Oct. 6, 2019
If you need a mortgage to buy a home, rest assured: Prospective lenders will ask you a lot of questions. After all, loaning someone money is a risky proposition, so they'll want some assurance you'll pay them back!
So what questions might they ask you? Allow us to outline the most common queries during a consultation, and to tell you what constitutes a decent answer—and what doesn't. That way, your mortgage pre-approval process won't be derailed by any big surprises.
Ready? Make sure you have answers to these questions before you start the loan application process.
1. What is your credit score?
For starters, let's look at your credit score—the numerical representation of how well you've paid off past debts. If you're in the dark on what your credit score is, get your score for free at CreditKarma.com, or your full report at annualcreditreport.com. You may also be able to get a free score through your bank or credit union, or another financial institution.
Lenders typically offer the best interest rates to customers with the highest credit scores, generally 750 and above. Yes, you may get a loan without a good credit score. But you'll pay higher interest rates if you do. Try to improve your score before you apply for a loan.
2. Do you have sufficient credit history?
A common misconception is that if you have a great credit score, you have the credit issue covered. Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage," sees people who are proud of the fact they only have one credit card, which they hardly use, and a credit score of almost 800."It's not just the score," he says. "The whole purpose of the credit report is to have some sort of record that you have been able to establish credit and pay it back as agreed, reliably." If you haven't done that, lenders won't be in a hurry to lend you money. You have what is known as "thin credit."
If you only have one credit card, for example, you may not qualify for a prime loan with the lowest interest rates, regardless of your credit score. Your loan officer may recommend that you go out and get another credit card, or take out a small car loan, and come back when you have built a better track record of paying back debt.
3. How much is your countable income?
"Not everything you make necessarily counts," warns Fleming. "It's not unusual for someone to have this idea they make $200,000 per year, and an underwriter says they actually make $100,000 per year."
The reason? A lender may not include any income that is sporadic, new, or for something that the lender determines isn't a sure thing. Plus, ending a verifiable source of income you've had for years can also send up red flags, even if you have a new source of income to take its place.
Heather McRae, senior loan officer at Chicago Financial Services, Inc. in Chicago, IL, had one mortgage refinance borrower who retired during the loan approval process. Even though he had plenty of money from his pension and Social Security benefits, they had to wait a couple of months to document his new retirement income before he could get the loan.
Take-home lesson? Make sure your lender is aware of any recent changes to your income—not just the amount, but where it's from.
4. Have you changed jobs recently?
People often move and buy a home at about the same time they change jobs. That can be a problem, especially if the new job compensates you in a way that's different from the old one.
For example, say you were making an $80,000 base salary at your last job. You moved for a great job, where you get a $60,000 base salary, plus expected bonuses of $40,000, plus stock benefits. If you're expecting the underwriter to count your salary as $100,000 or more, you'll be disappointed. "If you don't have a history to document that you have received that over two years, you can only use the lower base salary," says McRae.
If you changed job fields, and your base pay stayed the same or improved, your loan approval may depend on the lender you are working with. Some lenders don't care if you've even changed job fields completely, as long as you are a W-2 employee. Other lenders want you to stay in a new job field for one or two years first to establish yourself, before they'll loan you money.
5. Do you have enough cash on hand?
Lenders expect you to have enough assets, such as cash and securities, to be able to pay for your down payment, inspections, and closing costs. An amount in reserve is important, too. The catch is that you probably won't be able to count 100% of your assets for these purposes.
For example, say you have $20,000 in the bank, your parents have promised to give you $10,000 to help with the down payment, and you have $80,000 in your stock brokerage account. Sounds like you have $110,000 available to buy a house, right?
The lender won't see it that way. They'll count the $20,000, assuming you can show with bank statements showing that it's been in your account for a while. The promise from your parents is less sure. The lender may want to see the money in your account, and get a signed letter from your parents stating that the money is a gift.
As for the $80,000 in your stock brokerage account, it may not be worth as much in the lender's eyes as you think. Lenders often knock 25% to 35% off the value of a stock portfolio, according to Fleming. They assume selling off a stock portfolio and other securities will incur expenses. You may owe taxes on capital gains—they don't know how much, so they'll assume the worst.
Also, the stock market fluctuates, so if you have to cash in to buy a house, you could have to sell stock on a down day. If you need to sell stock to buy a house, and you are borderline on qualifying to have enough assets, consider cashing in before you apply for a loan.
What if you're saving money in a shoebox under the bed? It doesn't count. Put your money in the bank, and keep it there for at least a couple of months, so that it shows on your bank statements.
6. How much other debt do you have?
You could have a great income, plenty of cash, a high credit score, and still not qualify for a loan. The deal killer may be all the other monthly payments you have to make, from credit card companies to auto loans. You can even be derailed by back taxes, due to the Internal Revenue Service. Lenders compare your monthly debt payments to your income to determine whether they think you can handle your mortgage.
Tempted to go out and buy new furniture for your new house before the loan closes? Watch out—that added monthly expense can throw off your debt-to-income ratio, and ruin your chances of getting a loan. It's a classic mistake.
7. What home are you hoping to buy?
You can't control everything. For example, you could be trying to buy a condominium, and it turns out that the condo association isn't viable, by underwriter's standards. McRae says that sometimes the condo association doesn't have enough insurance coverage, or other problems come up.
8. Are you single, married—or getting a divorce?
Lenders aren't going to ask you how you're getting along with your spouse. But they are interested if you are in the midst of a divorce, or if you have other major changes going on in your life that can affect your finances.
McRae had some clients who were getting a divorce in the middle of the transaction. The couple didn't think they needed to mention this. They thought it wouldn't make any difference, because they were still both on the loan and the divorce was amicable. However, the husband was obligated to pay alimony and child support. The underwriters had to charge the alimony and child support as expenses to the husband. Meanwhile, they couldn't give the wife credit for those payments under underwriting guidelines, because she had not been receiving them for six months. In the end, it killed the deal. They couldn't get the loan.
Bottom line? Make sure to keep your loan officer informed about what's going on. You can do whatever you want after the loan closes, as long as you keep up your payments. But when in doubt, avoid making big changes to your life and financial situation before or during the loan approval process.
Article Courtesy Realtor.com