Possible Red Flags on Housing Lån Applications

It is that tense waiting time: People have filled out their residential debenture application and sent it to their housing loan officer. They have made copies of their tax returns, bank statements, and paycheck stubs. These documents are also sent to the lenders. Now the waiting game has officially started – waiting to see if the lending firm has questions and if they will qualify for the housing debenture they applied for. 

Borrowers hope their tension is unwarranted and that their application will get through the underwriting process. However, there are possible problem areas that will make underwriters pause and delay the application. If the person’s application is mired with these possible problems, they may receive the rejection that they have been dreading for a long time. What are common problem areas that lending firms fund with debenture applications? Listed below are issues that could sink the borrower’s loan request.

To find out more about the underwriting process, click here for more information.

Credit problems

When people fill out their loan app, they give their lending firm permission to pull their credit score. If the rating is too low – 640 or lower – they will face an uphill battle to get their app approved. And if they do, borrowers will be stuck with a higher IR (interest rate). Usually, individuals want a credit rating of 740 or higher. 

That is considered the highest possible score and will provide borrowers with the lowest home loan rates. According to experts, credit problems are by far the most common problem they find with a borrower’s app. Credit tends to be the main issue that home-debenture candidates face, and most of the time, they do not even realize it, especially if they experienced bankruptcy, a bad year, or divorce in the past. 

The solution to this problem? People need to order copies of their credit reports. They can access these things online. Once they get these documents, borrowers need to study them from top to bottom for any errors. People may also wish to get at least one of their scores – again; credit bureaus maintain separate scores on people – before they apply for a debenture. A lot of financial institutions and credit cards provide their updated rating for free. Otherwise, people will need to get it from major credit bureaus, which will cost them more or less fifteen dollars.

A Debt-to-Income (DTI) ratio that is very high

According to financial experts, high DTI ratios are a common problem area when applying for a mortgage. As its name suggests, the DTI ratio focuses on the relationship between the borrower’s monthly debt and their monthly income. 

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To know and understand this ratio, lending firms divide the borrower’s monthly debt – including student loans, the minimum required CC (credit card) payments, car debenture, and estimated new home loan payments that they will need to pay every month – into their gross monthly income. Gross income is the income before taxes were deducted. For example, an individual with three thousand dollars’ worth of debt obligations and a monthly income of seven thousand five hundred dollars before taxes would have a DTI ratio of 40%. 

Today, financial institutions want individuals to have a DTI ratio of no more than 43%. If their ratio is higher than the minimum requirement, they might be facing a hard rejection. One of the most common problems experts see is that buyers are at the top of their DTI ratio when their new property payment is included. 

The solution to this problem is to purchase less property, which will provide individuals with a smaller mortgage payment every month. They could also pay down some of their debts, targeting credit card debts that they have built up over time.

Significant undocumented deposits

A lot of financial experts cringe every time they see an app from people who have made large deposits in their checking or savings accounts but cannot document from where funds came. For example, people might receive ten thousand dollars from a family member to help them cover the down payment or housing loan closing costs. 

But they do not have a gift letter from the family member explaining that the fund is a gift and not a debenture that needs to be repaid. Gift letters are very important: If the ten thousand dollars is a debenture, lending firms have to include the payment terms as part of the person’s monthly debt obligations. If it is a gift that doesn’t need to be repaid, lending firms will not include it as part of the person’s DTI ratio. 

Where are these financial deposits coming from? Usually, people deposit their gift money and their paycheck into their personal accounts at the same time. This makes it pretty challenging to document the gift money. Undocumented funds are one of these last-minute surprises. People are all ready to go, and they will be surprised by the problem.

Last-minute purchases

Experts see another common issue: People who make huge purchases after they submit their debenture app but before their credit is officially closed. These new purchases can throw off people’s debt-to-income ratio and possibly scramble an app that otherwise would have been approved. 

Say individuals have a DTI ratio of 42%, just under that 43% limit. After they submit their debenture app, but before their credit closes, they finance a new vehicle. The vehicle comes with a monthly payment of five hundred dollars. The additional five hundred dollars might push their DTI ratio over 43% and into the red line. 

Before individuals do anything that they have not always been doing, anything that can break their normal pattern of spending and buying, they need to talk to their housing loan professional first. Most of the time, debenture officers will say people should do it. It will not hurt them. But if it is something that will cause problems, lending firms need to know about it.

Fluctuating bonuses or overtime

According to financial experts, a lot of applicants want to use their overtime income and bonuses when applying for a housing debenture. However, there is a significant challenge here. Financial institutions will want to see at least two years of bonus and overtime information. If this additional income fluctuates too widely – low this year and high for the next year – it could cause a lot of issues for applicants. 

One year borrowers might have thirty thousand dollars’ worth of bonus or overtime; another year, they might have ten thousand dollars. People cannot just use thirty thousand dollars as overtime figures they can expect to earn every year. Say that their base salary is fifty thousand dollars per year, but they also made thirty thousand dollars in overtime and bonuses last year. 

Suppose they only made five thousand dollars’ worth of bonus or overtime the year before. In that case, lending firms will not allow the borrowers to count their qualifying salary as eighty thousand dollars. People are usually not aware of the two-year history that goes with bonus and overtime income. That is why it is best to do all the necessary research to know and understand the process.