Preparing for a new mortgage or re-finance

If you prepare ahead of time for a obtaining a mortgage loan, it can make a big difference to make your deal go smoother and get a better rate.

  1. Do you have the required Income?
    Two ratios are commonly used in the mortgage industry to determine if a borrower can afford the loan payments. Run these calculation ahead of time to know where you need to be before visiting with a loan officer.

    a.) Front-end ratio (aka Maximum housing expense ratio)= annual earnings x 0.28 / 12 months
    As a general rule, your monthly mortgage payment including principal, interest, real estate taxes, and homeowners’ insurance should not exceed 28% of your gross income. The formula above calculates what this maximum mortgage payment can be.

    b.) Back-end ratio (aka Maximum allowable debt-to-income ratio) = annual earnings x 0.36 /12 months.
    As a general rule, your total monthly debt obligation (mortgage, minimum payment on credit cards, car payments, child support, alimony, student loans, etc.) should not exceed 36% of your monthly gross income. The formula above calculated what this maximum monthly debt payment amount should be.

  2. Do you have the required funds in your bank account?
    Lenders require borrowers to typically submit the most recent 3 months of bank statement to verify that the borrower has the funds needed at various stages of the process, such as funds needed to pay off certain debts to get the maximum allowable debt to income ratio where it needs to be, or pay off liens, and pay off any other funds due at close of escrow such as a down payment.

    Bank statements are also used to determine if the borrower has demonstrated the ability to manage finances, accrue savings, and probably make the future mortgage payments.

    If you plan to use cash on hand or proceeds from the sale of personal items, get those funds in your bank account at least 4 months in advance so those transactions do not appear on the bank statements that you will submit to the lender. This demonstrates that they are your existing funds.

    Deposits (other than those that match the regular earnings reported) showing on bank statements that are provided to the lender will generate questions and require explanations by you, some of which they may not allow, even though the funds are legitimate. If this happens you can be stuck if the lender states that you do not have enough verifiable funds even though your bank balances reflect the required balance. Their concern is that you are not borrowing funds from other sources, so verifiable funds are what they want.

    Lenders don’t like cash, as they cannot determine its source. Unnecessary problems and explanations can be avoided if you plan ahead with regards to these types of funds and get them into your account prior to the statements that you will submit. Gifts require the giver to submit a bank statement proving the funds were the giver’s at the time the gift was made as well as a signed form testifying the funds are in fact a gift, not a loan requiring repayment.So be prepared for that level of documentation if gifts are involved.

  3. Credit Score.
    Generally a higher score gets better terms. Pay attention to these things that you can do to change your score:
    a.) Pay your bills on time.
    b.)If you carry a balance greater than 50% of an account’s credit line, can you pay down the balance or transfer part of the balance to another card?
    c.) If you carry balances that combined use over 50% of the total of all of your credit lines’ limits, can you pay down the balances, or open an additional line of credit to increase your total available credit to get the utilization percentage below 50%.
  4. Gather up the required documentation.
    While the requirements vary a bit among lenders and whether you are self-employed or not, generally, at least you’ll need the following documentation. Gather it up before contacting the loan officer so you are ready to go with the bulk of the documentation.
    a.) Last 2 year’s tax return
    b.) Last 2 years of Form W-2 & Form 1099’s, and Sch K-1’s, if any.
    c.) Most current pay stub. Last pay stub from from prior employers within current year, if any.
    d.) Most recent 3 months of bank statements (all bank accounts) and brokerage statements.
    e.) Most recent mortgage statement, if applicable.
    f.) Most recent homeowner’s insurance bill and insurance agent’s name and phone number.