Tag: mortgage approval

Mortgage Pre-approval Application Perspectives

How to prequalify for mortgage?

Home buyers can simplify the steps of buying their dream home by prequalifying for a mortgage. So, what exactly does a prequalify mean?

Mortgage pre-qualification enables you to estimate how much you can borrow from a lender. This helps you plan for the maximum price of the home you can afford using a mortgage financed by that lender.

Clearly, for maximum value, you would want to explore multiple lenders, comparing their mortgage products and the interest rates they quote. This is where working with an online mortgage broker such as STEM Lending helps you save. You can compare multiple options with much lesser time spent as compared to shopping offline. Explore options here: https://www.stemlending.com/apply.

What are the factors influencing the prequalification amount?

Factors that influence the dollar value of pre-qualification by a lender include:

  • Credit score
  • Monthly disposable income
  • Financial assets; and
  • Overall debt at the time of application.

It is essential to build up a strong credit score and monitor your credit before applying for pre-qualification. To learn more, check out STEM Lending’s article on credit report monitoring: Proactively monitor credit report before seeking mortgage.

A key metric to understand regarding mortgage pre-qualification is your monthly Debt-to-Income ratio, often abbreviated as DTI. The debt-to-income ratio is: (Sum of all the Monthly Debt Payments) divided by (Gross Monthly Income).

This number is measure by which lenders assess your ability to repay the mortgage, since a high debt-to-income ratio can render the borrower miss a scheduled mortgage payment in the event of a large unforeseen expense, increasing the potential likelihood of default.

Common metrics that are included in monthly debt payments, thereby impacting the DTI, include:

  • Monthly payment on new mortgage
  • Student loan payments
  • Credit card payments
  • Auto loan payments
  • Home appliance loan payments; and
  • Other recurring debt payments present in credit report.

Lenders may set DTI thresholds for mortgage applicants and many lenders may not pre-qualify applicants with Debt-to-Income ratio greater than those thresholds. To learn more about DTI, and how it impacts your mortgage application, check out STEM Lending’s article: Explaining Debt-to-Income “DTI” and Its Importance.

Notably, other factors also indirectly impact the DTI by means of monthly mortgage (Debt) payment. These include:

  • Approved mortgage interest rate
  • Loan-to-value ratio (LTV)
  • Credit score
  • Property usage
  • Late payment history and
  • Any foreclosures or bankruptcies on record

Pre-qualification is not the same as Pre-approval

First-time home buyers should note that mortgage pre-qualification is not the same as pre-approval. Pre-qualification is a conditional approval of the mortgage — an estimate of how large a mortgage one can afford. However, it doesn’t create a binding commitment between the home-buyer and the lender. Pre-approval, on the other hand, involves a detailed review of applicant’s debt, income, assets and credit history and the borrower can receive a Pre-Approval Letter documenting the amount that the borrower has been approved to borrow. To learn more about differences between Pre-approval and Pre-qualification, read STEM Lending’s article: Mortgage 101: Pre-approval vs. Pre-qualification Letter.

To take the first step in getting prequalified for a mortgage and save on your mortgage, contact STEM Lending for a free initial consultation:

  1. Message: stemlending.com/contact-us
  2. E-mail: hello@stemlending.com
  3. Call: +1 (833) 600-0490 (toll free)

STEM Lending also offers simple and free mortgage calculators for you.

Wishing you a happy home buying experience!

– STEM Lending Team

co-borrowers Perspectives

Should I Add a Co-Borrower to my Mortgage Application?

Getting approved for a mortgage loan is the first step toward the milestone of becoming a homeowner. It is also the beginning of a serious, long-term financial commitment. For many first-time homebuyers, getting approved on your individual finances or as a co-borrower is a difficult decision.

According to data analysis released by Zillow, 70% of prospective home-buyers frequently search for a home with their spouse or partner.

But when you are actually applying for the mortgage, should you & your spouse both apply as co-borrowers? Or, should you try qualifying for the mortgage on your own?

Education continues to be a distinguishing factor in the first-time homebuyer decision making process, so let’s start there.

Mortgage Definitions

Co-borrowing vs. Co-signing

It’s important to understand the differences between a Co-signer and a Co-borrower. Remember, if you have any additional questions, you can always call STEM Lending, and we will connect you with a mortgage specialist.

Co-Borrower: this is someone whose name is on loan documents along with yours. Both people are equally responsible to repay the loan in this situation. Taking both the primary and co-borrower’s income, assets and creditworthiness into consideration for the loan application may help qualify for a mortgage loan with better rates.

The co-borrower has what is called an “ownership interest” in the home or condominium you are looking to purchase. Co-borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower’s income, assets, liabilities, and credit history are considered in determining creditworthiness.

Co-Signer: a Co-signer is a person whose assets, income and creditworthiness are taken into consideration to help qualify you for a mortgage. Co-signers are liable to repay the loan, but they have no ownership interest in the house.

Co-borrowers

Obviously, having someone with a substantial credit history (ex. a parent, grand-parent, uncle, aunt) co-sign on the home loan can help you get a mortgage with the best interest rates. The benefit for the co-signer (aside from helping you buy your house) is that the regular monthly payments made by the homeowner reflects well on his/her credit report.

Co-signers are liable for repaying the mortgage obligation and must sign all documents with the exception of the security instruments. The co-signers income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the co-signer must complete and sign the loan application.

As you can see, the downside of co-signing a mortgage loan is the risk of default. If you (homeowner / occupier) cannot afford to make monthly payments, your co-signer is liable to repay the loan. This is an extremely important point for all parties to understand upfront.

Non-Occupant Co-Borrower

There is a third, but less known option — the “non-occupant co-borrower.”

A non-occupant co-borrower is a person who is co-borrowing on a home, but not living in it. Non-occupant co-borrowers are a step above co-signers — they’re “partners” in the home’s ownership. This person may be added to a mortgage loan to help you qualify for a mortgage. A non-occupying co-borrower is beneficial from an income or credit perspective.

Some lenders who allow non-occupant co-borrowers, such as Fannie Mae (HomeReady) and Freddie Mac and some conventional home lenders, require a non-occupant borrower to be a relative of the person who will be residing in the home. The non-occupant borrower must be related to you by blood, marriage or law to qualify as a co-borrower who will not reside in the home. FHA loan programs allow non-occupant co-borrowers for home buyers who have little or no income for income qualification so they can meet the necessary debt to income ratios.

As a non-occupant co-borrower, you get the same notices as the borrower so you know if they’re not paying on time; and, you put yourself in position to force a home sale if the primary borrower is not fulfilling their duties to your arrangement.

When you apply for your mortgage, just tell the lender that you’ll be using a non-occupant co-borrower on the loan. Your lender will know what to do.

Fact vs. Fiction

Many non-homeowners think that if they are married, applying for a mortgage as co-borrowers is a requirement: 

Applying for a mortgage as Co-Borrowers is NOT a requirement.

Another commonly held belief is that, by bringing a Co-borrower onto your loan application, you will always improve your chances of being approved.

However, it is crucial to understand that the federal agencies (Fannie Mae, Freddie Mac, Ginnie Mae) that oversee and buy loans from lenders will generally require lenders to use the lower scoring borrower’s credit score (specifically, the median score from  Experian, Equifax, or TransUnion credit reports) to underwrite the loan.

So, even if your co-borrower’s credit is well established and 780, if you have poor credit, it’s very possible that your co-borrower’s credit won’t help you in determining creditworthiness.

What’s the Right Move?

Ultimately, adding a co-borrower to your mortgage loan application will result in having your income history, assets, liabilities, and credit assessed for eligibility and creditworthiness. The interest rate you both are quoted and your overall eligibility will be influenced by each other’s personal financial history, so it’s always a good idea to strengthen your credit as much as possible before applying.

Since you will both have equal responsibility to repay the loan, if you choose to bring on a co-borrower or co-signer, make sure you understand the legal differences. Additionally, given that many co-borrowers are related or spouses, you should discuss what will transpire if things go south (e.g. divorce, sudden death, job transfer, etc…)

Again, for more information on your specific situation, shoot us an email at support@stemlending.com or visit www.stemlending.com for more details.

Perspectives

Explaining Debt-to-Income “DTI” and Its Importance

When mortgage lenders approve borrowers for a loan who have completed applications on STEM Lending’s site, that decision is based on a standard set of guidelines that are generally determined by the type of loan program. Today, we are going to focus on one of the main components of a mortgage approval: Debt-to-Income (DTI) Ratios.

Many potential home buyers have only a rough idea before applying — even for a pre-approval letter — about their own DTIs, how lenders view them, and what sort of obstacles they’re likely to encounter.

How Do I Calculate DTI?

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.  This number (reflected as a %) is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.

The lower the DTI ratio a borrower has (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.

Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

For example, if you pay $2000 a month for your mortgage and another $200 a month for an auto loan and $500 a month for the rest of your debts, your monthly debt payments are $2700. ($2000 + $200 + $500 = $2,700.) If your gross monthly income is $7000, then your debt-to-income ratio is 38.57 percent. ($2700 is 38.57% of $7000.)

What is Front-End vs. Back-End DTI?

Debt ratios for home loans have two components.

The Front-end DTI ratio measures your gross income from all sources before taxes against your proposed monthly housing expenses, including the principal, interest, taxes and insurance that you’d be paying if the lender approved the mortgage you’re seeking.

The Back-end DTI ratio measures your income against all your recurring monthly debts. These include housing expenses, credit cards, student loans, personal loan payments and others. Under federal “qualified mortgage” standards, your back-end ratio maximum was capped at 43%, although with recent announcements from Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, there is wiggle room case by case

Why is the 43% Debt-To-Income Ratio so Important?

For loans to be eligible for sale to Fannie Mae or Freddie Mac, lenders have to follow the 43% guideline set by the GSEs.

The federal “qualified mortgage” rule sets the safe maximum at 43%, although Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) all have exemptions allowing them to buy or insure loans with higher ratios.

FHA traditionally allowed DTIs over 50% for some borrowers, however those borrowers have to pay private mortgage insurance (PMI) for the life of the loan.

Freddie Mac also uses private mortgage insurance and will accept loan applications with DTIs above 45%.

Fannie Mae will be raising its DTI ceiling from the current 45% to 50% as of July 29, 2017.

Fannie Mae also uses private mortgage insurance on its low down payment loans, but the premiums are automatically canceled when the principal balance drops to 78% of the original property value.

As an prospective borrower, your application will still have to go through Fannie’s automated underwriting system (Desktop Underwriter), which examines your entire application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes.

Takeaways

Studies by the Federal Reserve and FICO, the credit scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

In general, we think your front-end and back-end DTI ratios should be 28% and 36% respectively, or lower.

  • FHA limits are currently 31/43, though these can be higher with justification from the lender.
  • VA limits (for veterans) are only calculated with one DTI of 41.
  • Conforming loans have to conform with the DTI limits we mention above for your mortgage loan to be eligible for sale to Fannie Mae and Freddie Mac
  • However, a non-conforming (Jumbo) loan does not conform to purchasing guidelines set by Fannie Mae and Freddie Mac

To learn more about DTIs, head over to Fannie Mae’s “Know your options” site (www.knowyouroptions.com).

As always, follow our STEM Lending Blog for more relevant content for you as your home buying process moves forward.