Here are some rules of thumb that most lenders follow when considering
Buyer’s Credit History and income. Lately, this chart has been a moving target
and is subject to change at any moment. Check with your lender for updates.
Credit Scores
Typically range from 400-800. Varies from lender to lender, but for most
confirming loans you need a credit score of at least 620. Less than 20% down
needs 680. FHA/VA requires at least 620. The few non-confirming loans still out
there typically require 30% down with a minimum credit score of 700 for
self-employed and 650 for 3-2 employees.
History
Credit items usually are reported for 7 years. You may ask them to be removed
after that time frame. Bankruptcies expire after 10 years.
Unpaid Collections
Unpaid collections, judgments and charge-offs must be paid prior to closing an
A-paper conforming loan. There are some exceptions to this rule. If the debt was
due to the death of a primary wage earner or if the bill was due to a medical
expense, this may be acceptable to the lender. Or, if a borrower has negotiated
an acceptable payment plan, and has made on-time payments for 6-12 months, the
lender may not require the debt to be paid off.
Short Sale
Buyer can usually obtain a loan 2 years from the completion date.
Deed-in-lieu of Foreclosure
Buyer can usually obtain a loan 4 years form the date it is executed. From the
5th-7th year following the execution date, borrower may purchase a property
secured by a principal residence, second home or investment property with the
greater of 10% minimum down payment.
Foreclosure
Buyer can usually obtain a loan 4 years from the date it is executed. From the
5th-7th year following the execution date, the purchase of a principal residence
only is permitted with a minimum 10% down and at least a 680 credit score.
Second home or investment is 7 years.
Chapter 7 Bankruptcy
Borrower may be eligible 4 years after discharge or dismissal, provided they
have re-established credit and have maintained perfect credit after the
bankruptcy.
Chapter 13 Bankruptcy
Borrower may be eligible 2 years after discharge or 4 years from the dismissal
date.
Multiple Bankruptcies
Borrower may be eligible 5 years from the most recent dismissal or discharge
date for borrowers with more than one filing in the past 7 years.
Co-Borrower
Typically the good credit of a Co-Borrower does not offset the bad credit of a
Borrower. A Co-Borrower may come in handy if you don’t’ have job seasoning.
Checking and Savings
The lender will require that any money taken out of your checking or savings for
a down payment be seasoned for at least 90 days.
Down Payment
Conforming conventional loans start at a minimum of 5% down. Must have at least
20% down to avoid the monthly PMI. FHA loans now require a minimum of 3.5% down.
Revolving Credit
Revolving credit, such as department store loans, car loans and credit cards are
factored into your total debt calculation. If the loan has less than 20 months
remaining, the lender may not use it against you.
Debts Not Counted
Typically a lender will not use the cost of utilities, food, clothing,
schooling, etc. against you. Property taxes and homeowners insurance are
factored into your total debt calculation.
W-2 Income
Salary and hourly wages are calculated on a gross monthly basis prior to income
tax deductions. Two years of W-2s and completed, signed tax returns are
required. The lender will verify with your employer that you are still employed,
typically at the beginning stage of the underwriting process and right before
closing.
Commission Income
Commission income, bonus income and overtime income can only be used if received
for the previous 2 years. Furthermore, the employer must verity that the income
is likely to continue. An average figure of 24 months is used.
Alimony or Child Support Income
Lenders will require a divorce decree and a court printout to verify on-time
payments. Additionally, proof that it was received during the previous 12 months
and proof that it is going to continue for the next 36 months is required.
Social Security Income or other Retirement Income
Must show proof that it will continue for at least 3 years into the future.
Rental Income
Lender will use 75% of the monthly rent and then subtract ownership expenses. If
you still have positive cash flow, then this can count as income and not a
liability. Schedule E of your Tax Return is used to verify the figures. A copy
of the current lease will also be required.
Second Job Income
If you have a second job or a part-time job, a lender will typically not
consider it unless you can prove that it has been in place for 12-24 straight
months.
Self-Employed or Business Owner
Very difficult! Lenders can be hesitant and will be extremely cautious in
verifying and reviewing self-employed borrowers. At least 2 years previous tax
returns for both personal and business taxes (and all schedules) will be
reviewed.
As you can see, there are a lot of factors that go into evaluating whether a
buyer is able to obtain a mortgage.
As the chart indicates, all these folks who have recently completed a short sale
or foreclosure on their property will not be able to purchase a property for
another 2-5 years, depending on their individual situation.
Also take into account that the minimum required time frame is not the only
factor. Buyers’ credit scores take a huge hit after a missed mortgage payment
and a foreclosure. Depending on the steps that they take afterward, they may not
have it repaired for several years beyond the minimum time frame required for
the underwriting process!
Furthermore, now that we need to have a larger down payment, it generally takes
a buyer more time to save enough money, too!
