Approaching the Loan Application Process - What Loan Will You Qualify For?
On of the biggest time and money wasters in real estate is people that apply for the wrong loans - loans that they can never qualify for because they can't meet the guidelines, or can't prove they meet the guidelines, which amounts to the same thing. Often, loan officers are the worst offenders, judging by the people who come into my office with messes for me to clean up. They don't know how to submit a loan, or they know full well it won't be approved, but they get you to sign up by dangling this carrot, and then snatching it away, but now they've got you working with them and they end up with your business because they told you a fairy tale that sounded better than what the other guy talked about because he restricted himself to talking about loans he could actually deliver.
How do you know what mortgage market is best for you?
There isn't a cut and dried answer unless you're one of those folks who can qualify "A paper" full documentation. If you can do it, and a lot more folks can qualify this way than think they can, A paper full doc is the way to go. Because it's the least risky loan, the banks give you the best pricing. What if you can't make it, however?
The reasons why people fall away from A paper full doc is long. The two largest ones, however, are people who cannot prove they make enough money and people whose credit score isn't high enough. At a distance from that, the third reason why folks don't qualify, is late payments. A paper permits one thirty day late on the mortgage, or two on other credit. If you fall off the pace due to late payments, you have to go subprime.
A paper accepts only two ways of proving your income: Income tax forms and, for some employees not in construction or on commission, w-2s and year to date pay stubs. If, with the income taken from these forms does not qualify you according to A paper debt to income ratio considering your known debts (typically 45% back end ratio, but I've seen high seventies get accepted in some circumstances), you do not qualify full documentation. Think of full doc as being where you prove you're got enough income to make your payments. If you can't do full documentation, you have to go to stated income.
A paper also requires an absolute minimum credit score of 620. 619 is an automatic rejection from any A paper program out there. Some A paper may require higher credit scores (640 jumbo, 660 stated income, 680 for both), and if you haven't got it, you don't have the loan, either. If you don't have the relevant credit score, you're going to subprime.
A paper stated income is where you've got a good credit score and can prove that you've got a job (or a source of income) and you've had it for two years. You just can't prove you make enough money to justify the loan. You could be making it, though, and the lender agrees not to verify, although they will look at it to see if the income you claim is consistent with your profession. You're paying your bills on time, though, so lenders are willing to believe that you're living within your means, and therefore qualify for the loan. They are not agreeing to close their eyes if something indicates you cannot afford it or what your real income is; they're just not going to go out of their way to verify your income. They are going to have you sign an IRS form 4506, releasing your taxes to them. Don't worry too much about it. The IRS takes a minimum of 60 days to respond, and the loan will be done in thirty, if your provider is competent, and it's not fraud to overstate your income on a stated income loan. Dumb, maybe; fraud, no. The major reasons why "A paper" stated income falls out are low credit score, insuffient time with your source of income, and incompetent loan officers who allow the underwriters to find out that the client doesn't make that much. Low credit score goes to subprime, insufficient time in line of work goes to NINA, and loans with incompetent loan officers start over with another lender.
A paper NINA is a loan driven by the credit score and the situation you find yourself in. There is no debt to income ratio, and the personal qualification consists of a good credit report. Of course, you still have to have the appraisal and the rest of the documentation relating to the property. Furthermore, the rates are higher than stated income (which is in turn higher than full documentation), and the maximum Loan to Value Ratio is lower. Common fallouts are credit score too low (go to subprime), loan to value ratio too high (go to subprime) and something wrong with the property (go to hard money)
Subprime is an entirely different world than A paper. The standards are different, the qualifications are different, everything is different. Just because you can't go full documentation A paper doesn't mean you can't do it subprime. For one thing, typical subprime goes up to fifty percent debt to income ratio, and a few lenders will go higher - some as high as sixty percent! So even though the rates are higher, it may be easier to qualify.
Subprime also has another form of accepted income documentation: bank statements for the last six, twelve, or twenty-four months. When I started, this was always discounted, but of late personal bank statements have been accepted on the strength of 100 percent of the income they show. This rate will be higher than a borrower who can prove their income via one of the A paper methids, but is lower than stated income. Number one reason for falling out of subprime full documentation: Not enough income. Number two: sub-500 credit score. Number three: the underwriter believes that you manipulated your income on your bank statements. Not enough income goes to stated income subprime (with another lender, as if it was submitted full doc it cannot go stated income with that lender). Sub 500 credit score goes to hard money, which is where you might as well start when you find out, because regulated lenders can't touch you if you don't have at least one of your three credit scores above 500. If the underwriter thinks you manipulated your income, you or your loan officer have either got to convince them you didn't, which usually requires w2s at least, or you are going to another lender.
Subprime stated income is fairly wide open, with the proviso that a given credit score will have a higher rate and a lower maximum permitted loan to value ratio. Number one reason for falling you here is that you don't meet loan to value guidelines. Number two is you didn't state enough income in the first place, and you don't qualify by debt to income ratio guidelines. Number three is you stated too much income, and the underwriter doesn't believe you make that much money. They can always require income documentation - they don't have to let you state it without verification. At best, anyone suffering from any of these three problems can expect to have to go to another lender, because this lender will not now approve their loan. Maybe lose a little time if you're working with a broker who then submits the package elsewhere. Back to square one if you were working with a direct lender.
Subprime NINA is even more wide open. A loan officer has got to be a serious bozo to blow this one, but I clean up behind ones that went bad on a distressingly frequent basis.
Hard money is the last hope of the unfortunate. These folks don't care about your income, your credit score, or anything else. What they care about is that they can sell the house for enough to cover the loan if you default, and unlike regulated lenders, they will record that Notice of Default on the day you become eligible. Sometimes they are the only choice, but if you find yourself dealing with them you should really ask yourself if this loan is something you absolutely have to have, or if you just want it. If the answer is the latter, my advice is to reconsider getting the loan.
There you have it, something like a flowchart of what kind of loan you should apply for. These are far from the only reasons loans fall apart, of course, but they are the most common. A good loan officer knows enough of the tricks and traps to tell you the truth straight off, and apply to the appropriate loan first, without wasting your time and money. Bad ones don't.
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