The Ultimate Mortgage Financing Guide.

This mortgage financing guide provides a comprehensive look at the loan process step by step. In addition we will break down each step so you can prepare yourself for the process. Let’s dive in to understanding mortgage financing and loan financing. We’ll discuss a bit about understanding mortgage rates and you should play around with our advanced mortgage calculator.

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Mortgage Financing Basics

Is the process of obtaining a mortgage confusing? It certainly can be. Beginning the application is relatively easy. You can either apply for a mortgage online or visit your local lending institution and apply. Before you take that important first step you may want to gather some information about yourself and your finances. Here’s a checklist of items to know before you apply.

Understanding mortgages for dummies

In order to begin understanding mortgage financing, look at the steps involved first. Mortgages are loans that are taken out by individuals to purchase a home. When taking out a mortgage, the borrower agrees to pay back the loan over a set period of time, usually a period of 15 or 30 years.

Mortgages also typically involve interest, meaning that the borrower pays back more than the initial loan amount. In order to qualify for a mortgage, the borrower will usually need to provide proof of income, a credit score, and a down payment. Additionally, the borrower will need to be approved by the lender and may need to pay closing costs and other fees. The key understanding mortgage financing is to also know each step in the loan process.

The Mortgage Process

Step By Step:

Application
disclosures
Underwriting
Conditional approval
Closing
funding

Credit History

What’s my FICO score?
Do I have any late payments on my credit history?
Do I have any liens or judgements on my credit history?
Any bankruptcies or foreclosures in my history?
How long is my credit history?

FICO Scores

A FICO score is a type of credit score created by the Fair Isaac Corporation. It is used by lenders to assess an individual’s creditworthiness and is based on an individual’s credit history. A FICO score typically ranges from 300 (the lowest possible score) to 850 (the highest possible score). FICO scores are the most widely used credit scores. Your FICO score is critically important when applying for mortgage financing and just about any other type of credit. There are 3 credit reporting agencies that will report your scores to creditors, Experian, Transunion and Equifax. The Lender will use the middle score out of the three.

Example: If your scores are 690, 726 and 710, the lender will use 710 for qualification purposes.

Late Payments

Late payments when applying for a mortgage isn’t necessarily an automatic decline from the lender. It really depends on the frequency and severity of the payment.

Example: If you use a gas card and you miss one payment in a year, the result of the missed payment isn’t as severe as someone that missed a mortgage payment. A minor credit card does not carry the same wight as a major credit transaction like the purchase of a home or automobile. That said if you miss several payments on you minor credit card it will add up and reduce your credit (FICO) scores.

Liens/Judgements

Liens and judgements are a mortgage killer. They will always need to be paid off prior to closing your mortgage transaction. If you’re going to apply for a mortgage and you’re aware of any liens or judgements on your credit report, deal with them immediately. It will benefit you in the long run. Also be prepared to write a letter of explanation as to why these occurred.

Types of liens include: tax liens, judgment liens, mechanics liens, child support liens, and HOA/condo liens. Tax liens are placed on property when an individual fails to pay taxes. Judgment liens are placed on property when an individual has been found to owe money to another party. Mechanics liens are placed on property when a contractor or other service provider has not been paid for services rendered. Child support liens are placed on property when an individual has failed to pay child support. HOA/condo liens are placed on property when an individual fails to pay their homeowner association or condo fees.

Bankruptcy/Foreclosure

Bankruptcy: Bankruptcy is a legal process that can be used by individuals and businesses to resolve their debt. It allows individuals and businesses to either re-structure their debt or discharge it altogether. Bankruptcy can be filed under one of several chapters of the U.S. bankruptcy code, depending on the individual or business‘s financial situation. Bankruptcy can have a major impact on an individual‘s credit score and can remain on the credit report for up to 10 years.

Foreclosure: A foreclosure is a legal process whereby a lender takes possession of a property because the borrower has defaulted on their loan. The foreclosure process begins when the borrower fails to make the required payments on their loan. The lender will then file a foreclosure notice with the court, and the borrower will be given a certain amount of time to catch up on their payments. If the borrower fails to do this, the lender will proceed with the foreclosure process, and the property may be sold at auction to pay off the loan.

Both Bankruptcy and Foreclosure have serious ramifications when considering apply for a mortgage loan. The Mortgage Financing guide recommends if you have been involved in this legal process, speak with a mortgage professional prior to applying. This may save you a ton of time.

Credit History

Credit history is a record of an individual‘s or business‘ past borrowing and repayment behavior. It is used by lenders to determine whether or not to extend credit to an individual or business and to set the terms of the credit. It is based on information provided by credit bureaus, such as Experian, Equifax, and TransUnion.

There are many details that can influence your credit score, including how long you’ve been using credit. Your length of credit history is somewhat minor compared with other credit score factors like payment history or credit utilization. But length of credit history accounts for 15 percent of your FICO score.

Your Credit History begins with your very first credit card. If you’re new to using credit cards The Mortgage Financing guide recommends you begin small, one or two cards and be prepared to pay the balance in full every month. Once you’ve gotten the hang of it, borrow responsibly and your credit scores will grow. Understanding mortgage financing is to also know how credit will effect your rates and terms.

Income

What is my annual gross income?
Am I a W-2 Employee, self-employed or an independent contractor (1099)?
Do I have a stable employment history?
Do I earn bonuses or commissions?
Do I have a second job or additional income?

W-2 Income

Understanding how income gets calculated is a big part of understanding mortgage financing. Lenders will look at your gross income, the income before taxes and any other deductions prior to net earnings. Understanding mortgage financing and how your income is applied is a critical step.

W-2 income is easily calculated and in most cases can be verified using paystubs or an annual W-2. Most lenders will require 2 of the most recent paystubs so don’t throw them away. The lender wants the paystubs to cover at least a 30 day period. If you get paid more frequently you’ll need additional paystubs to cover this time frame.

Self-Employment Income

Self-employment income gets a bit more complicated. Most self employed borrowers tend to take advantage of the allowable tax deductions thereby reducing their overall tax bill. While this may save on taxes, it tends to make qualifying a bit more difficult.

Example: If a borrower has earned over $100K in self-employment income, buy has tax deductions of $70K, the potential annual income will be $30K for qualifying for a mortgage loan.

Lender will require the most recent tax returns for a minimum of two years. The will ask for all schedules as well.

1099 Independent Contractor

Independent Contractor (1099) A 1099 is a tax form used to report payments made to independent contractors and other non-employee service providers. The 1099 form is issued by the payer to the recipient, who then reports the income on their tax return. Recipients of 1099 forms must report the income on their tax returns, as it is considered taxable income. They operate in a similar fashion to self-employed borrowers.

Bonus or commission income

Bonus income is an additional form of income received from an employer or other source that is above and beyond the amount of money normally received for the same job. It may be given as a reward for good performance or as part of an incentive program.

Commission income is a type of bonus income earned by salespeople for selling products or services. Commission is typically a percentage of the total sale price, and is often based on the number of units sold.

These additional incomes will only be considered when there is a 2 year history or greater.

Second job, part-time work and additional income.

Second job, part-time work and additional income. These additional incomes will only be considered when there is a 2 year history or greater and there is a likelihood they will continue.

Additional Income can be many different types of income. Some common types are social security and social security disability income, pensions, 401K, annuities and several others. They need to be documented in order to be considered.

Assets

When applying for a home loan, there are several assets that you can use to secure the loan. These assets may include the home itself, investments such as stocks, bonds and mutual funds, cash, and other property such as vehicles, jewelry, and art. Depending on the type of loan you are applying for, the lender may require certain assets to be used as collateral. Additionally, the lender may also require that certain assets be liquidated in order to meet down payment and closing cost requirements. Assets are a key component of understanding mortgage financing.

Liquid Assets:

Liquid assets are assets that can be quickly converted into cash. Examples of liquid assets include bank accounts, stocks, bonds, mutual funds, and money market accounts. The liquidity of an asset is determined by how quickly it can be converted into cash without significant loss. Liquid assets are important for individuals and businesses to have on hand for unexpected expenses or when access to funds is needed quickly.

Non-Liquid Assets:

Non–liquid assets are assets that cannot be quickly converted into cash. Examples of non–liquid assets include real estate, art, collectables, jewelry, and other physical items. These assets are often difficult to sell and may take a long time to convert into cash. They are not considered liquid assets because they can’t be quickly converted into cash without significant loss.

Lenders often require proof of assets so if you’re planning on using non-liquid assets you may want to start converting the asset(s) into cash.

Mortgage Checklist:

Gather the following items:

Current paystubs for the last 30 days
W-2’s for the past two years
1040’s/Tax returns for 2 years. Critical for the self-employed
3 Months Bank statements, all pages.

Q&A

How does a mortgage work for first-time buyers? In most cases no different than for anyone else. There are programs that ore offered called HomeReady and HomePossible that make it easier for 1st time homebuyers.

Conclusion:

You’ve just read the basics of understanding mortgage financing. Follow the guide, read it twice and it you have additional questions you may reach us here: Contact Us