Sunday, 2 August 2020

How Does Credit Affect Qualifying For A Mortgage


Imagine someone walking up to you, and they say, can I ask you a question?. Can I borrow $300,000? What would run through your mind? Like haha. That's what the bank feels when you walk up to him to borrow $300,000 for a mortgage, $400,000 for a mortgage. But guess what? The first thing they ask you is, how's your credit?. In this article, we're going to go over how credit affects qualifying for a mortgage. Once you understand the credit categories, the debt worksheet, and the credit rules. You'll understand how the bank analyzes you to qualify you for a mortgage.


4. Categories Of Credit 
  1. Credit Score
  2. Public Record 
  3. Credit Automation 
  4. Credit Tradelines


Let's get into the article

1. Credit Score

Before the bank gives you the thumbs up to lend you the money, they want to know your credit score, they want to go over your public records, they run against credit automation, and then your credit tradelines. So credit score ranges between 300 to 850.


There are three credit bureaus that verify your credit. 
  • Equifax 
  • Experian
  • TransUnion 

What the banks do is out of your three credit scores, they take the middle score the three, so Experian, TransUnion, and Equifax will give you a credit score, and what the bank judges for your credit to qualify you for your down payment, interest rate, and your private mortgage insurance will be the middle score. For FHA and VA government loans. The bank qualification goes from 500 to 660, but we don't recommend that here on roadtosuccesse, we recommend that you have a 580 credit score to 660 to optimize the best interest rate you can possibly. Conventional ranges between 620 to 760, but to optimize great credit score, to get the lowest interest rate and the cheapest private mortgage insurance, you want to be between 680 to 760, and once the bank determines your middle score of the three scores. If there are any other borrowers who are going to be on the loan they're gonna go with the lowest middle score of that borrower as the main FICO score. So with that score is where they determine the interest rate, and the private mortgage insurance if you're going with the conventional loan.

2. Public Record 


When your credit is run, at the bottom of every credit report is the public records. Even if you run it with a free credit report company, or a credit monitoring company, or if you paid to get your credit ran by a mortgage lender, there are the public records. VA loans and FHA loans are a lot more flexible when it comes to your public records. When we're talking about your public records, we mean, your bankruptcies, your short sales, your foreclosures, your Repos, your evictions, your tax liens. So if you have bankruptcies, foreclosures, short sales, as you can tell, VA loans and FHA loans are a lot more flexible when qualifying for homeownership. You can tell that on conventional loans they're a little bit stricter, why would conventional loans be stricter? With conventional loans, you can avoid private mortgage insurance if you put a big enough downpayment, or after a certain amount of time if you have enough equity, your private mortgage insurance will fall off because they're taking away risks with private mortgage insurance, they do they are more strict when it comes to your public records.

3. Credit Automation 

Now that we determine your credit score and your public records. The next step is the bank takes the credit report, and they run it against a credit automation system. There are two types of the credit automation system

  1. Desktop Underwriting (Fannie Mae)
  2. Loan Prospect (Freddie Mac)

After you get your credit score, after they get your public records, they run your credit report just in case you don't qualify. There are little loopholes, let's say you have the perfect credit score, let's say you pass all your public record issues, but let's say there was late after the public record issues, after the bankruptcies, after the short sales, after the eviction. Right?. A lot of times, the bank still looks at it as a high risk. That's why they run against this automation system to see if you qualify. If you are teetering with that lower credit score, if you barely surpass the public record issues, definitely make sure that they run your credit report against credit automation. Once they run against the credit automation, and you get in approve eligible, which means now, you can get to the next step.


4. Credit Tradelines


There are four types of mortgage tradelines, there's
  1. Revolving Debt
  2. Installment Debt 
  3. Mortgages Debt
  4. Derogatory 


let's break it down 


Revolving Debt

Revolving is like credit cards, like a revolving door, if you can borrow the money, you can pay it back, and you can use it again, and again, That would be your revolving debt.

Installment Debt

Your installment trade lines are your car loans, your student loans, as you bide finance jewelry, electronics, or any type of furniture. Anything that you finance that has an end date would be an installment debt.

Mortgages Debt

Your mortgage debt is very different, it has revolving and installment. It has an installment because most mortgages are doing either 30 years or 15 years. That would be traditional, but mortgages also have a something called a "HELOC" a (home equity line of credit), they treat that like a revolving debt, you can use your line of credit and you can pay it off, and use it over, and over again, for the first ten years. After the ten years, if there's still a balance, it converts into an installment debt. That's why mortgage its own tradeline, it's like a chameleon. It has revolving, and it has an installment

Derogatory 

Revolving debt, installment debt, mortgage debt, can convert into a derogatory. If you're under the age of 30, derogatory is your best friend that you never wanted to be your best friend. Am I right? Most derogatory are going to be medical collections, they'll convert to charge off, they'll convert to collections, regular collection, or tax liens. So with derogatory, they're still on your credit, and, of course, as you get derogatory z' the debt is calculated differently when it comes to revolving and installment and mortgage. 


Here are the credit rules to follow under, to calculate the debt.

10 Credit Rules 


  • 1. Student Loans (Government Loans)
Student loans should fall under installment. Student loans normally you have to use 1% of the balance, or the fully amortized payment as the monthly payment. Yes, if you are not making payments on your student loans, you still have to hit either 1% or the fully amortizing payment against your debt. If it's an FHA loan.

  • 2. Student Loans (Conventional Loan)
If it's a conventional loan, which is rule number two. It's either going to be 1% or the monthly payment on your credit report. Those are the first two rules, and it affects student loan. So you have a student loan out there doesn't mean you don't qualify for homeownership, you just need to add the debt to your monthly payment. But with the student loans, it could knock you out from qualifying. Especially, if you are a doctor, if you have high student loans mostly doctors, lawyers, any degree that takes a long time to get into. These are public, these are federal student loans, not personal student loans. Of course, with a student loan, you can still qualified, but if the debt is too high, it could allow you to qualify for less or no home, of course, definitely talk to a mortgage lender to figure out the exact debt they're gonna hit you with.

  • 3. Collections
This where it affects derogatory. Like I said, collections, not charged off. With collections, if you have more than $2,000 worth of collections, you have to hit the collection against 5%. You would take that balance of the collection, times up by 5%, and whatever that monthly payment is you need to include that to your debt to income ratio. But guess what? Here's a secret, if your collections are under $2,000, you would not have to hit 5% against the debt. So it's under $2,000, the payment is omitted.

  • 4. Car Leases
Car leases might be installment if there's under ten payments left on a car lease. You still have to add that debt to your monthly payment. If it's a car lease, they will still count the monthly debt because of the bank's know that when that car lease ends, you're either gonna buy in a new car or lease another new car. So they still have to include the monthly debt.


  • 5. Installment Debt
If you have an installment debt less than ten payments left, and the monthly payment is less than 5%, you can omit the payment on an FHA loan. On a conventional loan. If it's less, there's no 5% rule. If there's less than five payments or less than ten payments left, you can omit the debt.

  • 6. Any debt that is in dispute you must remove it to qualify from homeownership.
A lot of times you guys use credit repair companies to qualify for homeownership, and what these credit repair companies do, they dispute the tradeline and it's in dispute, but when you qualify, the lenders will make you remove the dispute which will drop your credit score. Which will either, knock you off from qualifying, or drive down your credit score, and you will get a higher interest rate because your FICO score is so low. 

  • 7. Tax Liens
On FHA loan you must show at least three payments of your monthly payment for your tax lien to qualify for homeownership. On a conventional loan, you just need a payment letter, of course, you have to add the monthly debt to your DTI, but you can still qualify to buy without showing any payments.

  • 8. Rule #1. Co-Signer
You must be the cosigner and not the main signer if you are co-signing on any car or home. If you are the main borrower on that lien even with 12 months canceled checks you cannot omit the payment, you must be the co.


  • 9. Rule #2. Co-Signer
If there are less than 12 payments on a debt that you co-signed, if there are not 12 months canceled checks to prove that the other person is making the payment, guess what? you can't omit the debt. So if there are 10 months 11 months even though you're the co and there's canceled checks, you cannot omit the payment. You need 12 months of canceled checks.

  • 10. Rule #3. Co-Signer
On a mortgage, if you are the co-signer, but you wrote off the interest, guess what? you can't omit the payment. If you wrote off the mortgage interest as an owner-occupied even though you have the 12 months canceled checks, you can't omit the payment. 



So these are the ten rules you must pay attention to, and focus, when you're doing your debt worksheet to calculate your debt to income ratio.




Conclusion

Remember your revolving debt, and your installment debt is the face value, it's the monthly payment. Your mortgage debt is the face value as well, but remember, you need to subtract your debt against your rental income. Your derogatory is where you need to really focus on the credit rules to qualify to calculate your DTI. Once you calculate your monthly debts, you want to add all the monthly debt together to calculate, do you make enough to qualify?


Once you know your monthly debt which I want you to do is, add on there, what you are comfortable with your mortgage payment. Once you add those two numbers together, you times it by 2. If your monthly gross income is not more than that, that means you take a couple steps back. Either, drop the mortgage payment you can qualify for, or that's when you determine you go back to your worksheet book, and you pay off debt. You want to drop that monthly liability compared to the monthly mortgage payment. It's either drop the liability or drop the mortgage payment. Remember, for every dollar of debt you have, you need to make $2 of income

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