Take It from a Former Pro: Mortgage Lenders Do NOT Always Have Your Best Interests at Heart
Over the past two years, the United States has seen an unprecedented decline in mortgage rates across the country. As a result, first-time homebuyers become increasingly enticed by mortgage lenders through online advertisements. These advertisements have exceptional effectiveness due to the Coronavirus pandemic as people find themselves spending more time scrolling through their news feeds. Lenders pressure prospective homebuyers to buy before they fully understand the process. As a former operational manager for a mortgage firm who produced over $50,000,000 in loan revenue during 2018, I can provide critical insight into the Do’s and Don’ts when preparing to buy your dream home!
Believe me, loan officers DO NOT have your best interests at heart when they work towards getting you into a contract. I have seen hundreds of families not fully informed of the documentation required to meet government regulations for FHA/VA financing. Hence, these families became homeless or had to live in hotels when closing dates fell through. If you or someone you know plans on buying a home, I implore you to read further and arm yourself against the possibility of false promises and predatory lenders.
Income: Don’t Ask a Loan Officer What You Can Afford
The biggest mistake in the mortgage game: asking someone else what you can afford before doing your own due diligence. Loan Officers get paid on commission. They have a serious incentive to push the loan amount higher to cash in a bigger paycheck. Before you even begin looking at listings, take note of these tips:
- An underwriter will take a monthly average of your most recent two years’ worth of verified income to determine how much you make every month.
- If you’ve had more than 3 jobs within those two years, you should wait until your income looks more stable on paper.
- If you have any employment gaps within those two years, prepare to have a good explanation with supporting documentation to justify your employment gap.
Credit: Your Income’s Greatest Enemy
EVERYTHING revolves around credit. All lenders will pull your credit. If you don’t know your credit score, you can get a FREE credit report once a year from AnnualCreditReport.com. With a credit score below 670, keep budgeting and pay down your debts until your score gets higher. With a score below 620, the underwriter will look for any ammo they can use to deny your loan. Once you know your score, you must understand the following:
- DO NOT use credit consolidation companies to fix your credit. Oftentimes these companies make mistakes or cannot provide the correct documentation to justify repayment of your debts. You’re essentially saying: “I need someone else to pay my bills!” (not a good look for someone asking for a loan).
- The next number your underwriter will review: your debt-to-income ratio (DTI). To calculate your DTI, add your monthly debts including loans and credit cards, then divide the sum by your gross monthly income. Multiply the result by 100 to get your percentage ratio. For an affordable loan, expect a DTI lower than 36%. For anything over 43%, you should look for a cheaper home or wait for a lower DTI.
- Credit reports save any 30+ day missed payments over the past 7 years. For missed payments outside of 12 months, have a good explanation. If you missed a payment within the most recent 12 months, you MUST have supporting documentation for an extenuating circumstance to support the missed payment(s). Even though unavoidable circumstances happen, such as unexpected deaths and funeral expenses, do not act surprised when the underwriter asks for a copy of the death certificate or funeral receipts.
Assets: Stretching Yourself Too Thin?
FHA requires a 3.5% down payment for closing. How much money do you have in your bank account now? How much will you expect to have after closing? If you have the money, great, but let me fill you in on the one rule loan officers almost always fail to mention: the underwriter will source and verify every penny going to closing. Cash-on-hand? NOT an acceptable source of funds. The money saved under your mattress for a rainy day — utterly useless. Before you go cashing in those scratchers, make sure to have receipts from the convenience store confirming where your money came from. But what does “sourced and verified” mean?
- Well, you may need to provide up to 3 months’ worth of bank statements to the underwriter. In most situations, all funds in the account longer than 3 months have settled — but keep in mind, an underwriter can ask for more bank statements if they sense something fishy.
- If you have non-payroll deposits on your bank statements, you must provide documentation showing where the money came from. If you can’t, the underwriter will subtract the deposit from your current balance in your file.
- If you plan on receiving a gift for closing, the gift almost always has to come from an immediate family member. The gift donor may also have to provide a copy of their bank statement tracing the funds and confirming they did not come from any unacceptable third party.
Final Thoughts
Although you see low rates on online advertisements from mortgage companies, you should not froth at the mouth to get into a contract. By doing your own due diligence and preparing yourself with these tips from a former mortgage professional, I guarantee your first homebuying experience will not end tragically. We live in a land where the pervasive dream of homeownership resonates throughout our culture. If you’ve found out you’re not ready to buy your dream home, don’t fret! You will have your dream home soon through patience and planning ahead!