Qualifying

Conventional Home Loan Credit Qualifying Guidelines

A conventional loan requires a borrower to demonstrate a good to excellent repayment history of all debts. This history serves as the most useful guide in determining a borrower's willingness to repay credit obligations and serves as a model in predicting his/her future actions.

A borrower who has made payments on previous or current credit obligations (such as a credit card, student loan, etc.) in a timely manner represent a reduced risk. Conversely, if the credit history, despite sufficient income to support these debts, continuously reflects slow or often late payments, judgments and delinquent credit accounts, strong offsetting factors will be necessary to approve the loan.

When analyzing a borrower's credit report, it is important to focus upon the general pattern of credit behavior rather than isolated occurrences of late payments. Often times, people will experience a period of financial difficulty in the past and does not necessarily translate into an unacceptable risk. Reasonable explanations of the credit derogatory and evidence of offsetting factors (such as a new job or promotion with greater stability and pay, for example) will be necessary. All derogatory credit information must be explained, in writing, by the borrower.

The following is a brief synopsis of the credit underwriting guidelines for conventional home loans (please note that other mitigating factors may influence an underwriter's decision for loan approval):

	Lack of credit history: If a borrower does not have a minimum of 2 trade lines on their credit report, alternative forms of credit may be used. This would include items such as auto insurance payment history, utility bills, etc.
	Included credit obligations: Any installment loan (e.g. student loans, car loans, etc.) with less than 10 months remaining does not need to be included when qualifying for a conventional home loan. However, consideration is given to a large debt of over $100 a month, regardless of the number of months remaining. Furthermore, payments on auto leases with less than 10 months must be included in the qualifying ratios. The minimum payment on all revolving accounts (i.e. credit cards) is also factored in. If the borrower has an open revolving account without a balance, $10 per open account should be included when qualifying. Any loan where the borrower has co-signed for another party is included with their debts unless the borrower can prove that the the other party has made the payments on their own for a minimum of 12 months.
	Chapter 7 Bankruptcy: A minimum of 3 years (and in many cases 4 years) since the discharge of the bankruptcy. An explanation of the bankruptcy will be required. Furthermore, the borrower should have re-established credit (i.e. secured credit card) with no late payments.
	Chapter 13 Bankruptcy: A borrower still paying on a Chapter 13 bankruptcy if the payments to the court have been made for a minimum of 1 year in a satisfactory manner (as verified with the courts) and with the approval of the court trustee may be eligible.
	Judgments: Judgments must be paid in full prior to closing.
	Collection Accounts: If a collection account is minor in nature ($100 or less), it generally does not have to be paid off as a condition of loan approval. This may vary from region to region.
	Foreclosure: A borrower who has had a property foreclosed upon, or who has given a deed-in-lieu of foreclosure within the previous 3 years, is generally not eligible for a conventional home loan. However, if it was the result of extenuating circumstances beyond the borrower's control (such as the death of a spouse, loss of employment, or serious long-term illness, etc.) and the borrower has since re-established good credit, an exception may be granted. However, extenuating circumstances do not include the inability to sell a house when transferring from one area to another.
	Non-purchasing Spouse: If a married borrower is purchasing a property by himself/herself, the credit obligations of the spouse must be included with the application and will be factored in with the borrower's credit obligations and used to determine the financial capacity of the borrower. Furthermore, the non-purchasing spouse may be required to sign a security instrument or documentation relinquishing all rights to the property.

Conventional Home Loan Income Qualifying Guidelines

A conventional loan requires a borrower to have sufficient and adequate income to cover the repayment of the mortgage. Before a borrower can be approved for a conventional home loan, the stability of income and the continuance of the borrower's income must be established through acceptable sources of income, the borrower's past employment record, and the employer's confirmation of continued employment must be established.

Stability of a person's income is generally derived from their employment history. A conventional loan requires verification for the previous two full years and must be documented through lender verifications of previous employment or W-2's. This income must be analyzed to determine whether it can be expected to continue through the first 3 years of the mortgage loan (if the borrower intends to retire during this period, the expected retirement income, social security benefits, etc. should be used). Any gaps in employment must be reasonably explained by the borrower. Schooling or education for the borrower's profession (e.g. nursing school) can be counted towards the 2 year requirement. Allowances for seasonal employment, such as is typical in the building trades for example, may be used.

The following is a break down of the different types of income a conventional loan considers acceptable:

	Salary / W-2 Income: A two year history must be well documented
	Overtime or Bonus Income: Both may be used to qualify the borrower as long as the income has been received for the past two years and is likely to continue. An average of the bonus or overtime income over the last 2 years is used
	Part-time Income: Part-time income (second job) may be used in qualifying if the borrower has a 2 year employment history without interruption. Seasonal employment may be used if the borrower can demonstrate a 2 year history and the probability of continuation. Income from part-time positions that does not meet these requirements should be considered as a compensating factor only
	Commission Income: Commission income must be averaged over the previous 2 years. The borrower must provide his/her last 2 years Federal tax returns (1040's) with all schedules. Any un-reimbursed business expenses must be subtracted from the gross income.
	Retirement / Social Security Income: Verification from the source is required. If the income should expire within 3 years, the income cannot be used to qualify the borrower and used only as a compensating factor
	Alimony, Child Support, or Separate Maintenance: Though not required for qualification, a borrower who chooses to use this income must 1) provide a 12 month payment history from the ex-spouse or courts showing timely payment and 2) provide evidence that such payment will continue for at least 3 years. A copy of the divorce decree, settlement agreement, etc. will be necessary.
	Notes Receivable: A copy of the note and evidence that payments have been received for a minimum of 12 months are required. Should the note expire within 3 years, it can be used as a compensating factor only.
	Interest and Dividends: Interest and dividend income may be used provided documentation (such as tax returns or account statements) supports a 2 year history of receipt. This does not include dividend re-investment plans.
	Rental Income: Rent received from investment properties owned by the borrower may be used, subject to the proper documentation. Income from roommates, etc., in a single-family property to be occupied as the borrower's primary residence is not acceptable. Rental income is calculated from the borrower's Schedule E of their 1040's. Depreciation can be added back to the borrower's net rental income. Positive rental income is considered as gross income for qualifying purposes; negative rental income must be treated as a recurring liability. Copies of the leases must support a continuation of the income.
	Self-Employed: A borrower with 25% or more ownership interest in a business is considered self-employed. The income from borrower's self-employed less than one year is not acceptable. Borrower must supply the following: 1) personal tax returns for the most recent 2 years (with all schedules), 2) K-1's, 1120's or 1120S's for the last 2 years, financial statements (profit and loss statement and a balance sheet) for the interim and last 2 years, 3) borrower will have to sign an 8821 or 4506 income taxes release form (see lender).

Compensating Factors for Conventional Home Loans

When a borrower's payment or combined monthly debt payments is/are higher than the limits prescribe by a conventional loan , the loan may be approved with compensating factors. The following are several compensating factors to support borderline loan files:

· Energy efficient dwelling

· Less than 10% increase from old rent/house payment to the new housing expense

· A borrower's excellent savings ability (as shown by savings accounts, IRA's, etc.)

· 3 or months cash reserves (house payments after closing) that are not part of a gift

· Limited use of credit

· Borrower has potential for increased earnings

· Borrower has income that cannot be used as qualifying income

· Larger than minimum down payment

Good credit, steady income and residual income are not compensating factors.

Sun Nations Mortgage, Inc. 15849 N. 71st Street, Scottsdale, AZ 85254 602 993-0000 MB#0013507 NMLS170474
Content copyright 1995-. Sun Nations Mortgage, Inc. All rights reserved.

Sun Nations Mortgage, Inc. | Promote Your Page Too