Financing Houses

What Real Estate Lenders Look For

Lenders control many programs — some make use of over 200! Generally, lenders look for the following typical standards, with many exceptions:

1. Absolutely no late mortgage payments

2. Credit score above 580

3. If bankruptcy, no charge-offs or collection accounts afterwards

4. If bankruptcy, only 1 late payment afterwards

5. Two active revolving accounts in good standing

6. Good employment history or stated income

7. Three to six months reserves (covering mortgage payment, taxes & insurance) in savings

8. 55% income to debt ratio

9. Appropriate loan-to-value ratio on purchase property

Borrowers obtain a loan by bringing something of value to the table. One of the following assets ought to get you financing:

1. Good credit score

2. Good income

3. Good cash down payment and reserves

Seven Loan Types and Finance Terms

Understanding the variety of loan types and terms enables you to choose an effective lender. Here are seven important loan types and related terms:

1. “A” Loans

Borrowers with great credit, a good cash reserve, good employment, and a debt-to-income ratio of less than 33%, qualify for “A” loans. These loans typically cost less upfront for points and costs, charge no prepayment penalty, and offer lower interest rates.

2. Sub-Prime Loans

Credit reporting agency websites portray Americans as having great credit. These informational articles and graphs mislead and cause struggling home buyers to feel inadequate. In fact, my Countrywide lending contact told me that 60% of all applicants are considered “sub-prime” borrowers. Sub-prime borrowers usually are those with credit scores under 620 or those with other conditions such as undocumented stated income, poor employment history, or credit issues such as collections, charge offs, and late payments.

3. Stated Income Loans

Most applicants for a mortgage have a full-time job with income tax returns verifying income for the past two years. Other borrowers, like me, with multiple streams of income must get loans with stated income. Some lenders require two years of bank statements showing deposits equaling the required total income, proving the ability to make the mortgage payment.

4. Full-documented Loans

These loans require tax returns, employment verification, bank statements, and other individual lender demands. Other processing types, more flexible and easier for the borrower to gather information on, do not necessarily cost more. High credit scores, big down payments, and large cash reserves ease documentation requirements.

5. Conforming Loans & Jumbo Loans

According to Fannie Mae and Freddie Mac guidelines, “conforming loans” are mortgages for less than the following allowable amounts at the time of this writing:

(Unit= dwelling or housing unit)

1 unit $333,700

2 units $413,100

3 units $499,300

4 units $625,000

Note: the amounts are higher in Hawaii and Alaska. Other states like California, New York, and Florida join the higher limits this year. The dollar amount of these loans changes periodically.

Conventional lenders also use the term conforming loans for loans which are not Fannie Mae and Freddie Mac loans. Conforming loans simply refers to the dollar amount; it doesn’t mean you get a Freddie Mac or Fannie Mae loan.

6. “Jumbo loans” are for higher dollar amounts.

You need jumbo loans to finance properties requiring larger mortgages than the limited conventional loan amount. Jumbo loans usually charge higher interest rates than conforming loans.

7. Home Equity Line of Credit (HELOC)

If you already own your own home, consider a Home Equity Line of Credit, with few fees and lower costs, for purchasing investment property. Use this line of credit for a large down payment on your investment properties over and over. With twenty percent or more down on an investment property, you get better financing plus save on loan costs.

Credit Help for Real Estate Financing: Five Categories of Your Credit Score

1. Payment History — 35%

The number of accounts paid as agreed and a good payment history give you a higher score.

Negative points lower credit scores because of 30 days, 60 days, and 90 days late on any debt. The dollar amount of these delinquencies also impacts credit scores. Severity of delinquency, how long past due, and number of delinquencies are nasty remarks on some credit reports. The older these derogatory items are, the less impact they have on credit scores. You do not want any present delinquent accounts when applying for a real estate loan.

Never, ever pay a mortgage payment more than 30 days late. Lenders do not like to see any delinquencies on real estate loans.

Adverse public records, such as bankruptcy, judgments, suits, liens, and wage attachments negatively dominate credit history. Any of these items cleared up helps improve a credit score, unless the item is aged. The older the derogatory entry, the less the impact. Any activity on a particular item makes the item update and therefore, remain on the report for another seven years. So, if a derogatory item is more than four or five years old, don’t bother with it.

Collection items unfavorably shape credit payment history. The more age a collection account has, the less its consequence. Most mortgage companies require that collection accounts be cleared before lending. If this is your problem, see “Help with Collections” later in section six.

2. Proportional Amounts Owed — 30%

The amount owed on a credit line compared to the available credit is termed the proportional amount owed. With a credit card limit of $5,000, the score will be higher if less than $2,500 is owed. Even better is to owe less than 1/3rd of the available credit or less than $1501. To have the highest proportional amounts owed scoring factor, owing less than ten percent of the available balance gives you the best possible rating. On the other hand, owing over $4,500 on an account with a limit of $5,000 lowers your score significantly, especially if you have too many credit cards and other loans with high balances compared to available balances.

Tip: Call your creditor and ask them to raise your available credit as long as you don’t use this credit. This raises your proportional amount owed scoring factor.

To raise your credit score dramatically and quickly, pay down as much as possible on each credit line instead of paying off one credit card at a time. If a credit card is totally paid off, it does not compute in the proportional amount owed; therefore your rating does not benefit from paying balances in full. On the contrary, paying balances in full takes the account out of the equation and you don’t get higher points for the low proportional amount owed.

3. Length of Credit History — 15%

Any account over twelve months with a good payment history helps a credit score if the balance is not too high compared to the available credit. Six months is the minimum length of time to establish credit. The time since accounts opened and the time since account activity are factored into the length of credit history.

4. New Credit — 10%

Whenever you apply for a new credit line, your score receives a negative hit. The more inquiries you generate, the lower your score. Obtaining new credit lowers your credit score. We only apply for credit when applying for mortgages. Every time we get a new mortgage, our credit scores go down.

Never finance a new car or get a new line of credit when you are getting ready to finance property. Wait until after closing to apply for further financing. Be aware that after your new loan shows up on your credit report, your financing abilities shrink. If you need credit funds for any reason, including renovation costs for your new house, apply for this after closing your property purchase.

5. Types of Credit Used — 10%

The different types of loans taken out by consumers affect credit scores. Credit assessors view mortgage accounts more favorably than consumer finance accounts. Too many installment loans, auto loans, and department store credit cards affect credit negatively. To improve your credit score, pay off installment loans and consumer finance company accounts after you have lowered your proportional amounts owed. Then pay off your department store retail accounts. Keep balances as low as possible on home equity lines of credit because they often count as consumer finance accounts instead of mortgages. Achieve higher credit scores by having only mortgage accounts and a couple of major credit cards with low balances.

Note: In addition to credit scores, lenders consider length of time at residence and employment as well as income and education.

Do You Need a Credit Score of 700?

Don’t believe it! We have so many loans; our scores are in the mid 600s, but we buy and sell property all the time. Even with a perfect payment history, we can’t get our scores up because we have so many real estate loans with high balances remaining. We often need to get “B” loans instead of “A” loans, which means we pay higher tax-deductible interest, points, and fees.