If you are buying a home in Chicago or the Chicago area, an FHA mortgage might be your best financing choice. With 
FHA there are two ways to get your mortgage approved. The first is through an automated approval. This is the way nearly all conventional loans are approved, and most FHA loans are approved this way, too. When you apply for a mortgage approval or pre-approval your loan officer enters all your personal and financial information into a computer program and uses an Automated Underwriting System (AUS) to determine the risk in the loan. The system issues either an approval or a refer to the underwriter decision. This is a very simplified explanation. Part of getting the approve decision is based on how your loan officer interprets your loan information and how it corresponds to FHA guidelines. If the wrong information is put in, or if the information is right but not acceptable according to the guidelines, you may get an automated approval, but when the underwriter goes over the details she may overrule the approval and deny the loan. So it is important that your loan officer understands all the ins and outs of FHA financing. But if the loan is put together correctly and the right information put in, an automated approval is the quickest and easiest way to get an FHA loan approved.
But what happens if the loan doesn't get the automated approval decision? Sometimes there are borrowers who don't quite fit the box for the automated approval, but have reasons why they should be able to own a home and pay a mortgage. The AUS measures risk, but it isn't a live person, and sometimes a loan that looks too risky based on the computerized decision is a safe loan when all the facts are presented. The loan could seem too risky for a number of reasons: maybe because of recent credit problems, maybe it appears there isn't enough income to handle your debt, or it could be an employment issue. My job is to find the strengths in the borrower and present their file in the best light. If there is a problem in the file, I need to understand what happened and why it happened. Maybe the credit looks bruised and the credit scores are low, but there was a reason for the late payments which make them isolated and unlikely to happen again. Explaining the special circumstances can lessen the risk and show the underwriter why the loan should be approved.
One of the common reasons that loans are close calls is when the ratios are too high. Ratios, the percentage of your income which goes toward your mortgage payment and the percentage of your income which takes up the mortgage payment plus all your other debt are set at 31% and 43% respectively, but you can go higher than those percentages with the automated approval. If you don't get the automated approval and you need to go beyond these stated ratios, you will need compensating factors to show that you are not taking too much risk. Here are some of the things looked at as compensating factors. The more of these that your loan has, the stronger your case for an approval is:
• The borrower has substantial documented cash reserves after closing. (At least 3 months' worth).
• The borrower has demonstrated the ability to accumulate savings.
• The borrower makes a large down payment (10% or more.).
• The borrower has demonstrated a "conservative" use of credit.
• The borrower has demonstrated the ability to pay housing expenses equal to or
greater than the proposed monthly housing expense for the new mortgage over
the past 12 months.
• Previous credit history shows that the borrower has the ability to devote a
greater portion of income to housing expenses.
• The borrower receives documented compensation or income not reflected in
effective income, but directly affecting the ability to pay the mortgage (this could be a 2nd job that we can't count as full income or even public assistance).
• There is only a minimal increase in the borrower's housing expense.
• The borrower has substantial non-taxable income.
• The borrower has potential for increased earnings, as indicated by job training or
education in the borrower's profession.
• The home is being purchased as the result of relocation of the primary wage earner
and the secondary wage-earner has an established history of
employment, is expected to return to work, and there is reasonable prospects for
securing employment in a similar occupation in the new area.
There are other issues like having been on the job or your current residence for a long time which add to your stability and make your case stronger, but aren't really compensating factors. If your case is a close call, the way that your case is presented can mean the difference between loan approval and a denial. If you are considering an FHA loan in Chicago or the Chicago area? If so, give me a call, I'd love to help.
Pete Thompson is an Illinois mortgage banker who provides superior mortgage service and competitive mortgage rates in Chicago, the Chicago area and throughout Illinois. Click here for a Free copy of The Real World Home Buyer's Guide - How to Save Thousands when Buying a Home and Getting a mortgage. For information on the latest mortgage news and current Illinois mortgage rates, please visit http://www.illinoismortgageratesandnews.com
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