The Factors Lenders Use to Evaluate Your Mortgage Application

The Factors Lenders Use to Evaluate Your Mortgage Application

When banks evaluate your application for a mortgage, there is a rough formula they use to determine how credit worthy you are and whether to approve your application. Understanding this formula can help you strengthen your application and increase your chances for getting the loan you want.

When banks and mortgage companies evaluate your application for a mortgage, there is a rough formula they use to determine how credit worthy you are and whether to approve your application. Understanding this formula can help you strengthen your application and increase your chances for getting the loan you want.

In general, there are four main criteria that banks and mortgage companies use to evaluate a borrower. They are: income, assets, credit, and appraisal.  Lenders do not just evaluate the quantity but also the quality of each criterion.

Income

Lenders look at how much money a borrower makes but also the stability of that income. Has the borrower earned similar amounts in past years? Is the borrower's employment status secure and have they worked at the same company for some time? Do they have a stable employment situation? A borrower who makes $10,000 in one year and $300,000 the next has the quantity but not necessarily the quality. Lenders like predictability.

Assets

How much money does an individual have in the bank and in investments? Has this amount increased steadily or because of a $50,000 gift from grandpa? Lenders like to see stable, year-over-year increases in assets. One time gifts do not provide the same level of comfort that the borrower can continue to increase savings every year.

Credit

Lenders look not only at the credit score, but also at the credit score trends. Has the borrower maintained a high credit score over time? Does the borrower have other debts that they have responsibly paid off? Has the borrower shown that they can manage debt? Lenders prefer an individual who has responsibly managed some debt over someone who has never taken out a loan before. So, in this case some debt is better than never having debt at all.

Appraisal

The amount that a house appraises for it important, but so is the quality of the appraisal. Borrowers want to see that the appraisal was done by an independent, qualified individual who can accurately assess the value of a house. Did the appraiser take the time to really inspect the house, take pictures, and evaluate the condition of the property? Drive by appraisals are a relic of the past.

Having quantity and quality in all four categories ensures that a borrower will be approved and receive the best possible rates. That doesn’t mean that a borrower can’t get a loan if quality or quantity is slightly low in one or two categories, but the chances do go down. Evaluate your own borrowing strength using the chart below.

 

Criteria Quantity Quality
Income Lenders like to see that mortgage payments, interest, insurance, and taxes will not exceed 28% of a borrowers gross income (pre-tax) income. This is called your debt to income ratio. Income is the second most important criteria behind Appraisal value of the house. Consistent income over time. Steady employment and stable or rising income.
Assets Lenders like to see that homeowners have substantial assets. Ideally the value of the assets would cover the mortgage amount but this is not necessary. This ensures that lenders will continue to receive payments should the borrower lose their job and income. Increasing asset growth over time is better than lump sum increases from a gift, inheritance, etc.
Credit According to myFico, Credit scores over 760 help a borrower get the best rates. The myFico site shows that the difference between a 760 and 639 credit score is nearly $300 per month on the same $300,000 mortgage. A credit report that shows a history of being able to manage debt.
Appraisal A house that appraises for at least the amount of the mortgage. If not, the house is considered underwater and lenders will not approve the loan. This may be the single most important criteria. A reputable appraisal done by an independent company.
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Comprehensive List of Mortgage Assistance Programs

Comprehensive List of Mortgage Assistance Programs

It seems like every week the government is announcing a new program to help homeowners. To make sense of all of these programs, we've pulled them together and listed them below. If you are having trouble with your mortgage, or can't refinance your house, hopefully one of the programs on the list will provide you with some assistance.

It seems like every week the government is announcing a new program to help homeowners. To make sense of all of these programs, we've pulled them together and listed them below. If you are having trouble with your mortgage, or can't refinance your house, hopefully one of the programs on the list will provide you with some assistance.

Home Affordable Modification Program (HAMP)

HAMP is designed for homeowners who are still employed but are struggling to make their monthly mortgage payments. The program can lower your monthly mortgage payments to 31 percent of your verified monthly gross pre-tax income. This can often save a homeowner hundreds of dollars per month. You are eligible if:

  • You occupy the house as your primary residence.
  • You obtained your mortgage on or before January 1, 2009.
  • You have a mortgage payment that is more than 31 percent of your monthly gross (pre-tax) income.
  • You owe up to $729,750 on your home.
  • You have a financial hardship and are either delinquent or in danger of falling behind.
  • You have sufficient, documented income to support the modified payment.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

The program is offered through your mortgage servicer, so you'll need to contact them. If they do not provide the program, or don't feel you qualify, ask them what other options they have for you.

Pricipal Reduction Alternative ( PRA)

If you owe significantly more on your home than what it is now worth, PRA is designed to help you by encouraging mortgage servicers and investors to reduce the princpal you owe on the house.

You may be eligible if:

  • Your mortgage is not owned or guaranteed by Fannie Mae or Freddie Mac.
  • You owe more than your home is worth.
  • You occupy the house as your primary residence.
  • You obtained your mortgage on or before January 1, 2009. 
  • Your mortgage payment is more than 31 percent of your gross (pre-tax) monthly income. 
  • You owe up to $729,750 on your 1st mortgage.
  • You have a financial hardship and are either delinquent or in danger of falling behind.
  • You have sufficient, documented income to support the modified payment.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

Note that the eligibility above is just a guideline. You will need to contact your individual servicer for more information. A list of participating servicers can be found here.

Second Lien Modification Program (2MP)

This program is designed for homeowners who had a first mortgage modified by HAMP and have a second mortgage. This second mortgage may also be eligible to be modified. The program works in tandem with HAMP to help homeowners who purchased a home using a first and second mortgage.

You may be eligible for 2MP if you meet all of the following criteria:

  • Your first mortgage was modified under HAMP.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.
  • You have not missed three consecutive monthly payments on your HAMP modification.

Servicers participating in 2MP are:

  1. Bank of America, NA
  2. BayviewLoan Servicing, LLC
  3. CitiMortgage, Inc.
  4. Community Credit Union of Florida
  5. GMAC Mortgage, LLC
  6. Green Tree Servicing LLC
  7. iServeResidential Lending, LLC
  8. iServeServicing, Inc.
  9. J.P.MorganChase Bank, NA
  10. NationstarMortgage LLC
  11. OneWestBank
  12. PennyMacLoan Services, LLC
  13. PNC Bank, National Association
  14. PNC Mortgage
  15. Residential Credit Solutions
  16. ServisOne Inc., dbaBSI Financial Services, Inc.
  17. Wells Fargo Bank, NA

Program ends December 31, 2012

FHA, VA, USDA Home Affordable Modification Program (FHA-VA-USDA-HAMP)

This program helps homeowners whose mortgages are insured by the FHA or the VA take advantage of the HAMP program. To find out more, contact the respective government agency.

Home Affordable Refinance Program (HARP)

If you are not behind on your mortgage but your house is underwater and you can't refinance, this program may be for you. HARP is designed to help you refinance your mortgage into a lower rate.

You may be eligible for HARP if you meet all of the following criteria:

  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
  • The current loan-to-value (LTV) ratio must be greater than 80%.
  • The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.

Contact your mortgage servicer to see if they participate and if you qualify. You can also contact Fannie Mae or Freddie Mac to see if you qualify.

FHA Refinance for Borrowers with Negative Equity (FHA Short Refinance)

For those homeowners not behind on their mortgage but who owe more than their homes are worth, FHA Refinance is another program. FHA Short Refinance is designed to also help homeowners refinance into a lower rate, more stable mortgage. If the lender agrees to refinance your mortgage, they will be required to reduce the amount you owe on your mortgage to no more than 97.75 percent of your home's current value.

You may be eligible for FHA Short Refinance if you meet the following criteria:

  • Your mortgage is not owned or guaranteed by Fannie Mae, Freddie Mac, FHA, VA or USDA.
  • You owe more than your home is worth.
  • You are current on your mortgage payments.
  • You occupy the house as your primary residence.
  • You are eligible for the new loan under standard FHA underwriting requirements.
  • Your total debt does not exceed 55 percent of your monthly gross income.
  • You must not have been convicted within the last 10 years of felony larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage or real estate transaction.

To find out if you can use this program, contact your mortgage servicer and find out if the participate in the program.

The Responsible Homeowner Reward Program

This private program is designed to reward homeowners who stay, or become current on their mortgage. In place of reducing the principal on a mortgage, servicers that participate in this program will provide cash bonuses if a homeowner meets certain agreed-to milestones. While each mortgage company determines the terms and conditions of their programs, below is the general outline:

  • The homeowner is awarded an initial RH Reward amount.
  • The homeowner makes full and timely mortgage payments, keeping their RH Reward status active.
  • For a period of time following registration, an additional amount of money will be added to the initial RH Reward amount for each month the homeowner maintains active status.
  • Once the mortgage balance is paid in full – either by selling the home, refinancing, or by paying off the mortgage – the homeowner is paid the entire RH Reward.
  • Going forward, if the homeowner becomes delinquent more than once in any 12 month period, they risk forfeiting their entire RH Reward.

From a servicer perspective, the goal is to reward good behavior (paying off a mortgage), and discouraging bad (strategic default). To do this, the servicers reduce the amount of the loan but instead of taking it off the mortgage, pay it out as an incentive.

To find out if you can take advantage of this program, contact your lender.

Learn More.

$25 Billion Landmark Mortgage Settlement

This agreement between the Federal Government, 49 of the States' Attorney Generals, and five of the biggest mortgage lenders (Bank of America, Ally Bank, JP Morgan Chase, Citicorp, and Wells Fargo), provided a mechanism for these banks to provide foreclosure relief. The settlement is intended to benefit homeowners who are underwater with their mortgages or having difficulty making payments. While the terms are still being worked out, three classes of homeowners stand to benefit in the future. They are:

  • Homeowners needing loan modifications now, including first and second lien principal reduction.  The servicers are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide.State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.
  • Borrowers who are current, but underwater.  Borrowers will be able to refinance at today’s historically low interest rates.  Servicers will have to provide up to $3 billion in refinancing relief nationwide.
  • Borrowers who lost their homes to foreclosure with no requirement to prove financial harm and without having to release private claims against the servicers or the right to participate in the OCC review process.  $1.5 billion will be distributed nationwide to some 750,000 borrowers.

Unfortunately, it's still not clear who will benefit from this settlment as the details are still being determined. We'll post more information as it becomes available. Visit the settlement webpage.

If you know of any other helpful programs for homeowners, please tell us and we'll be sure to add them to the list.

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Five Advantages of Choosing a 15-Year Fixed Rate Mortgage Over a 30-Year Mortgage

Five Advantages of Choosing a 15-Year Fixed Rate Mortgage Over a 30-Year Mortgage

A 15-year fixed rate mortgage is preferred by many mortgage advisors and home buyers. What are some of the benefits of this type of mortgage and why is it becoming more and more popular for today's home buyer?

With all of the options available to you as a home buyer, choosing the right type of mortgage may seem overwhelming. You can choose from fixed rate mortgages, adjustable rate mortgages, mortgages in which you only pay interest for several years, and several other options. So how do you decide which one to choose? If you are trying to decide, here are some advantages of choosing a 15-year fixed rate mortgage to help you with your decision.

1. A 15-year fixed rate mortgage means paying less interest over the course of the loan.

When you pay your monthly mortgage payment, there is always going to be a significant amount of your money that goes to pay the interest. The longer your mortgage term is, the more interest you are going to pay over the life of the loan. Assuming a straightline amortization schedule and the same loan amount, you will pay less than half of the overall interest over the life of a 15-year fixed rate mortgage than on a 30-year fixed rate mortgage.

2. A 15-year fixed rate mortgage means getting out of debt faster.

Many financial experts suggest doing a 15-year fixed rate mortgage because it will help you get out of debt faster. Experts like Dave Ramsey suggest that you put at least 20 percent down on the home and he also says that your mortgage payment should be no more than 25 percent of your take home pay each month. While the monthly mortgage payments on a 15-year fixed rate loan would be a little higher than on a 30-year mortgage loan, that increase is due to faster amortization (i.e., faster pay down of the loan amount) and you will be out from underneath your mortgage debt in half the time which can be liberating, both financially and psychologically.

3.  Rates on a 15 Year Fixed Rate Mortgage are ordinarily Lower than on a 30 Year Fixed Rate Mortgage

While rates on 30 year fixed rate mortgages are at historically low levels, in most parts of the country rates of 15 year fixed rate mortgages are as much as 50 basis points lower.

4. You Are Unlikely to Live in Your Home More than 15 Years

Many home buyers believe that it makes sense to lock in to today’s historically low rates for the longest period possible and therefore believe that they should choose the longest term possible.  Such a strategy ignores the reality that very few home buyers will live in their home more than 15 years. When you sell your home, you will be paying off your mortgage.

5. A 15-year fixed rate mortgage loan instills discipline.

You might be asking yourself, “Why can’t I just get a 30-year fixed rate mortgage loan and pay it off in 15 years?” That might sound like a good idea, but the fact is that more than 97 percent of home buyers lack the discipline that it takes to do that and they never make any extra payments after the first few months of their mortgage. When something comes up during the month, it’s very easy to simply forego the extra payment for the mortgage and put the money towards something else. But signing up for a 15-year fixed rate mortgage forces you to discipline yourself and budget your money accordingly so you actually pay off your house in 15 years instead of 30. Besides, even if you sign up for a 30-year fixed rate mortgage and you pay it off in 15 years, you might be paying a higher rate than if you had just signed up for the 15-year fixed rate mortgage (see point 3 above).

 A 15-year fixed rate mortgage has both financial and psychological benefits over a 30-year fixed rate mortgage. If it is a possibility for your budget and your financial situation, it may be your best option. Crunch some numbers and work with a qualified financial consultant to make sure a 15-year fixed rate mortgage is ideal for you.

Have a look at 15 year fixed rate mortgage rates where you live here.

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