The 4 Pieces of the Mortgage Puzzle

Buying a home is easy. Well…if you take a minute to skim through this it might be a little easier for you on the qualifying end of things. Getting a mortgage is a matter of helping the lender put together the pieces of your financial puzzle. Many times it can get what feels like overly complicated in this world of increased government regulation and lending guidelines. But it can be a lot less complicated if you do a little preparation and have realistic expectations.

So what are the pieces of the mortgage puzzle? Credit, income, assets, and property. If one piece doesn’t fit, your puzzle isn’t complete and you probably won’t get approved. Let’s take a look at those items one piece at a time.

Credit 

Your credit scores and credit history are looked at thoroughly. Each score will be verified from the three credit bureaus (experian, transunion, and equifax). If you only have 2 scores that show up that’s okay, but your lower score of the two will be used to qualify. If you have 3 scores, ideally you want to have a middle score in the mid to high 700 range. Anything below 680 can make things more complicated than what you may be looking for. The other factor that your credit report helps with is determining your monthly debt in comparison to your monthly income (debt to income ratio).

Again, the goal is to keep things simple.

When considering the history shown on your report it’s best to have 3-4 established tradelines that you have been paying on for 24 or more months. A tradeline is any obligation you’re required to pay on a monthly basis that is reported to the credit bureaus. Things like credits cards, student loans (that are not deferred), car loans, personal bank loans, and mortgages would be simple tradelines to verify and use. Cell phone bills or car insurance payments are an example of debts that are not typically on a credit report, and generally would not be used as traditional credit. For derogatory credit tips and more credit preparation see my credit page.

Income

Having a 2 year consecutive and verifiable income stream will help keep things simple for you. You want to have 2 year’s tax returns, W-2’s, and 30 day’s worth of recent pay stubs from your current employer. These items are asked for so that you have the opportunity to show stability and consistency in your income.

If you’re on a base salary or hourly (full time) that will definitely help minimize bumps in the road. Keep in mind that if you receive overtime, bonus, or commission pay it needs to be verifiable to show history and consistency. If you changed employers in the same line of work within the last 24 months, be prepared to provide proof of that employment. If you’re self employed or receive other types of income be prepared to show a consistent history (24 months) and likelihood to continue. For more in depth income tips see my income page.

Assets

There are many options when considering how much you should be putting down to buy your home. Everyone’s situation is unique. You’ll need funds for down payment, property taxes, homeowners insurance, and closing costs. Having at least 2 full months bank statements (all pages) would be something to expect to provide. If you have retirement funds or other liquid assets in a brokerage account that you’ll be using then you’ll need to provide a most recent quarterly statement, and recent activity statement on that account to show proof of funds available. You’ll need to show proof that you have transferred those funds to your bank account prior to closing.

Be prepared to provide a paper trail for everything. If there are any deposits in your accounts that you don’t have a legitimate paper trail for then you will find yourself in a difficult position as far as approval is concerned. Selling your favorite baseball card collection for cash to someone you met on craigslist might be tough to prove. For gift, grant, and other asset info see my assets page.

Property 

The home you are purchasing is the collateral that is being used to secure the financing. Your lender will get an appraisal done to get an opinion of what the fair market value is in relation to the agreed upon purchase price that you and the seller came to terms with. If the appraised value comes in high, congratulations! You technically have instant equity, but the lender will still use the purchase price as the value for qualifying purposes. If the appraisal comes in low you and the seller will need to renegotiate price or you’ll need to bring the difference to the table. The lender will also ask for any repairs noted by the appraiser to be fixed and re-inspected prior to closing. In most cases you’d insist that the current owner completes those repairs because you don’t own the home yet.

Simple enough right? Look, even if you’re not a first time home buyer, it can be a bit overwhelming. The market and the guidelines are constantly changing. You will save yourself a lot of heartache and pain if you take the time to get your ducks in a row several months before you intend to buy.

A few tips to end with…

Your willingness to provide all items asked for by your lender in a timely manner is helpful to minimize the length of time it takes to close on the home.

Use a Realtor when buying or selling a home. He/she will save you time and money.

Remember that all the pieces to the puzzle have to fit. Even if you make $100k/year, buying a $50k home, and have no debt. You still need to have acceptable credit to obtain financing.

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