Qualifying terms

In today’s market the qualification for a new home loan has become increasingly difficult.  Lenders have witnessed their portfolios performing so poorly that even the seemingly best borrowers in the market face obstacles when qualifying for a loan.  Loan programs, in general, have narrowed their scope to such a degree that these programs are only interested in qualifying new loans under the following circumstances:  Credit worthiness, acceptable employment and income terms, and stability within you prior residential history.

Credit worthiness will be based upon your credit report, and analyzing your credit will generally be the first step in the pre-qualification process.  Without an acceptable credit rating your loan will be next to impossible to obtain approval.  The standards have been elaborated on over the years; for example, today if your credit score is below 600, then it will be quite difficult for you loan to be approved. Recently, I had an opportunity to analyze our database to determine, statistically, how many loans were approved and funded with credit scores below 600.  We had taken on approximately 1500 applications over the years, and of those 1500 applications an estimated 40% had credit scores below 600.  This may surprise you, as it certainly surprised me. Based on this percentage, it adds up to a total of 600 applicants with a credit score below 600.  Can you guess how many of the 600 applicants actually had their loans approved and funded? The results were eye-opening.  We had only three loans (with credit scores below 600) approved and funded.  These applications were taken on during the best and worst of times; so, no matter how stringent or flexible the loan approval guidelines are, you will need at least a 600 credit score in order to be approved.

Once your credit score meets the mandated quota, a more intricate review of the actual account data will take place.  Any late payments, bankruptcies, judgments, collections, and tax liens will be included in this detailed analysis.  If, in fact, you have had one or more of these deficiencies reported it is best not to panic, as we may still be able to get approval for you.  The approval process becomes more complicated at this point, but there are particular circumstances where an approval can still occur.  If the negative issues appear rampant throughout out the credit report it is common for your credit score to reveal it, however, even if the credit score meets the given standards, your credit history will not.  If, in fact, your credit history is free and clear, then we will move to the next qualifying term in the pre-qualification process.

Your employment history and income rate will help determine the likelihood of your ability to make your payments on the new loan.  Lenders prefer to see a continuous work history, in the same line of work, for at least two years.  Even more preferable, in regards to work history, is if you have maintained the same job for at least two years.  This is not a requirement, but it does make for a stronger file.  If you do not have a full two years at the same job, be prepared to report all of your previous employers and positions, in order for the lender to know where you have been employed during the two year period. 

Report your income properly.  The basis for an income decision is contingent on the income you disclose.  The income will be verified, which means that any exaggerations made about your income will not benefit you in any way.  Income is necessary for obvious reasons; if you don’t have sufficient income to pay the new home loan odds are you will not qualify.  Income will be analyzed on a percent scale known as your “debt-to-income ratio.”  Your debt-to-income ratio is simple to calculate: add up all of your minimum payments listed on the credit report then add the new home loan payment to the total.  Once you have added it all up then divide the sum of your minimum payment debts by your total income.  The ratio needed to qualify will normally be under 50%.  This number will appear to be higher than what most guidelines currently report, but we have found over time that 50% is a realistic number.

There will be several reasons why someone will not qualify for a home loan, based on employment and income information.  The most obvious reason is that the borrower does not have enough income to be consistent or dependable with payment on the new home loan.  Other reasons for income denial can be that the income cannot be verified because of self employment situations; or the income will not continue over time; or your income is provided from a source that does not meet the minimum time frames for employment history. 

Moving from income to employment, we can now look at reasons why borrowers will not qualify based on their employment.  As previously stated, employment history must encompass at least two years.  If there are large gaps in employment history, approval for a new home loan will be slim to unlikely.  Here are some other reasons why you may be denied for a home loan, based solely upon employment.  Your current employment does not reflect full-time status; you are self-employed and have not been self-employed for at least two years; your employment can’t be verified; your employment is commission-based and commissions are not documented with the full income; and lastly, the current job is contracted and will end soon.   

The final qualifying term for pre-qualification will be verification of your residency.  Residency is important for lenders because it represents your ability to maintain stability in the residential market.  Residency, as with employment, will be verified for a two year period.  If you have had any payment issues with your residency obligations your loan will be subject for denial.  Residency must be verified in the following manner:  if you currently live in a residence that involves a landlord, verification will need to come directly from the landlord.  There are situations where residency verification can be difficult.  If you are renting from a person directly, then additional information on your rental history will be requested.  In order to use the landlord’s verification of residency the landlord must be affiliated with a property management company.  If no affiliation exists, the lender will require a paper trail that confirms proof of payment over the last 12 months.  Proof of payment can be in the form of money orders, checks, or automatic deposit transfers.  If you do not have a paper trail showing the rental history the loan will be denied.  If we are able to verify your residency history, and no issues have appeared over the last two years, you will be approved under your residency qualifying term.

Once all three qualifying terms have been analyzed and are determined having met the minimum acceptable standards, you will be pre-qualified.  The pre-qualification process does not constitute a full approval, but the probability of your loan being denied will be very remote.