1. Give The Lender a Naked Picture
A mortgage underwriter once explained to me that her job is to very closely examine a financial snapshot of a borrower. From that picture, she had to try to determine what happened in the past and how well she could predict the future, while being certain the present was completely ‘naked’.
It is her job to try and make sure her employer will only approve ‘good’ loans that can be sold in the secondary market and will be paid on time. So, in essence, you may look fabulous in your Armani suit, wearing Gucci loafers, with hair done by a student of Vidal Sassoon, but we need naked, baby, naked to get a true picture. In terms of your mortgage application, that’s what Underwriters want. Be ready to explain those work history scars, put your financial birthmarks under a microscope,and wash off that credit history makeup. Beautifully naked is the goal and let’s strive for, as Seinfeld used to say, “Good naked.” Easier said than done? Keep reading.
2. Make Sure You've Been Working Out
Think of your credit score – FICO – as your silhouette. FICO stands for Fair Isaac Corporation, so you can blame that dang Isaac, who is often not fair, for all your credit blips! No really, the acronym combines the names of the company founders – Bill Fair and Earl Isaac. Further, the term FICO is now synonymous with credit scoring models from all existing credit bureaus. In order to be approved for a mortgage, your FICO score has to be deemed as ‘Good’. That range will vary depending on the type of loan you seek -- e.g. an FHA loan, one ensured be the department of Housing and Urban Development, may be more likely to accept some credit blemishes than a non-FHA loan. And some mortgage lenders accept lower FICO scores than others.
About 35% of your “FICO score” is based on your history of making payments to creditors. Another 30% is related to how much you owe. 15% of that score is based on the length of your credit history. About 10% is related to new credit. That leaves about an additional 10% designated as “other”. That’s where Bill Fair and Earl Isaacs just flip a coin. Seriously, that ‘other’ category can be composed of things like “credit inquiries” – having too many might mean you are strapped for cash and applying for credit cards and loans all over town … or it might not. “Other” may also include how many accounts you have.
I once completed a loan application for a woman who had 48 credit cards! Every time she received one of those “Company XYZ is offering you great credit cardrates for the next 30 days only! Apply Today!” offers in the mail, she obediently applied. So her FICO score didn’t look so great naked, shall we say.
You can get a free copy of your credit report any number of ways. The Federal Trade Commission tells us, “You're entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Order online from annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228. You will need to provide your name, address, social security number, and date of birth to verify your identity.”
Get your credit report and review it closely. Typically, depending on the credit agency (yes, there are more than one, and three are mainly used), a good credit score is in the 700 range.
A few more credit tips:
- Do not close any open accounts. Part of your credit score is computed as the ratio between how much you owe versus the total credit available.
- Do not apply for any new credit; do not make any new purchases.
- DO try to have balances that are 25% or less of the total credit limit.
There’s a very old joke: “I have a doctor's appointment on Monday. I'm not even sick. It's just that I've been working out and I want someone to see me naked” that relates. Good credit means you’ve been working out – financially – for a while!
3. Get a Personal Trainer, Unless You're an Underwear Model
Next let’s discuss the income aspect of you financial nakedness. When I applied for my first mortgage, I had changed careers just over a year previously. I had been a college and high school educator and, well, wanted to make more money – lots more. My brother had transitioned similarly – from education to the mortgage world and made so much money, I was in awe. So this motivated me to do the same. Problem: in order to ‘use’ your income when qualifying for a mortgage, the past and present are thoroughly examined -- for at least 2 previous years -- and the future is predicted. I did not have a two year history of income from the same profession. Therefore, the Underwriters – the examiners of my compensation nakedness -- did not want to use my recent income in my new career to approve me.
If you have been at the same job for more than 2 years, get W-2s annually which show the same or increasing income, and have recent paystubs verifying those W-2s, you should be a professional underwear model! Underwriters will love that part of you, assuming your income is sufficient to carry the mortgage payment.
But most of us are not underwear models. Do you need to use income from bonuses or over time to qualify for the mortgage payment you seek? Do you receive (or pay) child support or alimony? Are you self employed or part of a partnership or do you have a side business? Have you been in different jobs or, yikes, different lines of work in recent years? Are you receiving disability pay, money from a trust, or have you won the lottery (no, not a BIG one, just a smaller but still exciting version)? Has anyone loaned you money or gifted you money? Do you own multiple businesses? Do you derive income from investments you’ve made? Do you receive veteran’s benefits? Does your employer give you a car to use? Have you received workers compensation? Are you brilliant enough to have obtained a fellowship or scholarship of any kind? Have you made any foreign currency transactions? Do you get Medicare or HAMP payments? Did you inherit any cash from Great Aunt Trudy?
That list of questions is by no means complete. That’s why you need to make sure you work with a professional who knows what questions to ask, up front, to avoid any snags later. Because answering “yes” to any of those questions could, in fact, yield a snag. And since you’re wearing nothing here, snags could be painful and take a long time to heal. Like a personal trainer, a qualified loan professional will be able to coach you into your best possible form before you're pics hit the underwriter's inbox.
All of this may seem onerous and completely unnecessary, but the years 2007 and 2008 proved otherwise. Those were the years of nail technicians declaring they made $300,000 a year. The mortgage industry took its hits and it has vowed to never go that route again. This is actually a good thing for home buyers since it protects us and results in people who really can afford to make their mortgage payments – think fewer foreclosures, abandoned houses, ghost towns, etc. – much more appealing nudes.
4. Avoid Junk In the Trunk
Once you’ve scrubbed your FICO score, you should have a general idea of how much you can afford to spend each month for a mortgage payment. Or you can use any of the online “mortgage calculator” tools available. Next compute your ‘ratios’. While 34-24-34 may be sought after by many, Underwriters – for most types of loans -- fantasize about pairings such as 30/40, or smaller. The first number is PITI – Principal, Interest, Taxes, and Insurance divided by your (real, au naturale) monthly income. The second or back number – Debt to Income -- includes the PITI total and then adds to it all other monthly expenses you have (like credit card payments, student loan payments, monthly contracted gym membership, alimony, child support, car payments, etc.) before dividing by your monthly income. Hence the junk in the trunk, so to speak. If your ratios put you in the ‘do not qualify’ category and you are truly confident you can afford the payment, ask your lender about different loan types, higher down payments, and other possibly helpful solutions.
5. Do Not Photoshop Your Assets
Assets are simpler to prove and document, right? They are completely visible, aren’t they? Weeeeelllll – usually. Let’s shine some of that underwriting light on your, err, assets.
Perhaps you have a healthy savings account, an IRA account, and a small stock/investment account. You have reams of paper (online and/or hard copy) to verify all these values and show the consistent growth in all (even excluding the stock account.) You have more than enough money to make a down payment on a house, pay the loan closing costs, and even have enough left over to buy some new furniture or do some painting, without touching the stock. Perfect. Let the photography begin!
But what kind of assets requires more in-depth investigation? So, so many.
For example, if your savings account has a two year average balance of $20,000 and the statement you give to a mortgage lender shows $300,000, you’ll have some “splainin” to do. If you want to use the value of your wine cellar, then be prepared to show how much it is insured for, to whom, when, and where you can convert it to cash quickly, and be ready to do that if needed. Perhaps you will draw funds from your IRA. Good for you, but what’s the penalty? How much tax will you owe on it? Is it vested and fully available to you? Maybe your wonderful and doting parents will loan you some money for your dream home. That’s excellent, but … they will, in all probability, need to prove it was their money and has been for a long while, and they don’t want it back, and they gave it of their free will and etc. That means they’ll supply documentation and sign an official “gift letter”. And what about that cash you stuck in the Cayman Islands? Let’s not go there – wait, let’s do go there!
All of the assets described above CAN be used to get approved for a mortgage loan –all of them. But they are outside the lines, different in nature, open to investigation and yada, yada, yada. So be prepared to prove, answer, document, and wait. Don’t Photoshop assets – Underwriters have programs to undo your work. And be real. I clearly remember the borrower who was selling his beloved Picasso for the down payment on a million dollar home in the Hamptons. He planned to obtain at least $200,000 from this sale. Imagine his surprise and chagrin when he eventually learned that, all along, it had just been a good copy. Yikes! Can you say $200?
Next time, we’ll talk about body hair, regretful tattoos and uneven tan lines. Kidding – we’ll move on to the property, the mortgage process and documentation, dates and details, and a few other issues. Until then, pull the applicable paperwork for everything mentioned here, speak with a trained mortgage professional before you start looking at potential. Scores more mortgage applications have happy endings than the opposite. Being prepared gives you confidence. And from the brilliant Paris Hilton, “No matter what a woman looks like, if she’s confident, she’s sexy.”