Loan Prep 101
Money Matters
Stick with it! What I mean is that changing jobs right before you want to buy or build a home is never a good idea, but it’s an especially bad idea when it comes to securing a loan. Changing jobs at any time before or during a loan application creates the possibility that the lender could decide that your employment income is unusable. At a minimum, it will likely delay the date of your closing until your new income can be documented.
Changing jobs changes your income. It’s pretty unlikely that you’ve taken a a new position where you will make less money, however, the way compensation is structured from the view of a mortgage company is by the term “stable income.” The lender may determine only a portion of your income as “stable” and may reduce the income that can be used to qualify. Going from a salaried position to a commissioned position will likely cause the determination that you have a lowered income. “What if my employer will vouch for me,” you may ask. Even if your new employer communicates that your new income is “guaranteed”, it’s unlikely that the company will put those words in writing so that they can be used in your mortgage proceedings. Overall, it’s important that you hold off on a job change until after you close if it’s at all possible.
Know Your Credit
Just do it! I know, it’s stressful. You’ve tried to make sure that everything has been taken care of, kept track of and on time, but somehow, you’re still nervous. Just do it! Check your credit for free at www.annualcreditreport.com. It’s easy, quick and all consumers get one free report a year. I’m not affiliated with them, and no I don’t get anything for recommending that website. I am telling you to use this site because it’s trustworthy and when it comes down to it, it is really all that you need to get started. At that point, it’s up to you to check (and then double check) to be sure that it’s accurate and that nothing negative is listed. If there is collection activity on your report that you were unaware of and they are less than a year old, pay them off. If they are older than two years, you may be better off leaving them for now.
Don’t pay for your credit score. There are hundreds of different credit scoring models out there. The only model that matters is the mortgage model that the mortgage company will pull when you apply for your loan. Just because some random credit scoring website shows that you have a perfect score, doesn’t mean your mortgage score is perfect. There is NO association between the two.
NO new credit! Limit your credit checks. In most cases it’s not a big deal, but if you are somewhere in the middle, it can make a difference in the decision of whether or not you are approved.
Keep your credit card balances low. One item that has a major impact when it comes to your credit score is the balance on your credit cards relative to the limit of the cards. This is called the “utilization rate” and it can ruin your credit score. When the utilization rate rises above 10% (i.e. balance of $1,000 on a $10,000 limit) your credit score drops. It is very common to see someone’s credit hurt by 50-75 points just because of having high balances on credit cards. Keep your balances as low as possible; definitely below 30% and ideally below 10%. If you use credit cards on a regular basis, try to make a payment on a weekly basis to keep the balance down (you can do that).
On another note, the credit score impact is per card. So, if you use multiple cards and as a whole your utilization rate is below 30% with one or two that are at 75%, you are still going to lose points. The credit score model looks at each card separately. In order to optimize your scores when they are pulled, keep the balances low on all cards before, during and until you close on your mortgage.
Resources
Documenting where your money comes from is a really big deal. Lenders want to know where a borrower’s funds are coming from and they pay close attention. Documenting where the money came from, the acceptability of that money, and any “large” deposits can add a lot of additional documentation and in some cases, get your loan denied.
Seasoned Assets Matter! You will be required to submit two months of bank statements when you apply for your loan. Any funds that go into your account during to the preceding months statement are seasoned. If there are any funds that you would like to avoid with the additional documentation, get those in your account long before you apply for your loan.
Big Money. A large deposit is generally viewed as a non-payroll deposit of 50% or more of your monthly income. A large check deposited into your account will need to be sourced. The bank will want to know where it came from and if it is an acceptable source for down payment. For example, any kind of unsecured loan is not likely to be acceptable. In any case, be prepared to prove where the funds came from if they were deposited within the two months of statement that you will have to show.
Be Still. Moving money from account to account can create a lot of extra documentation. Do you have multiple accounts with the same bank or different banks? Do you move funds between them often? If you do, you will most likely have to provide all of the accounts to show that you are the account holder of the account. It’s a lot of extra paperwork. If it’s at all possible, just let the money be for a while if you can avoid moving it.
Where did that come from? There many acceptable sources for a down payment. There are also unacceptable sources. Like I said before, unsecured loans and credit card advances are not acceptable. If you won’t be getting your down payment from your own checking or savings account, you’ll need to be sure to chat with your mortgage person before you move any funds around or make a deposit.
One. If it is possible for you to take your time and plan 3-4 months ahead, you could move all funds into the one account that you want to use for your down payment. If this is something that you can do and there is no in or out activity, it will drastically limit the paperwork and documentation that you will need to provide for the loan application.
Paperwork
There is loads of documentation that is going to be needed for your loan application. While you may be able to alleviate some of the paperwork by implementing the suggestions in this article, you will still need to provide a lot. It’s a good idea to begin pulling some of the documents together so that you are sure that you don’t have to request a copy of something that you don’t have. Some examples are:
- Pay Stubs.
- Tax returns and W2s.
- If you have K-1s listed on Schedule E, you will need them.
- If you own 25% or more of a business or partnership, you will need the corporate returns as well.
- If you own 25% or more of a business, you may need a year to date, unaudited, profit and loss statement.
- Bank statements.
Construction Items
In most cases, you won’t have your construction items initially, but there are some things to consider early on:
- Timing: If you will be purchasing a property and closing on your construction loan at the same time, make sure that you have your timing right. You’ll need to choose your contractor and have a tight budget planned out. Once that is complete, you will need to have an appraisal done within 30 days of closing. Getting all of this done within a 45 to 60-day window is a stressful, to say the least. In some cases, it’s better to close in two separate steps; first on property acquisition and second on the construction loan.
- Cost: Understanding what will be needed for the project cost will make or break you. For a construction loan, you have to document the total cost of the project. In almost every case, the project cost will be the budget from the builder or general contractor (GC) that you have chosen. However, in some cases you may decide to have some costs that are separate from the contractor. If this is the you, then you will need to get bids for the material and labor for all items outside the contractor’s budget before the appraisal can be done.