What You Really Need to Know About Today’s Mortgage Lending World

You're not going to be able to skip steps in the mortgage lending process. Here's the reality of what it takes to get a mortgage.

Are you trying to qualify for mortgage financing? Telling your story to a lender without providing thorough financials and pulling credit is a recipe for disappointment.

The mortgage industry is a bureaucratic environment. Consumer protection and compliance remain supreme with mortgage lenders and banks. Financial institutions are under tight scrutiny from the Consumer Financial Protection Bureau and as a result, must be specific about what they can and cannot do in regard to credit decisions. Loose underwriting in the mortgage industry was blamed for helping cause the financial crisis in 2008. The pendulum has swung 180 degrees and, as a result, getting a mortgage these days requires playing by the rules.

Consumers, on the other hand, want information quickly so they can make a decision. Unfortunately, mortgages do not work like that for the lion’s share of mortgage loan applicants. If you’ve had financial difficulties, and you think you may not qualify for financing, you might go to a lender thinking, “I don’t want to waste your time so, I am only going to provide the bare-bones information and then you tell me if you can do the loan.” Any lender who says they can make a loan based on bare-bones information is doing you a disservice (here’s a quick guide for understand mortgage lingo).

No moral lender has the ability to give you a “what if” scenario without seeing your entire financial picture. This includes your financial documents and credit report. Based on this information the lender can tell you the exact loan amount you qualify for, the purchase price you qualify for, what is hurting or helping your file, how your cash-to-close comes into play and how your file can be put into a workable loan with a chance of closing.

But I Don’t Want to Pull My Credit

If you don’t want to pull your credit because you don’t want the inquiry, you’re out of luck. The lender is required to pull your credit to decide whether they can put together your loan. Keep in mind: Credit reports are not transferable between financial institutions, so you can’t use one lender’s reports to take to another.

A credit pull will show up as an inquiry on your credit reports and could have a temporary impact on your credit scores. In most cases, though, as long as you’re not shopping for other forms of credit, applying for a mortgage does not adversely affect your credit score (if you don’t know where your credit stands, you can check your absolutely free credit scores right here on Credit.com).

Why Can’t I Just Find Out the Terms Up Front?

You may not want to provide your full financial documentation until you know what a lender can offer. It doesn’t work that way. Rates, fees, the loan amount, the loan program and the entire basis for the loan can change based on your financial supporting documentation. A lender requires these documents and a credit report to give you numbers they can actually deliver on.

But I Just Want to Know About Loan Programs & Rates

The lender needs to evaluate your income, credit score, liabilities on your credit history and financial profile to tell you what you qualify for now, and what you could qualify for in the future. Again, the lender needs a full financial picture to tell you what you can borrow.

But I Was Already Denied Once Before

Not all lenders have the same appetite for risk. One might make your loan while another could refuse. Some banks have more aggressive underwriting. As a result, you have to provide financials to get different scenarios run for your financial profile.

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How to Buy a House When You Have Too Much Debt

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When you fill out a mortgage application, lenders look for income to offset debt. If your monthly debt payments consume too much of your income, you may have a tough time qualifying for a home loan.

Underwriting, which is the decision-making of whether or not to grant credit, determines what your income is with supporting documentation like pay stubs, W-2s and tax returns. (It also looks at your credit scores to decide whether you qualify. You can get your two free credit scores, updated each month, on Credit.com.)

Fortunately, a lender may be willing to look at more than just your regular salary when it comes time to calculate your debt-to-income ratio. Here are various forms of income most mortgage banks will sign off on.

1. Annuities

If you’re eligible, you can purchase an annuity, a contract sold by a life insurance company that provides regular monthly income in return for an initial lump-sum deposit.

The income derived from this annuity will be used to determine how much mortgage and/or house you can qualify for. An annuity can be brand new — you need not have a long history of this income as long as it’s set to continue for the next 36 months or longer.

2. Social Security Income

If you’re eligible for Social Security, you might want to consider taking it early as this income can easily be used to help you qualify for a mortgage. You may be also able to “gross up” this income by up to 1.25%, depending on whether or not you pay taxes on it.

3. Notes Receivable 

Generally, you’ll need to earn income from a note receivable (a credit extended to a business) for at least 6 months for it to count on a mortgage application. Notes receivable income has to be based on the market rate and it’s the interest on the note that is used to determine your eligibility for your desired borrowed amount. For example, if you have a note receivable at 5.5% based on a principal balance at $50,000 that income would be $229.16 per month used for a mortgage.

4. Purchasing a Rental Property

If you are looking to purchase a rental property, you’re in luck. You can use projected fair market rents to qualify for its mortgage. Lenders will use up to 75% of gross market rents to offset the mortgage payment. In other words, because the renters are making the mortgage payment, you don’t need to earn as much to get a green light on your loan application.

5. Renting Your Current Home

If you are trying to buy a new primary residence, but don’t have enough income to support two mortgage payments, you can rent out the property. A rental agreement and tenant security deposit allows you to offset the mortgage payment on your current home to qualify for a mortgage on a new home. The concept is almost identical to purchasing a rental property, with the exception of needing to have a rental agreement in place for your current home.

6. Self-Employment Income

A history of self-employment income is required for it to count on your mortgage application. Generally, Schedule C Sole Proprietor income needs to be in place for at least 12 months in order for that income to count. Note: If you have been self-employed for the past two years and you had one bad year, followed by a good year, your income will be averaged by your lender.

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