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Mortgage Secret Part III What Lenders Look At
Thank you for tuning in to my Mortgage secrets blog. To review or get a quick recap on Part I - Types of Loans, please click here. To review or get a recap of Part II - Cost of getting Into a Home, please click here.
What in the world do Lender's look at when making their determination on if they will lend and how much they will lend? Here are the general guidelines, each lender is different, but this guide will get you on the starting path. The 4 main components are 1. Employment/Income, 2. Assets, 3. Liabilities, and 4. The Property.
Usually, a lender will look at your 2-year employment history. A salary employee is qualified on their gross income, while a self-employed person is qualified on their net income. Thus, depending on your life situation, one should most likely buy when salaried, before going to self-employment. Once the person has their documents to their lender, make sure to ask the lender to run the file through their computerized underwriter.
This is considered the borrower's cash to close. The most common sources are one's savings and borrowing from a 401k. Another potential addition that most buyer's don't consider is the seller. A seller is allowed to pay up to 3% of the sales price. Now, this doesn't make the offer look as attractive as one that isn't asking for any contribution to a seller, but it is a potential avenue. It works great if the seller really needs to sell and your offer is the only offer.
Typically, a lender will allow approximately 41% (some cases up to 50%) of the gross monthly income to be committed to all of a borrower's debt, including the house payment. The math to calculate this goes as follows: (Gross Monthly Income X .42) - Monthly Debts. Speak to your lender to find out what debts are excluded from the calculation (i.e. utilities and car insurance)
An appraisal is done on the property to determine its approximate value. This is done by an appraiser comparing recently sold homes to the one that you are buying. If the appraised value is less then the sales price, there are a couple alternatives the borrower can take. The first is to try and re-negotiate the sales price for the two to match. The second is to pay the difference (i.e. Accepted offer for house was $250,000, but house later appraises for $245,000. The lender will loan on the appraised value and borrower will have to bring the additional $5,000 to the closing as cash). Remember, the lender is giving the borrower the remainder of what they do not put in their down payment, so if one is putting down 5%, the lender will let you borrow the remaining 95%. The third option is to possibly back out of the contract, which can result in losing some money or being sued to perform on the contract. Consult with your Realtor to determine which results will apply to you.
This concludes my Mortgage Secrets series. Keep in mind that this is general information and subject to lender approval. Please consult your lender to determine what is specifically applicable to your situation. Thank you all for your time and make sure to refer your friends and family to your local Realtor... Jacob Hyde.