Ok. You were interested in buying a home, but you have been told you cannot. Perhaps a Loan Officer or a Realtor told you have serious challenges such as credit issues, or income issues, or down payment issues, Green Card or residence status, etc.
What if you could buy? And even if you cannot buy right now, would it help to know what to do so you can eventually buy?
We will cover many of the challenges and what to do if you are being declined right now.
What’s the deal?
So, you get a phone call from the Loan Officer, advising you that you do not qualify for the home you had your heart set on. Perhaps your income is solid, but your credit is not or vice versa. Maybe you don’t have much money in the bank, or you think you need much more to make it work.
Lending has gotten much more complex in the past 6-7 years, and things that seemed like they would not matter are now of great importance to the lender. There are many areas that lenders review, but we break them down into 3 categories here, which I nickname ICE for simplicity:
1) Income – This includes the time on the job (2 years required), Same industry for past 2 years, paystubs and w2s, or 2 years of Schedule C or E if you are self employed.
2) Credit – Perhaps the easiest aspect to understand, you receive a credit score from each of the 3 repositories (Equifax, Experian, and Transunion) – scores range from 350-850. The higher the score, the better your credit profile is considered to be. Banks prefer your score to be over 720, and your interest rate is lower as your score improves. The best rates are for clients whose score are over 780.
3) Equity – When purchasing a home, this is your down payment or cash committed along with credits from the seller, agents or others. If you put 20% down, you then have 20% of your home value as built in equity or value.
There are many sub categories of each of the above 3, but all loan decisions come down to these three primary categories.
The Fine Print…..
When a bank is declining you, they are required to inform you of the reason in writing. This is often where the frustration begins – could you have been working on this before your file information was submitted?
Preparing for your loan in advance is always a good idea. But, what exactly can you do up front?
Follow the Yellow Brick Road…..
The first thing to do, is to get a copy of your credit report, and confirm that everything is accurate on the report. If the scores are low (under 700) then you either have credit that near the credit limit, or the credit is new. Be especially aware of any late rating for accuracy. If an account was factually 1 month behind, that is all that should be reported.
The second thing to do is to address any job changes and job gaps. If you took time off between jobs to find another one, that is classified as a job gap. Gaps that are more than 60 days raise bigger questions and flags to banks and need to be explained.
Third thing to do is to explain where the down payment is coming from, and if most of the cash is coming from a family gift, then you will need a letter to explain that there is no expectation of payback. If some of the down payment is coming from a city or county down payment assistance program, then verification of completion of that program (usually a certificate) is needed. If you are getting a gift or some assistance from one of these programs, that needs to be indicated on your application so the lender can come up with your total down payment sourcing.
If you do not have US citizenship, and either have a green card or a work visa, the lender will require proof of your employment contract and any documentation of employer assistance with the citizenship. There are lending programs that do not require a credit score for clients who have no US credit.
The fact of the matter is…….
Your loan application is now treated like a story, and your lender needs to know how to tell your story. That story needs to be compelling, and indicate why you are a good risk to lend to. The normal procedure of just sending documents is not enough, and lenders want to see that they are making a sound decision with large sums of money. This story telling includes any future raises that may be on the horizon for you, and any problem resolution with creditors, and any cash that you may be coming into any time soon.
There are many different ways for a loan application to die, and the skill of your lender can make or break your being able to purchase a home.
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