Qualifying Income – It sounds basic, but only traditionally documented income is acceptable at this time. Overtime and bonus income must have a two year history at which time an average would be calculated. Commission, self-employed or 1099 income will trigger a need for tax returns. If income is not on the tax return do not plan on using that income to qualify!
Credit Score – Mortgage lenders use a Tri-Merge Residential Credit Report. This is different from the free credit reports you might subscribe to and often returns different scores depending on your scenario. A tri-merge will identify your credit score from the 3 major credit bureaus: Transunion, Experion and Equifax. Your credit score used in pricing and qualifying will be the middle of the 3 scores. Loans are available with a middle credit score as low as 620. A 740+ credit score will allow you to avoid bank charged increases to the price of your interest rate.
Debt-to-Income Ratio (DTI) – Your DTI is a calculation of your new principal and interest mortgage payment, taxes, insurance (PITI) and homeowners association dues in addition to all minimum payments reflected on your credit report divided by your gross monthly income. For example: Your proposed PITI is $2400 and your monthly car payment, revolving credit card payments and student loans equal another $600. Your annual gross salary is $80,000. Your monthly gross income is $80,000/12 or $6666.67. Divide your total debts, including the house ($3000) by your income. $3000 divided by $6666.67 is 45%. Lenders view this debt ratio as a solid, qualifying DTI for most loan programs. Any DTI under 41% is considered a qualifying ratio for loans requiring mortgage insurance.
Mortgage Insurance – This is RISK insurance. You pay this premium on a monthly basis in addition to your mortgage payment. It is required by the lender and paid by you, the borrower. An element of risk on loans is the amount of “skin” the borrower has invested in the purchase of the home. It stands to reason that if a borrower puts 20% down on his purchase he is less likely to default or walk away from the home. It is a low risk loan and therefore does not require mortgage insurance. Less than 20% down payment raises the risk of default. A borrower with little of his/her own money invested in a property has less at stake and in a hardship situation may choose to default on his loan. Mortgage Insurance is provided by insurance companies, not the lender. Loans requiring mortgage insurance can often have tighter qualifying requirements.
Loan-to-Value (LTV) – This is your loan amount divided by your purchase price or home value. For example, if you are getting a loan for $400,000.00 and the purchase price is $500,000.00 you are putting $100,000.00 down payment or 20% down. Your LTV is 80%. FHA loans require the least amount of down payment at 3.5% down. But don’t forget your mortgage insurance! FHA has an up-front mortgage insurance fee in tandem with a monthly mortgage insurance fee.
FHA Loan – This loan program is the original “subprime” mortgage. Instead of a loan insured by a private mortgage insurance company, this loan is insured by the Government. Lower than average credit scores are permitted and DTI ratios can be a bit higher. In addition, this is a low down payment program requiring only 3.5% down payment. It is acceptable for the down payment be gifted from a family member or relative. FHA is an excellent first time buyers program!