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Am I Eligible for a Mortgage?

Friends talking over coffee in a trendy cafe courtyard

Am I Eligible for a Mortgage?

By: Mike DeKuiper

So many people are amazed by the fact that they didn’t think they could get a mortgage, let alone one they could afford. Thanks to all the acts and procedures put in place after the housing market crash, we cannot write a loan for somebody that they cannot repay. What does this mean for you? Chances are, you had no idea that owning a home could be affordable to you, and chances are you didn’t think you would qualify.

Too long, didn’t read: you may believe that you won’t qualify, but we have resources available to you that may say otherwise. Without speaking to a mortgage professional, you can’t truly know if you qualify or not – you may be surprised!

Many banks and credit unions have what we call “overlays,” which means they are more strict than what Fannie Mae and Freddie Mac require. Who is Fannie Mae and Freddie Mac anyhow? Simply put, they give lenders, like us, money for you to borrow when purchasing a home. You can read more about them here: Fannie Mae & Freddie Mac. Since we unfortunately can’t give money to whoever wants money to buy a house, they have set a minimum standard of qualifications, called guidelines, that we use to determine if you are eligible to purchase a home.

The 3 main parts of what goes into your ability to be approved for a mortgage you’re your credit score, your income, and your debts. You can learn a lot about your credit score from so many sources, so I won’t go into those details, but it plays a huge role in your qualification for a mortgage, as well as what type of mortgage you will qualify for, in the fact that we want you to pay back what you borrow. It’s that simple. If you have consistently paid back what you borrower, and done so in a timely fashion, you have a better chance at being approved to borrow more money.

Now, not everybody is perfect, and I have been there myself. You may have come into hard times, where you couldn’t make payments on different items, maybe you even went through a bankruptcy. There is nothing wrong with that! There are just some guidelines we have to follow when that happens. This is why it is so important to never doubt your eligibility for a mortgage, and always speak to a mortgage professional about your situation.

Your income and your debts will always be played against each other. An important tool in determining your eligibility for a mortgage is calculating your debt to income. How do we do that? The simple answer is:

Total Monthly Debt / Total Monthly Income = Debt to Income Ratio

So, take out your calculators, and think about what you must pay monthly – or at least what shows up on your credit report. This includes car payments, credit cards, student loans, child support, that boat you couldn’t say no to, and that fancy new RV that you would use every weekend if you could just buy it and it now sits next to your house. If you have a loan out, and you make a monthly payment on it, include that in your debt ratio. We do not have to take into consideration self-reported debts, such as phone bills, internet, utilities, etc. In regards to your income, we use your gross monthly income, or the amount before the government takes some, before your health insurance comes out, and before you pay in to your retirement plan that never seems to grow the way you want it to. Divide your total debts by your total income, and you get your debt-to-income ratio. Once we as a lender determine your debt-to-income ratio, we can determine if we need to pay debts off, pay debts down, or if we can qualify you as you currently sit. Different loan programs have different eligibility requirements that can be found here.

Quick note on calculating your income: we can use overtime income if you have been receiving overtime for the past 2 years, consistently. We can use bonuses if you have been receiving bonuses for the past 2 years, also consistently. Having a verification of employment requested by your lender in advance can help ensure you have the best available income ranking possible. Also, we have the ability to “gross up,” or show more income in certain situations when we look at social security income and disability income. This is why it is so important to talk to a mortgage professional.

Both a blessing and a curse right now is the fact that student loans are in forbearance. That is suspected to change in the coming months (as of May, 2022 the repayment plans are supposed to start up in August), but as of right now, depending on the underwriting guidelines we are using (Fannie Mae or Freddie Mac), we take either 1% of the total balance or 0.5% of the total balance to calculate the monthly payment. However, if you are in a modified repayment plan based on income, we would just need a copy of that plan!

Furthermore, there are 2 types of debt-to-income ratios that we look at. The “front end” ratio is specifically looking at your monthly housing payment, which includes principal, interest, taxes, insurance, PMI, and HOA dues if applicable. The second ratio we look at is the “back end,” or the total debt-to-income ratio, which includes your new housing payment, plus all your other monthly obligations.

Sounds easy right?

I wish. These are the main factors that we look at as lenders, but there is one more step that we must go through. Once we have gathered all your information, done a deep dive in properly calculating your debt-to-income ratios, and looked at all of our options, we then take all of that information to our automated underwriting system, or the AUS. We can use the AUS with Conventional, FHA, and VA loans, however USDA RD loans require that we use their GUS (Government Underwriting System) to qualify you as they have different standards.

Once we run all of your information through this AUS, we receive a determination. We always want to receive an “Approve/Eligible” or an “Accept/Eligible” finding, which means that we have entered the information correctly, and the system likes what they see. If we get a “Refer/Eligible” or a “Refer with Caution” finding, we as lenders look to see what we can do to help bolster your case.

At Stockton Mortgage, we are able to do what is considered a manual underwrite, which basically means we couldn’t get anything to go with the AUS, but our best bet is to look at getting you the best ranking possible. Some of the ways we can do that is having a certain number of months in reserves (extra money saved up that shows you have money to pay your mortgage for at least a few more months), proving you have been able to make rent payments for a certain amount of time that is equal to or less than your new mortgage payment, or simply lowering the amount you are looking to borrow.

None of this is something that we expect you to do on your own. And I would never recommend trying it on your own, mostly because you don’t have access to the automated underwriting system. A lot of this seems overwhelming, but the goal is to show you that even if you do not believe you can afford a mortgage, you won’t truly know until you speak to a mortgage professional. You know where to find us, and we are always readily available to answer questions!

Let us guide you home.