Why We Need What We Need

WHY WE NEED....

Employment History

Your employment history and your income are the keys determining your "capacity" to repay your mortgage. We must document your employment history and income in detail for the last (2) years.

A full two year history of employment indicates stability and the ability to master a job. Unless you have been employed for two years with the same employer, we may need additional documentation from you.

Your employment history is verified with: a verification from your employer(s) for the last 2 years, last 2 years W 2's or 2 years federal tax returns and 1 months pay stubs.

The verification of employment form asks your employer to verify the probability of your continued employment, how long you've been on the job, this year's year-to-date earnings, etc. The verification of employment form is checked against the other documentation you've provided us with.

Important Note:
Do not change jobs during the loan process. Doing so can jeopardize our chances of closing your loan. If you must change jobs for any reason, contact your loan officer immediately.

Your Income

Your income must also be verified for the last 2 years, and the same basic documentation used to verify your employment history is what we usually use to determine your qualifying income. Qualifying income is the income that can reasonably be expected to continue at the same or higher rate in the first 3 to 5 years of the loan.

There are 4 different types of income that may be used to help you qualify.

These include salary and wage income (wages, salaries, commissions, etc.), investment income (rental income. note income, etc.), non-earned income (child support, alimony, trust income, etc.) and self-employment income.

Investment income, non-earned income and self employment income all require additional documentation and special guidelines apply.

The basic rule, "If you can't trace it, you can't use it", applies to employment history and income. That's why income that does not show up on your tax returns, W 2's or pay stubs or an income that is received in cash and can't be documented usually cannot be used to help you qualify for a mortgage loan.

Consult your Loan Agent regarding QQ and NIQ programs.

Your Credit History

Your credit history is what the underwriter reviews to determine your "character" or your willingness to repay the loan. Underwriters look carefully at your past payment record as shown on your credit report. Credit reports are ordered at the beginning of the loan process and just prior to closing to insure that you have not incurred any additional debt that could affect your qualification for the loan. That's why it's so important that you avoid buying anything until after your loan has closed.

What Does Your Credit Report Show?

Your credit report shows open accounts, closed accounts, and any derogatory accounts you may have. On open accounts, the report indicates if the account is revolving (like a credit card) or installment (like a car loan). It also gives a rating for each account to show if you pay as agreed or have been late on the account.

There are some items that may appear on your credit report that will require further explanation from you. These include:

Credit Inquiries: If you have recently applied for a credit card, car loan, etc., an inquiry from the company you applied with may show up on your credit report. We will need a letter of explanation from you and if you did obtain a loan, we'll need the paperwork in order to determine what the monthly payment and balance are.
Late Payments: Any and all derogatory items that show up on your credit report will require a written explanation from you.
Judgments, Liens and Collections: A written explanation is required and the judgment, lien or collection will have to be paid off prior to close of escrow if it is not marked satisfied on the credit report. See the section on "Your Debts" for details on paying these items off.
Bankruptcy: Most bankruptcies must be discharged for a minimum of 2 years and we will need a letter of explanation and complete bankruptcy papers including the schedule of creditors and the discharge. You must also have re-established good credit since that time.

Writing an explanation Letter

A letter explaining late payments or derogatory credit should include the following points:

The derogatory item was due to circumstances beyond your control
It was an isolated incident and will not happen again
It was not a result of credit abuse or over extension of financial means.

What the Underwriter Looks For in the Credit Reports

Generally, the underwriter is looking for the intent to have excellent credit. An excellent credit history does not have to be a perfect or spotless credit record. A minor instance of poor credit or late payment can usually be explained as long as there are plenty of other accounts that have good payment records. This proves Your intent to have excellent credit. What underwriters don't like are patterns of late payments. For example, if you had late payments consistently over the last three years or had late payments after a bankruptcy, your package may not be looked at favorably.

If you do not have much in the way of a credit history, we'll need your help in establishing one for you. Letters or recent statements from utility companies (i.e. telephone, PG&E etc.) can assist us in showing that you have the ability to make payments on time.

Your Debts

What debts count against you in qualifying for a home loan? Typically car payments, student loans, revolving charge accounts, real estate loans, stock pledges, alimony, child support, unreimbursed additional debt during the loan process since credit reports are ordered just prior to loan closing.

Paying Off Debt

If your Loan Officer requests that you pay off some of your debt, pay close attention to the procedure they outline for you. They will probably instruct you to take your statements to the title company and have them disburse the funds. The reason for this is so that we have proof that the bills are actually paid off. If you send in a check to pay off the bill, we may not receive proof that it is paid off in time to close your loan and your qualification may be affected.

Circumstances That Require Additional Documentation

You may have circumstances that make it necessary for us to request additional documentation from you. Some of these circumstances include:

Co-signed Accounts: If you have co-signed for anyone else on a loan, we must document that you do not make the payment so we don't have to count it against you. We usually need a letter from you and a letter from the other party stating that they make the payments. We will also need 12 to 24 months worth of canceled checks to prove it.
Undisclosed Debt; Any debt that you haven't mentioned on your application that shows up later on your credit report or on a verification of deposit form will need to be explained by you in writing.
Cars 5 Years Old or Less Owned Free and Clear: If you own cars that are 5 years old or less, we'll need copies of your pink slips to prove that it does not have a loan on it.
Alimony or Child Support Obligations: If you owe alimony or child support, we'll need complete copies of your divorce papers or legal separation agreement. The figure in the court papers is what we'll have to use as a debt.
We may also ask for statements on your credit cards to show what your minimum monthly payment is so we don't have to count 5% of the balance against you. This often helps with your qualification for the loan.

Your Assets

In order to close your home loan, we most verify that you have enough liquid assets to cover these three things:

Your Down Payment: Your down payment is the difference between the purchase price of the home you are buying and the loan amount.
Your Closing Costs: Your closing costs are fees charged by the lender or other parties providing services that facilitate the closing of the transaction.
Cash Reserves: Cash reserves are liquid assets required to be left over after close of escrow insurance, mortgage insurance (if applicable) and home owner's dues (if applicable). Two months cash reserves are usually needed.

Verifying The Source of Cash to Close

Verifying the source of your money for the down payment and closing costs is one of the most critical aspects of putting together your loan package. That old rule of thumb "If you can't trace it, you can't use it" is especially applicable here. Usually, lenders want to see that you have at least 5% of the sale price in your own money. This portion of your down payment cannot be a gift or seller credit.

Acceptable Sources of Cash to Close

There are many sources of funds that are acceptable to lenders as cash to close your transaction. This money can be from your bank accounts, the deposit you make on the property, proceeds from the sale of your home, IRA and Keogh accounts, loan against your 401K, sale of stocks or bonds, sale of personal property, a gift, a seller credit or a secured term. Very specific documentation is needed to verify each of these sources of money so be sure you follow your Loan Officer's instructions carefully. Cash is not an acceptable source of funds because it usually cannot be traced.

Gifts

If you are getting a gift to help with your down payment or closing you must provide us with the following documents so that we can create a paper trail for the loan package:

A handwritten gift letter from the person giving you the gift and a recent bank statement showing the "donors ability to give ".
Proof of the withdrawal from the donor's bank account(a copy of the canceled check, a withdrawal slip, a bank statement, a written statement from the bank that the check has cleared the account).
Proof that the money is in your bank account (a deposit slip showing the amount of the gift - no automatic teller receipts please) or verification of deposit form (we send).

Closing Costs

Below is an overview of the types of closing costs you may incur on your loan. Some are one-time fees while others recur over the life of the loan. You will receive a Good Faith Estimate of Settlement charges and a booklet that will explain these costs in detail a few days after completing your loan application.

Loan Origination Fee

This fee covers the lender's administrative costs in processing the loan. A one-time fee often expressed as a percentage of the loan.

Loan Discount

Often called "points", a loan discount is a one-time, charge used to adjust the yield on the loan to what market conditions demand. One point is equal to 1% of the loan amount.

Appraisal Fee

This is a one-time fee that pays for an "appraisal" - a statement of property value - for the lender. The appraisal is usually made by an independent fee appraiser.

Credit Report Fee

This one-time fee covers the cost of the credit report which is run by an independent credit reporting agency.

Title Insurance Fees

There are two title policies - a lender's title policy (which protects the lender against loss due to defects on title) and a buyer's title policy (which empowers you). These are both one-time fees.

Miscellaneous Title Charges

The title company may charge fees for a title search, title examination, document preparation. notary fees, recording fees and a settlement or closing fee. These are all one-time charges.

Document Preparation Fee

There may be a separate, one-time fee that covers preparation of the final legal papers.

Prepaid Interest

Depending on the time of month your loan closes, this charge may vary from a full month's interest in just a few days. If your loan closes at the beginning of the month, you will probably have to pay the maximum amount. If your Loan closes at the end of the month, you will only have to pay a few days interest. Your Loan Agent can explain all the details.

PMI Premium

Depending on the amount of your down payment, you may be required to pay up for mortgage insurance (which protects the lender against loss due to foreclosure). You may also be required to put a certain amount for PM1 into a special reserve account (an impound account) held by the lender.

Taxes and Hazard Insurance

Depending on the month that you close, you may be required to reimburse the seller for property taxes, You will also need to pay an entire year's hazard insurance premium up front. In addition, you may be required to put a certain amount for taxes and insurance into a special reserve account held by the lender.

Your Good Faith and Reg Z

A few days after your loan application, you'll be receiving a Good Faith Estimate of closing costs and a truth-in-lending disclosure statement (Regulation Z). These statements are provided in compliance with federal law and since they often raise a great deal of confusion, we'll try to provide some explanation here.

The Good Faith Estimate

The Good Faith Estimate is exactly that - an estimate of the closing costs on your loan. The figures are usually high and may vary depending on several factors. For example, your appraisal and credit report fees are required to be disclosed on the form but, you have probably already been charged for them up front. You will not be charged again but they are included here as a part of closing costs. Another example is prepaid interest. The amount of prepaid interest you pay changes, depending on the time of the month your loan closes but, we show a full 30 days in the estimate. Please refer to the page on "Closing Costs' for details on the charges shown on the Good Faith Estimate. The Good Faith Estimate shows two separate areas of closing costs. The lower set of figures disclose, the Total Prepaid Finance Charges. The total is subtracted from the Total Loan Amount to show the Amount financed figure on which your annual percentage rate (see Truth in Lending Statement) is estimated, under the miscellaneous charges disclosed on the top portion of your Good Faith Estimate. This is due to federal regulations prohibiting the totaling of the two set of figures. Adding the Prepaid Finance Charge line on the top portion of the Good Faith Estimate, with the Total Prepaid Finance Charge found on the bottom will give you an estimate of your total closing costs. Please note that these figures do not include your down payment.

The Truth-in-Lending Statement (Regulation Z)

Amount Financed: The amount financed represents the actual loan amount minus the Prepaid Finance Charge line on the Good Faith Estimate. The amount financed is NOT the loan amount that you have applied for or what will appear on the note.
Annual Percentage Rate (APR): The APR represents the interest rate of the note plus certain prepaid items shown as a constant rate averaged over the term of the Loan. In other words, it is the cost of the credit over the full term of the loan expressed as an interest rate. The APR is not the interest rate that you have applied for or that will appear on the note.
Finance Charge: The finance charge is the total dollar amount the credit will cost you over the full term of the loan. This is paid monthly as the interest portion of your principal and interest payment.
Total of Payments: The total of payments is the total of principal to be prepaid plus the interest to be paid over the life of the loan. It is the Finance Charge plus the Amount Financed. When reviewing these documents, please keep in mind that the figures shown are only estimates.

Components of a Mortgage Payment

Your monthly mortgage payment is made up of several components. This housing expense is commonly referred to as "PITI or Principal, Interest, Taxes and Insurance. PMI and home owners association dues also make up a portion of your total payment.

Principal

The original balance of money loaned, excluding interest. Also, the remaining balance of a loan, excluding interest. The interest is calculated on the principal.

Interest

The charge for the use (loan) of money.

Taxes

The county assessor charges property tax based on the value of your home. There are two tax installments due each year. The first installment is due November 1st and is delinquent on December 10th, The second installment is due February 1st and is delinquent on April 10th. Taxes may be impounded depending on the amount of your down payment (anything less than 20% usually requires an impound account) An impound account is a trust account set up by the lender to which a portion of your monthly payment is credited so that funds will be available for the payment of taxes and insurance. This way, the lender actually pays the bills for you (supplemental taxes are, not included).

Hazard Insurance

A contract that pays for loss on a home from certain hazards including fire. You obtain home owner's insurance from your own insurance agent. The standard policy pays replacement costs, minus depreciation based on actual cash value. Talk to your insurance agent about the different types of insurance available. Hazard insurance may be impounded.

PMI (Private Mortgage Insurance)

Depending on the amount of your down payment, you may be required to have PMI (anything less than 20%) usually requires PMI. Because loans with small down payments involve substantially more risk for the lender, they want protection in case the loan goes into foreclosure. Mortgage insurance helps cover the lender's losses in the event of a foreclosure. Because this insurance is available, lenders can offer loans with lower down payment. PMI can require an up front fee which is payable as a part of your closing cost, and/or a monthly fee depending on your choice of payments, available. The cost of PMI varies according to the amount of your down payment. FLA also charges a fee for mortgage insurance which is called MIT or Mortgage Insurance Premium. There is both an up front fee (which may be financed) and a monthly charge on homes or townhouses (only monthly on condos). VA charges a funding fee, which may also be financed.

Qualifying Ratios

On all loans, you are required to meet certain "ratios" of debt vs. income. There are usually two ratios that must be met (there are some exceptions on VA loans, for example). The first ratio is the "top" ratio or housing expense ratio. The second ratio is the "bottom" or total debt ratio.

The bottom ratio is calculated in the following way:

Monthly Housing Expense plus All Other Monthly Debts divided by Gross Monthly Income.

The top ratio is calculated in the following way:

Monthly Housing Expense divided by Gross Monthly Income.

All other monthly debts include car payments, revolving charge accounts, real estate loans, student loans, credit union loans, child support and alimony, etc. Acceptable ratios vary by loan program, by the amount of down payment you make and your monthly debts. For example, ratios on a standard fixed rate loan would be as follows:

95% Loan (5% down payment) = 28/33
90% Loan (10% down payment) = 30/36
80% Loan (20% down payment) = 33/38

If you don't meet the required qualifying ratios on one program, you may be able to meet them on another for example, PEA and VA have very different guidelines, as does the Community Home Buyers Program. Your Loan Officer is an expert at determining the best plan for you and they can answer any questions you might have.

Compensating Factors

In addition to meeting ratio guidelines, underwriters like to see "compensating factors" or other facts about the loan that are good.

Compensating Factors include:

A large amount of money left over after close of escrow

Verified net worth high enough to repay the entire loan

The new payment is only slightly higher than current rent or mortgage payment

Increasing earning capabilities

Excellent ability to save

Very large cash down payment

Call or E-mail Today! Let us tailor a loan package with flexible, real world, terms to meet your specific needs.
713-526-2500 or 713-480-7777 or WestUmortgage@gmail.com

www.Al-Cohen.com