From the Lenders point of view
When undertaking the laborious task of refinancing your home, you may wonder how a lender views potential borrowers. If you know what your lender looks at you may be able to beat him to the punch before he starts putting on extra stipulations that need to be satisfied in order to close your loan.
For example, what can you do if you have had a bankruptcy but it has only been a year or so since it was discharged? Check your credit report and under the public records section you should find the discharge date, but quite often that information is missing. If that is the case, when you send in your papers for the refinance why not send in the BK (bankruptcy) papers that you received when it was discharged. Your lender will use this as proof of discharge and date of discharge.
Also take a look at your credit report, there should be a note after each debt saying the creditor has been paid off through the BK and a date that it was paid. However, sometimes some creditors get missed, and even though they were paid, it wasn’t recorded on your report. It will be listed though in your discharge papers so hang on to those for the 7-10 years that it takes to be removed from your credit report. If you are making monthly payments as required for the terms of your bankruptcy and you are still paying at the time of refinance you will need additional documentation. You will have to get a BK rating that shows payment history and hopefully you will not have missed a payment. That would be bad news and worse than a late mortgage payment, credit wise.
Take a look at that same section and see it there are any liens, tax liens or otherwise that are open. Any open liens will have to be paid off with the close, unless you can prove you paid them off. If you have the documents showing that you paid them off, you will want to get those papers to your lender right away. Be aware that sometimes liens show up on title and not on the credit report so if you have paperwork for any liens that do not show up on your credit you should send it proof of payment. As soon as the title search is done those liens will be discovered and the process momentarily halted.
Your debt to income ratio is used by lenders to determine your ability to make the monthly payments on the new loan. For prime borrowers this usually needs to be 40 percent or lower. I have seen lenders fund loans where the debt ratio was as high as 45 percent. On the other hand, non prime loans often go through with a debt to income ratio as high as 55 percent.
Your lender will also be looking for proof of willingness to pay. Your ability to pay could be very high, but that doesn’t mean you will actually pay your mortgage, it just means you can afford to. If you have a number of charge-offs or late payments despite your debt ratio, it shows an unwillingness to pay your debts and your lender will suspect you may not be responsible when it comes to your house note.
When you are working on the income part of the refi and have decided to use bank statements rather than W-2’s and pay stubs, you need to look for NSF’s (Non sufficient funds). If you have NSF’s sprinkled throughout your bank statements it shows the lender you may not be able to afford the loan you’re applying for. Don’t wait for the underwriters to find out and turn down the loan. If that happens it is doubly hard to re submit your loan. Take care of all the problems before sending in your paperwork, it will save everyone a headache. You may need to look for an alternative to bank statements.
Once an underwriter sees something you cannot go back and change things. For example, if you have your loan submitted as a full document deal but find it gets rejected due to lack of enough income, you cannot go back and resubmit as a stated deal and put in a higher income. Once and underwriter has seen the income you cannot change it.
Here is another issue that most people don’t think of. If you are doing a stated income deal the type of work has to make sense with the amount of income you put on the application. In other words, if you put in the income section of the app, at four thousand a month but on your credit report you work at Mac Donald’s it doesn’t make sense and your loan could get turned down just based on income, or lack thereof. If you decide to put in five thousand a month in the income box make sure it is possible to make that much money with that job. And if you put down on your loan application that you are a legal assistant, but on your credit it says you worked at Burger King, you are going to have problems. Everything has to fit and make sense for the underwriters.
If you loan application says you live in Western Kentucky but your credit report says you live in New Hampshire, you will need to explain that one and include it in the other papers you submit. Underwriters are trained to look for borrowers that are misrepresenting themselves or trying to pull the wool over their eyes. While some of this sounds nit-picky, it raises a red flag because shady borrowers usually have some things that do not match up with either the loan app or credit report, or any other documentation.
Underwriters are so vigilant that sometimes a Loan Officer begins to feel like they are there to try to stop your loan from funding, when in actuality they are there to help you fund it.
Good luck and be sure to catch the last half of this article about you and your credit.
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