At Black Diamond Mortgage Corporation, we receive a lot of requests for loans. Many times people wonder how the decision is made to approve or deny their loan application. While there are thousands of pages of guidelines used in determining the quality of a borrower’s loan application, there are 3 categories of important criteria that determine if your loan will be approved.
We recommend obtaining your mortgage approval (qualifying) before attempting to buy a home with a Realtor, and we will gladly deliver a “Pre-Approved or Pre-Qualified Letter” on as many purchase offers as you need to make. Our “Pre-Qualified Letter” is specific to each transaction, and the letter does not show the property seller your maximum qualification parameters (this is for your negotiation protection). We will provide our “Pre-Qualified Letter” letter as requested, once you have applied for a mortgage with us:
The 3 C’s:
Credit (Credit Score)
Cashflow (Income / Expenses – DTI- Debt to Income Ratio)
Collateral (Appraisal, Home Value, LTV – Loan to Value Ratio)
The following is a “generic overview” of current loan approvals that would be likely to apply to a majority of our applicants. However; every situation is unique, and if you do not fit within these guidelines, a detailed and specific review of your loan application is recommended in order to determine for sure if you can obtain a loan or not.
Every mortgage loan application must demonstrate a reasonably acceptable level of verification on all “3 C’s.”
Examples of the general lending standards that can be approved for most mortgages are listed here:
(IMPORTANT NOTE- you must apply for a mortgage to receive a “bona-fide” approval or “Pre-Qualification Letter” – this article is simply an informational piece designed to help you understand mortgage approvals):
Credit (Credit Score):
A mortgage credit approval is generally determined in part by your credit score, and generally a score of 640-620 or higher is required to obtain a mortgage (exceptions exist). A prime score, which provides access to the best possible interest rates, is generally any credit score over 740.
Mortgage lenders will often pull a score from all three credit bureaus: Equifax, Transunion, and Experian…. and they will use the middle score of the three bureau scores (or the lower of 2 if only 2 exist) … and they will rely on the lower “mid-score” of all the borrowers on the loan application (if 2 or more borrowers exist).
When your credit score is below 640 or 620 (depending on the loan program), some form of credit repair will likely need to take place. We will help you! Some credit repair information can be found on our website- HERE . We are always happy to offer an appointment to provide guidance on credit scores, we do not charge fees for credit counseling or repair, and if technical credit repair help is needed, we may recommend some credit repair specialists to accomplish the task more quickly. We are not a credit repair or credit counseling firm, but we will simply tell you what we know in order to help, as a free service.
There are techniques for underwriting loans with lower credit (below 640, or no credit). The technique usually involves a method called “manual underwriting,” and essentially requires that the applicant demonstrate that they have successfully paid their housing expenses and at least 2 other monthly credit accounts in a verifiable way over a minimum of the last 12-24 months, depending on the loan program. (note: Derogatory credit items must be paid or corrected and it must be clear that the derogatory event is not likely to continue or repeat in the future. Judgements, Tax Liens, Foreclosures and Bankruptcies can further delay your future mortgage transaction depending on the circumstances)
Whenever you apply for a mortgage at Black Diamond Mortgage Corporation, we will provide you your credit scores and important information to help you understand your credit with the 3 credit bureaus.
Cashflow (Income / Expenses – DTI- Debt to Income Ratio)-
A mortgage cashflow / income approval is determined by calculating the total reliable income from the borrowers on the loan application and then determining the total monthly debt payments from the same borrowers. The total monthly debt payments are divided by the total monthly income and this becomes the “DTI” or debt to income ratio for the mortgage application.
“DTI” – Debt to income ratio approvals can range from 42% to 50+ % for the application and the “debt” includes the “liabilities” or monthly credit obligations listed on the borrowers credit report and also the housing expenses inclusive of rents/mortgages, taxes, insurance, mortgage insurance and HOA or Condo dues as they apply. The most conservative approval would be for a maximum of a 28% DTI for the housing and a maximum of 38% for the DTI inclusive of all monthly obligations. More expansive DTI approvals are often allowed, and in some cases a total DTI of 50% could be approved without even consideration to the amount of housing vs. other debt being analyzed.
The income for the DTI is determined by verifying a 2 year history of income that is deemed to also be stable for the next 3 years. Exceptions to the 2 year history are allowed for recent graduates of a specialized training (ie; college degree or similar) or applicants that have a consistent history of working a variety of jobs, but earning consistent annual income. A 2 year history or an employer commitment of full-time employment is often satisfactory for determining that a borrower is likely to have the income for 3 years into the future (either or both).
In general, self employed borrower’s incomes are calculated by taking a 2 year average of their Federal Tax Return’s “adjusted gross income” for their self employment and also adding additional income for recorded “depreciation and non-cash expenditures” from the business or personal tax returns as applicable. Most self employed borrowers require a detailed analysis, so the best advice is to deliver 2 years of Federal Tax Returns (personal and business) to your loan originator as soon as possible for a proper DTI calculation.
Debts that can be waived from the DTI are often debts that only have 10 months of payments left on them, debts being paid off with the loan proceeds of the new mortgage, debts that can be shown to be paid by a business or another person over a 12 month period, debts that are paid by rentals (ie; other property mortgages), and there may be other ways to minimize certain debts / liabilities from being included in the debt to income ratio calculation.
Student loans in deferment can be more difficult to underwrite so the lender may use 1% of the owed balance as the monthly payment to qualify. Therefore; on most student loans, it is better to have a minimum monthly payment assigned to the loan than to have the loan in a deferred status. Do not assume that a lender will use $0/month as the payment on a student loan, even if that is your current monthly obligation.
In general, excessive DTI ratios will prohibit a loan from being approved, and low DTI ratios will allow for more expansive approvals.
In general, if you have extra cash reserves (6-12 months of all debt payment totals as a consistent balance in your savings or investment accounts) then you are likely to also obtain a more expansive DTI ratio approval.
Collateral (Appraisal, Home Value, LTV – Loan to Value Ratio)
A mortgage collateral value approval is determined by the appraisal, and in the event of a purchase or brand new construction, the actual purchase price or cost of the home is the value at the time of purchase.
Generally, if a lender is forced to decide between an appraisal and the actual cost of acquisition, they will choose the lower of the 2 values.
The loan to value ratio (LTV) is the loan amount divided by the home value.
The best loan terms are usually offered to applications with lower than an 80% LTV.
Depending on the loan program being used, the loan to value ratio can range between 80-100% for approval on certain loans.
VA loans and USDA Rural Development Guaranteed loans often approve 100% loan to value ratios
FHA and Conventional Loans (Fannie Mae / Freddie Mac) have been available at 96.5 – 97%
When a loan is approved in excess of 80% LTV, generally some mortgage insurance is paid, either upfront and financed into the loan, or monthly during the term of the loan. Each loan program has unique parameters for mortgage insurance, so it is important to review the entire loan disclosures carefully when trying to decide between these programs. For example, a loan with a lower interest rate may have a higher monthly payment depending on the mortgage insurance requirement.
In general, a primary residence is allowed the highest LTV (up to 100%!) and an investment property will be held to a lower, more conservative LTV (renerally ranging from 65-85%). Second homes and vacation homes are usually in between primary residences and investment properties for their apptoved LTV (averaging 80-90%).
We hope you have found our GENERAL information on loan approvals helpful. For more information, call us (406)862-4999 or apply online at www.blackdiamondmortgage.com