The Lending Coach

Coaching and teaching - many through the mortgage process and others on the field

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Key Factors Lenders Consider When Evaluating Applicants

Mortgage approval can be a lengthy, detailed process.

As you can imagine in today’s environment, lenders scrutinize their mortgage applications, along with a myriad of other documents, in order to determine if borrowers are low-risk and able to repay the loan.

With that said, here are some key factors that all lenders will consider….and make sure to reach out to your chosen mortgage lender to have them walk you though this process:

Income

In order for any lender to make sure that the borrower will be able to repay the loan, they will check the applicant’s income to determine loan eligibility. Essentially, this will help determine if the applicant can afford a home loan and budget for monthly payments.

If the applicant is self-employed or commission based, lenders will evaluate them differently than standard W-2 buyers.  Their income may be considered “unstable” and a more detailed earnings history may be required.

More often than not, the last 2 years of tax returns will tell the income story for these types of borrowers.

Credit Score

An applicant’s good credit score can demonstrate to the lender that they are financially responsible and can qualify for a mortgage, sometimes with significantly lower interest rates.

While a good credit score is a good indication that an applicant can pay off their loan, liens and civil judgments on credit reports can impact scores. Lenders will check with public records to determine if they have any liens or judgments against them that could affect their ability to qualify for a mortgage.

Financial Assets

An applicant must have sufficient assets and collateral they can use for a down payment, if they are purchasing a home. For example, liquid assets like stocks and a savings account can be used to secure higher lines of credit.

Since the property that an applicant purchases will often be used as collateral if they end up foreclosing, the value of the property must match the applied-for loan.

Essentially, lenders are trying to identify these 3 key criteria when it comes to lending to a particular borrower. Today’s rules are determined, for the most part, by the underwriting guidelines of Fannie Mae and Freddie Mac, as the majority of today’s mortgages a sold through these enterprises.

Pre-Approvals and “Findings”

Here are a few great quotes from agents regarding the importance of the mortgage pre-qualification process:

“If the buyer I sent in your direction receives a pre-qual, and then three weeks later does not pass underwriting, whose fault is that?”

“To be honest, if the mortgage broker or lender will not invest in the front end, collect and verify the critical information, I truly don’t have much use for them.”

“I need to KNOW that the buyer, who has invested their trust in me, will not be compelled to find someone else at the last minute in order to salvage the transaction.”

With that said, you can actually evaluate the quality of the pre-approval you received from your lender with one question:

“What are your findings?”

This simple question will go a long way in determining the validity of your pre-approval letter.  The answer is either Approve/Eligible (Fannie Mae) or Accept (Freddie Mac).

What Are Mortgage Pre-Approval ‘Findings’?

These “findings” are in the report that outlines the factors that were used to either approve or disapprove that loan application.

The Fannie Mae (Desktop Underwriter) or Freddie Mac (Loan Processor) programs are the specific automated underwriting systems.  These should absolutely be completed prior to the issuance of that pre-approval letter.

The underwriting  report summarizes the overall underwriting recommendation.  It lists the steps necessary for the lender to complete the processing of the loan file.

If a lender receives the go-ahead from Fannie or Freddie through these automated systems, underwriting should be relatively easy.  If not, the transaction is most likely heading for trouble.

Timeframes

The pre-approval process is not a 15-minute conversation.  If you supply me with all the documents necessary for a full document (full doc in industry jargon) review, I need time to read them.  I’ll do the analysis, load the data into systems, and run the analytics….which takes a bit more than 15 minutes.  Giving your lender time to process the information helps to secure a reliable pre-approval.

If your lender is offering you a super speedy pre-approval, you as the agent need to question your choice of loan officer.

Obvious mortgage killers, un-seasoned BK, late payments, etc, are the exception. These issues take only a minute or two to disqualify the credit approval.

Negotiation Importance

Home sellers and their Realtors insist that home buyers submit a valid pre-approval letter along with their initial offer for the home.  Sellers don’t consider offers from people who haven’t taken the time to determine if they can even get approved for a loan in the first place.

Again, make sure to have your client reach out to me prior to going house hunting to get a true pre-approval letter!

Financial Advisors – the biggest mistakes they have ever seen

coop-refinance

“You want to do what?”

“As a financial planner, I see clients make some pretty bad mistakes.  A sad fact of life is that financial mistakes can be made in a heartbeat.”

Here’s a great article about the 13 largest financial blunders seen by financial advisors – it’s absoford-superduty-1lutely worth reading

My favorite: The Retirement Truck…..

Source: Forbes

 

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