Guide to Qualifying for a Home Loan

Introduction to Pre-Qualifying and Pre-Approval

What is a Pre-Qualification?
A pre-qualification is an assessment by a Creative Home Mortgage Loan Officer of your income, assets, debts, and credit history used to determine your buying power. Pre-qualifications do not guarantee that funds are available for purchase.

What is a Pre-Approval?
A pre-approval is an actual written loan commitment by a lender after formally applying for a loan. A pre-approval may serve as a huge advantage to your purchasing power. At the time of offering your purchase contract you may disclose to the sellers that you are approved for a loan. Other offers may be contingent on the buyer having to get approved for a loan. This is a great way to get a leg up on other people who are interested.

What is included in my payment?
Your mortgage payment could consist of up to 6 items. Here is a list of all 6 items:

• Principal - these dollars are used to pay down your mortgage balance
• Interest - these dollars go to the lender you borrowed money from and are income tax deductible
• Taxes - these dollars go to the county for property taxes and are income tax deductible
• Insurance - these dollars go to you insurance company to insure your property from any hazard; sometimes hazard insurance is included in your H.O.A. dues.
• Mortgage Insurance - these dollars go to an insurance company to protect the lender from loosing money if you default on the loan. Only required on some loans.
• Home Owners Association - these dollars go to the administration of your local covenant to pay for community-shared responsibilities; the H.O.A. dues will sometimes cover your hazard insurance.

What criteria are underwriters using to approve loans? The underwriter is the person who assesses financial risk. Based on a particular set of criteria and my help they will approve your loan. There are numerous mortgage loan products available and each product has a set of guidelines on which it will be approved. Even though there are numerous mortgage products, their basic criteria are very similar. The basic criteria that you will be approved upon include:

• Your Credit Score and Credit History
• Your Employment History and Method of Income
• Your monthly Debts compared to your monthly Income
• Your Assets and your liquid ability to re-pay
• How much equity or down payment you will have in the home
• The type of property you are trying to buy
• For what purpose do you want to buy the property?

Qualifying with Your Credit Scores and Payment History

What does an underwriter assess?
Underwriters will evaluate a couple parts of your credit score and payment history. They will evaluate your FICO score and how many times you have been 30 days late or more paying a creditor back. Of course, underwriters will look for Bankruptcies and Judgments as well. If your blood pressure just went up, don’t worry. We have an excellent team of trained loan officers that will be very helpful and up front with you in addressing these issues prior to applying for your loan.

What is a FICO score?
The FICO score is a numeric evaluation system of how well you use credit. The FICO score takes a snap shot of your payment history at that particular time of inquiry. The FICO scoring system is time sensitive. The further away collections or late payments are from inquiry, the less they affect your score. Typically credit scores range from the low 400’s to the high 800’s. Good users of credit could expect to have scores of 620 or higher.

How is my FICO Score going to affect my loan approval?
Depending on the mortgage product that you are qualifying for, your FICO score may play a very little part or it could play a key part in the approval process. Mortgage products that don’t verify income will use the FICO score as a key indicator of a person’s ability to repay. However, if you have verifiable income and you have a good 12-month payment history, it is quite likely that the FICO scores will have little to do with your ability to qualify for a loan. Rather than being concerned about your credit scores, really focus on having a good solid 12-month payment history with no 30-day credit lates.

What is in my FICO score?
FICO scoring is composed of 5 categories:

1. Payment History is 35% of your score
   • Credit account payment information
   • How often do you pay as agreed vs. past due
   • Severity of past due payments
   • Presence of bankruptcy, judgments, suits or liens
2. Amount of Credit Owed is 30% of your score
   • The percentage of credit balances to the total credit limits
   • Dollar amount owing on accounts
   • Number of accounts with balances
3. Length of History is 15% of your score
   • Time since accounts have been opened
   • Time since last account activity
4. New Credit is 10% of your score
   • Time since and number of recently opened accounts
   • Time since and number of credit inquiries
   • Re-establishment of positive history
5. Types of Credit Used is 10% of your score
   • Number of various types of accounts
   • Credit cards
   • Retail accounts
   • Installment loans
   • Mortgage

Qualifying with Income and Employment History

Basically, if you have been employed consecutively for two years with the same method of income (i.e. salary, commissions, self-employment), you should have no problems qualifying for a mortgage loan. If you fall somewhat short of this, there are several mortgage products available that will allow for a variance of the above.

What does an Underwriter assess?
When it comes to your income and employment history underwriters have some basic guidelines to follow. Every underwriter will evaluate the following:

• Likelihood of continued employment / source of income
• 2 year consecutive employment history
• Gaps in employment greater than 1 month in the last 2 years

Gaps in employment greater than 1 month should be justified by situations that make sense. For example:

• Military or education leave
• Took a short leave before advancing for a better employment opportunity
• Took a short leave for relocation
• Took a short leave for family or religious events
• After lay-off, obtained a new position in a similar field

What income may I use to qualify?
Verifiable income may be used from these sources:

• Salary
• Commission
• Self-Employment
• Child Support
• Alimony
• Retirement
• Investment
• Rental Property
• Trust

You may be asked to provide income tax returns, W-2's, and pay stubs for loan approval.

What if I want to change jobs?
Advancing to another company for personal or financial benefit will not cause you any problems. Problems occur when there are lengthy gaps in employment. It is best to avoid the gaps in employment by having a new employer lined up before leaving your old employer. A letter of explanation must remedy any gaps greater than one month in employment.

Qualifying with Debt vs. Income Ratios

What is a debt to income ratio?
Debt vs. Income (DTI) is a ratio calculated by dividing your total monthly credit debt by your total monthly gross (pre-taxed) income. (Monthly Credit Debts) / (Monthly Gross Income) = DTI %

What does an underwriter assess?
The allowable monthly debt to income ratio is completely dependent on the mortgage product you choose. Conventional underwriting guidelines say that the maximum DTI is 38%. It has been our experience that if you have good credit and assets, it is very possible to get a loan approval with a DTI of 50% or even higher.

How do my debts affect my purchasing power?
Your monthly credit debts limit the amount of mortgage payments you qualify for. If you are able to lower your monthly credit debts, you will leave more room in your DTI for other debts like mortgage payments. Qualifying for a larger mortgage payment ultimately means that you increase home purchasing options for yourself.

Qualifying with Your Assets for Down-Payment
Underwriters are assessing three different items when it comes to assets: your ability to re-pay the loan in hard times, where the funds came from, and the lenders risk of the Loan size compared To the Value of the property.

How much money do I need to qualify for a loan?

• Enough assets to pay for the down payment, closing costs, and pre-paids
• Enough assets to pay your mortgage payment twice
• Verifiable source of assets

What defines down payment, closing costs, pre-paids, and LTV?

• Down Payment - Part of purchase price, which the buyer pays in cash and does not finance with a mortgage.
• Closing Costs - The one time cost of originating, processing, appraising, underwriting, and closing, and insuring title your mortgage loan and property.
• Pre-Paids - Any recurring fee paid up front such as mortgage interest, hazard insurance, and county property taxes.
• LTV Ratio - Loan To Value ratio, is the ratio of dividing the loan amount by the value of the home. (loan amount) / (value) = LTV %; ($200,000) / ($250,000) = 80% LTV

What assets may I use for down payment?
You may use the money in these accounts for down payment:

• Checking and Savings
• Certificates of Deposit and Money Markets
• Stocks and Bonds
• 401K’s and Individual Retirement Accounts
• Gifts from Wedding, Parents or Close family member
• Grants or loans from Government

Is a down payment required?
No, there are many ways to avoid bringing a down-payment to the closing table. Here are some ways to bring little to no money to close:

1. Conventional Loans
   • 100% LTV mortgage with seller paying closing costs
   • 80% LTV 1st Mortgage, 20% LTV 2nd Mortgage with seller paying closing costs
2. Government Loans
   • 97% LTV FHA loan with 3% down-payment assistance, seller paying closing costs
   • 100% VA loan

How does Loan size compared To the Value of the property affect my payment?
Aside from having a larger payment due to a larger loan amount, there is a different factor to consider. The greater the down payment or existing equity in the property, the less risk you are to lend money to. In fact, the lenders risk of loosing money begins at lending 80% of the value of the home. Some loans require that you insure the risk for lending over 80% LTV. This insurance is called mortgage insurance and is charged monthly in your payment.

What is Private Mortgage Insurance and why do I need it?
You don't need P.M.I., rather the lender needs it and may enforce that you pay for it as long as your loan amount is greater than 80% of the value of the home. For a while you could not get a home loan unless you had 20% down payment. Well as you could imagine, it was very difficult for most people to save that kind of money. So the government came up with a ways to insure the lender of their risk of going over 80% loan to value, and hence we now have P.M.I. (private mortgage insurance) or M.I. (mortgage insurance). Not every loan over 80% loan to value requires mortgage insurance. There are high LTV loans out there that do not require mortgage insurance. Typically they are slightly higher in interest rate.

How do I avoid Mortgage Insurance?
There are a couple of ways to avoid of mortgage insurance. One way to avoid mortgage insurance is to use 2 mortgage loans. Borrow up to 80% LTV with a 1st mortgage and use a 2nd mortgage past 80% LTV. Another way to avoid mortgage insurance is to find a loan that pays it for you; typically the interest rates are a bit higher.

How do I Choose a Mortgage Product?
The most important question to ask yourself is; how long do you plan on owning the home? After you have that answered, our trained Loan Officers will be able to guide you to a couple of different products that really make sense for you!

What is a Fixed Rate Mortgage?
Fixed Rate Mortgages are loans that have the same interest rate for the duration of the payback period. The payback period is called the amortization period. They will have the exact same payment every month, until the loan has been paid back in its entirety.

What Fixed Rate Mortgages are Available?
Fixed Rate Mortgages only come in a couple of varieties. What you will find is the national best seller:

30 year Mortgages, 25 year Mortgages, 20 year Mortgages, 15 year Mortgages, and 10 year Fixed Rate Mortgages.

The difference between them is the amount of time you pay the loan back in.

What is an Adjustable Rate Mortgage?
An Adjustable Rate Mortgage is a mortgage loan that the interest rate will adjust according to an index. An index is a measurable economic indicator and may be found posted in any business newspaper daily. Here is a list of common indices:

C.O.F.I. (11th District Cost of Funds Index), C.M.T. (Current Monthly Treasury), L.I.B.O.R. (London Interbank Offered Rate) and the U.S. Federal Reserve Prime Rate.

How it works is you will have an agreed fixed percentage of margin that you will pay over the adjustable index.

(Margin) + (Index) = Interest Rate
(2.500%) + (2.000%) = 4.500% Interest Rate

Every mortgage product has a different term as to when the loan will adjust and to how much a loan is allowed to adjust.

What Adjustable Rate Mortgages are available?
Quite frankly, there are more ARM's available than you like to know about. The most popular ARM products are the ones that are fixed for a period of time and then adjust after that period of time. For example:

• 7 years Fixed / Adjust every 1 year after the initial fixed period
• 5 years Fixed / Adjust every 1 year after the initial fixed period
• 3 years Fixed / Adjust every 1 year after the initial fixed period
• 1 year Fixed / Adjust every 1 year after the initial fixed period
• 3 months Fixed / Adjust every 3 months
• 1 month Fixed / Adjust every 1 month