Mortgage Loan Information
Understand basic information about how banks and mortgage companies determine if you qualify for various types of home loans including conventional loans, FHA, VA, USDA Rural Development, and special first-time buyer loans (such as North Dakota Housing Finance Agency/North Dakota Bond and Minnesota Mortgage Program/Minnesota Bond).
Disclaimer: I am not a mortgage loan officer (I’m a licensed real estate agent), but I have complied this information with the help of mortgage loan officers. Loan qualification guidelines do change periodically. This information can help you as a starting point before you contact local lenders in your area to pre-qualify for available programs. I generally do not recommend that any of my own clients use long-distance, online mortgage companies. The most knowledgeable, personal service is usually from local lenders, and you should talk with at least two, since some lenders do not offer all programs. If you live in the Fargo-Moorhead area, I’ll be glad to recommend good loan officers at a variety of banks and mortgage companies.
CREDIT HISTORY AND INCOME GUIDELINES FOR SECONDARY MARKET LOANS (FANNIE MAE and FREDDIE MAC GUIDELINES)
The following are only general guidelines for most mortgage loans sold on the secondary mortgage market. “In-house” loans or sometimes “sub-prime” mortgages for borrowers with poor credit may be possible with certain lenders if you do not qualify under the secondary market guidelines below, but terms such as interest rate and upfront charges would be worse with a “sub-prime” mortgage, and that type of mortgage is rarely available anymore.
- BANKRUPTCY: Minimum of 1 year since final discharge date. Must have re-established positive credit history and have no negative credit.
- FORECLOSURE: Minimum of 4 years since foreclosure was finalized. Must have re-established positive credit history.
- LATE PAYMENTS: Most loan guidelines will require a minimum of 12 months (1 year) with no late payments on a credit report. If credit has been excellent for years, and a minor late payment occurs, it may be acceptable with explanation. A late payment for installment loans or credit card accounts usually only appears on a credit report if a payment, or minimum required payment, is 30 days late or more. Lenders also usually check with landlords for a borrower’s rental payment history for at least the past 2 years for renters to verify timely payments.
- CREDIT SCORES AFFECT MORTGAGE INTEREST RATES: The minimum credit score to qualify for an FHA loan is 580 to 620, but FHA will also consider the circumstances related to the score. For a conventional mortgage to be sold on the secondary market, the minimum credit score is 660. A lower credit score will likely result in a higher interest rate. Credit scores can also affect the annual cost of private mortgage insurance for loans with a downpayment of less than 20% Note: When more than one person, such as a couple, applies for a joint loan, lenders will use the lower of each person’s two middle scores from three credit reporting agencies.
- DEFAULTED STUDENT LOANS: Generally if a government guaranteed student loan is in default, this will disqualify a person for a mortgage. Sometimes if a loan repayment schedule has been renegotiated and payments are timely again for at least a year, the history of the defaulted loan might not disqualify the borrower.
- COLLECTIONS: Generally any account which is in collection status must be repaid before qualifying for a mortgage loan. Sometimes medical collections can be an exception, depending on the individual circumstances.
- NO STUDENT LOAN DEFAULTS
- NO TAX LIENS
- JUDGMENTS: Generally, any court ordered judgment must be paid in full. In cases of court ordered child support payments, the payments must be caught up and current.
- SELF-EMPLOYMENT AND COMMISSION-BASED INCOME: In most cases, self-employment income and commission income cannot be used as “qualifying” income for a mortgage loan until the income has been received for at least 2 years, so that the lender can use an average income. Usually, lenders will want two tax returns showing the self-employment income. There can be some exceptions.
- OVERTIME AND BONUS INCOME: In most cases a lender will count overtime or bonus pay as “qualifying” income if the borrower has a history of overtime or bonus pay from the borrower’s current employer for at least one to two years (usually two years). The employer must verify the number of overtime hours or anticipated bonus income that is likely to continue for it to be used as “qualifying” income.
- INCOME FROM A SECOND JOB: If a borrower works at two jobs, the income from the secondary job (usually a second part-time job) is often only able to be included as qualifying income if the borrower has had a continuing history of working two jobs for at least two years.
- CHILD SUPPORT INCOME: Income from child support needs to be received consistently to be used as “qualifying” income. Often a history of payments is required, so newly awarded child support payments might not be considered “qualifying” income in some circumstances.
- LAWSUITS OR PENDING DIVORCE: If a borrower is being sued, or is otherwise involved in legal actions such as a pending divorce, usually a mortgage loan cannot be granted until the lawsuit is settled.
HOW HIGH CAN YOUR HOUSE PAYMENT BE?
“QUALIFY” versus “AFFORD”: A bank or mortgage company can tell you how large of a loan you “qualify” to borrow, but not how much you can truly “afford.” Your own personal budget, savings goals and spending habits may limit what is comfortable for your own finances and what is “affordable” for you. For many people, it may be wise to limit their borrowing to an amount lower than what they “qualify” to borrow.
Mortgage lenders use calculations which take into account a borrower’s “qualifying” income and debts (income-to-debt ratio) to determine the maximum monthly house payment for the borrower. The maximum monthly house payment figure will include principal and interest, real estate taxes, home owner’s insurance, flood insurance if required, and mortgage insurance premiums if required. Many mortgage lenders will then translate this figure into an approximate maximum mortgage amount to reflect current interest rates and loan programs.
In most cases, lenders must use two calculations to determine the maximum monthly house payment. The first calculation is a simple percentage of a borrower’s “qualifying” monthly income. The second calculation adjusts the income for debt obligations. The lower result from the two calculations will usually be the borrower’s maximum monthly house payment.
The following information includes general guidelines. NOTE: There are some exceptions (both to credit guidelines and income-to-debt ratios) For specific calculations for your own personal situation, please visit local mortgage lenders.
When subtracting debts in the formula, include items such as car payments, student loan payments (if payments start in less than 12 months), credit card payments (subtract either the minimum monthly payment or 5% of the balance, whichever is greater), child support and alimony payments, consumer loans, and any other debt obligations.
- FHA loans:Calculation #1 takes a borrower’s gross monthly qualifying income (before taxes are taken out) multiplied by 31%.
Calculation #2 takes a borrower’s gross monthly “;qualifying” income (before taxes are taken out) multiplied by 43%, and then subtracts monthly debt obligations.
The lesser result of the two calculations is the borrower’ maximum monthly house payment based on standard guidelines (some exceptions may allow for a higher house payment).
- CONVENTIONAL LOANS:Calculation #1 takes a borrower’s gross monthly qualifying income (before taxes are taken out) multiplied by 29%.Calculation #2 takes a borrower’s gross monthly “qualifying” income (before taxes are taken out) multiplied by 41%, and then subtracts monthly debt obligations.The lesser result of the two calculations is the borrower’ maximum monthly house payment base on standard guidelines.
(NOTE: SOME CONVENTIONAL LOAN PROGRAMS WILL ALLOW A HIGHER PERCENTAGE OF INCOME TO BE USED IN THE FORMULA TO QUALIFY FOR A HIGHER PAYMENT. ASK YOUR LENDER FOR DETAILS.)
- VETERAN’S ADMINISTRATION (V.A.) LOANS:The V.A. loan calculation takes a borrower’s gross monthly “qualifying” income (before taxes are taken out) multiplied by 41%, and then subtracts other monthly debt obligations. This figure is usually close to the maximum monthly house payment, however a lender must then also calculate a special V.A. formula which takes into account the veteran’s current living expenses (such as rent) compared to the new living expenses (including house payment) to determine the maximum monthly house payment. This calculation is complicated, and should be done by a mortgage lender, since there are calculations to determine “residual income,” taking into account how much the borrower needs to pay annually in federal and state taxes.
SPECIAL LOW-INTEREST RATE PROGRAMS AND DOWN PAYMENT/CLOSING COST ASSISTANCE PROGRAMS
The most commonly used programs are for qualifying “first-time home buyers” and also for persons who have not owned a home for at least 3 years. Programs are available in North Dakota through the North Dakota Housing Finance Agency and in Minnesota through the Minnesota Housing Finance Agency to buyers who meet program guidelines, including household income limits.
- North Dakota Roots program provides new North Dakotans (moving into the state) or returning North Dakotans (moving back to the state) with either a below market interest rate loan or a market interest rate loan which includes down payment and closing cost assistance. This program is available for both previous homeowners and also for first-time home buyers.
- North Dakota Home Access program is available for special needs households including single parents, disabled persons, people over 65 years of age, and any veteran who has served on active duty. Applicants’ income cannot exceed program limits. North Dakota Home Access provides a below market interest rate, plus down payment and closing cost assistance.
- Minnesota “Step Up” Loan for repeat home buyers or for homeowners who want to refinance their current home mortgage.
- Home Improvement Loans are also available for persons who meet program guidelines in both states.
For a formal mortgage pre-approval, please visit with local mortgage lenders. We work with all area lenders, and I’m glad to give you recommendations. For more information, call or text me on my cell at 701-729-6450.