As rates have crept up, buyers are finding themselves in a position to borrow very close to the maximum amount the bank will qualify them. When rates were in the 2's and 3's I found many buyers were borrowing substantially less than the bank offered them. Now, not so much. When the buyer is at or near the maximum borrowing limit the underwriters in charge of approving the loan can get really picky and tight on any discrepancies or variances from the guidelines. Borrowers should not assume they qualify, nor should they assume they do not. Loans are complicated instruments and it is always worth sitting with a professional loan officer to find out if you qualify and what to do the get qualified.
Generally the base guidelines for conventional mortgage borrowing are as follows:
- PITI (Principle, Interest, Taxes, Insurance) is <36% of gross income
- Total debt service is <43% of total gross income
- Credit report is clean, no derogatory entries in 24 months
- Stable provable income for two years without gaps
- Minimum 6 months on the current job
These are guidelines and routinely borrowers are granted exceptions based on superior credit, low LTV (Loan to Value), or excellent reserve cash in the bank. Exceptions are often made for job time as well. For example a college engineering grad that takes a brand new job as an engineer can get a waiver on the time on job due credit for time in college so long as employment is verifiable as permanent.
It is important to check with you mortgage professional who will look at your specific financial situation and give you far better advice than I can. I have seen 50% debt to income ratios approved. I have seen 50% PITI as well. It happens but it almost always happens when the borrower has other strong financial attributes. A low credit score will always make it difficult to get any exception from these guidelines. Being right up against the wall on multiple guidelines will also make it difficult to get an exception even if your credit score is sky high.
Buyers should avoid the following activity when buying a house:
- Opening new lines of credit
- Allowing credit balances to get larger
- Applying for credit lines of any kind
- Moving money around in bank accounts
- Making large cash deposits into personal accounts
- Closing credits lines unless advised to do so by lender
- Changing banks during the process
- Taking unpaid leave from job
Buyers should do the following:
- Leave the down payment money in the account untouched
- Continue making all debt payments on time as scheduled
- Contact your loan officer before making any financial move
- Immediately get documents requested by loan officer
Remember the closer you are to the maximums the harder it is to get exceptions. You will find that a bank making a mortgage loan of $200,000 on a $500,000 home with a borrower that has an 800 credit score, and $800,000 in the bank will be much more lenient than a 620 credit score borrower putting 3% down with a debt to income ratio of 50% and no money left in the bank after the loan closes.
Buyers need to follow the loan officer's lead. Do not make assumptions, always ask the loan officer before making financial decisions. I have watched buyers lose their buying opportunity because they failed to heed the advice of the loan officer or failed to ask before making a financial move.
The most important thing to remember is this simple rule: He who has the money, makes the rules. They may not seem fair, but they are what they are and banks don't care about your feelings.
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