Some years ago even though I already had three property purchases under my belt, I remember still feeling insecure about the mortgage lending process as a rookie broker fresh out of real estate school.  Then things got interesting.

"Just tell me everything you know."  This was the first thing out of my mouth when I met my first mortgage lender in a professional capacity back in Columbia, South Carolina.  My goal was to have all the knowledge of a mortgage lender so I could better pre-qualify my clients and also help inform my sphere of influence on the mortgage lending process.

Even though what I'm about to tell you can change slightly depending on the individual lender and the market area, I think it still serves as a good general guideline on how to get your loan.  Here is what I learned back then, most of which still rings true today:

1) What is "good credit?"

Generally, your credit score must be a 640 or higher for conventional loans and 620 for everything else (VA, FHA, etc).  Understand that these requirements can vary somewhat by lender and are subject to period change.  Also.......

• A 2 year record of being up to date and on time on all your obligations is considered very good credit.
• A period of financial difficulty in the past does not disqualify you if a good payment record has been maintained since.
• No credit does not disqualify you if you can show a good payment history for other things such as rent, utility bills, lay away plans, insurance, doctor bills, child support etc.
• All credit problems hurt you, but problems with housing obligations and installment debt such as car payments and student loans hurt the most. So if your housing and installment debt history is good but you have some small unpaid obligations, you should be OK if you're willing to pay those off.

Student loans  Delinquent student loans must be paid off or refinanced or brought up to date and paid on time for one year.

Court judgement  Judgements automatically disqualify you unless you pay them off or the creditor agrees in writing to subordinate its claim to your new house loan.

Collections  Collections don't disqualify you automatically, but they sure don't help you. If you don't pay them you will need to make a strong case for your side of the story.

Previous foreclosure  This requires a three year wait unless the cause was the death of the principle wage earner. That requires a two year wait. Good credit during the wait is required.

Bankruptcy  Chapter 7 requires a 3 year wait and good credit during the wait. One year is required if the cause was the death of the principle wage earner.
Chapter 13 requires court permission to buy the house plus 12 consecutive on time monthly debt payments plus good credit on other obligations.

Tax liens  Federal and state tax liens must be paid or you must have a written payment plan with the government.

Divorce  If you are divorced and your name is still on a previous house note, you are OK if the divorce decree gave your “ex” the house payment responsibility and you gave your “ex” a recorded quit claim deed for your ownership share.

Co-signer
A co-signer such as a parent or other close relative can help if they have good credit and enough extra income to help you qualify.

Remember that your credit history must be acceptable. If not, you can't be on the loan. If you are not on the loan, you can't buy the house.

2) Many lenders use a 28/36 debt to income ratio, but there are some who can work with less.  For example, in the Research Triangle Area of North Carolina there are two income tests: 

• Test One: Total monthly payment on your new home is less than 32% of your gross monthly income.
  
• Test Two: Total monthly debts must be less than 41% (USDA), 45% (Conventional/VA), and 50% (FHA) of your gross monthly income.
  

In other words, for this market the debt to income ratio would be 32/41 instead of the typical 28/36.

3) What is provable income?

You must have at least a 2 year work record unless you just got out of school and your new job is in your field of study or you took time off from a career and you have been back at work in the same field for 6 months.  All income that is counted toward qualifying must be expected to continue at least 3 years. It is good if your income is steady or is going up. 

Overtime & Bonuses  These will be counted if you can show 2 straight years' worth and it looks like it will continue. One or two years is sometimes OK.

Part Time Income  Part time income will be counted if you can show a 2 consecutive year record and it looks like it will continue. One to two years is sometimes OK.

Commission Income  This will be counted if you can show 2 full years' federal tax returns and a recent paycheck or stub. If you switched from salary to salary plus commission then you need only one full year federal tax return if your job didn't change and your total income didn't decrease.

Child Support  This is counted if you can prove it has been paid for 12 consecutive months and it will continue 3 more years.

Self Employed  Self employed borrowers need two full years' federal tax returns that show enough net income to qualify. If you are a sole proprietor your net income is line 31 in the federal return (Adjusted gross income) plus depreciation and business car miles at $0.121/2 per mile.If your company is a corporation, your W-2 is your income. Your corporation’s net income will be credited to you according to your share of company ownership. One full year's self employed tax return is OK if your previous 2 years' type work was the same as now or you were in school studying your trade for one of those previous two years.

4) How much do I need for a down payment?

Remember, each $1,000 you make in down payment reduces your monthly mortgage payment by about $5.

• North Carolina Housing Finance Agency - Potentially 0% (if eligible NC will assist you up to either 3%/5%)
• FHA (non-HUD) - 3.5%; HUD homes are $100
• VA/USDA- 0%
  
• Conventional - 3% for first time homebuyers, 5% for the rest

If you need advice on getting mortgage lending, email the author at This email address is being protected from spambots. You need JavaScript enabled to view it.