of what they are doing when applying for and procuring a mortgage loan. You have had a basic look at some of the decisions that need to be made on every loan, but realize this is just a cursory look of the process. It is far more complex with a lot more variables then were used in this discussion. Information and knowledge are your best defense in any transaction, especially a financial one, that you might consider. You must decide when you are comfortable with the
Information and knowledge you have to move forward. I hope this column brought that point home to you.