What you need to know before you apply for your next loan
The biggest challenge you will face when buying or refinance a home today is the loan process. While loans are readily available, loan requirements changed a lot in the last few years. Many borrowers are not able to obtain the financing they planned to use or it is taking several painful months to do so.
To avoid these problems, you must know how these changes affect you before you begin the loan process. Two simple steps will save you money, eliminate surprises, and ensure your loan closes on time.
Step One: Chose A Qualified Lender – All loans now require full documentation including tax returns. Ironically, well-qualified borrowers often have the most trouble. They are used to less scrutiny and their finances are often very complex. These differences make your choice of lender even more important.
Most loan officers do not have specific underwriting expertise or experience. The result is a frustrating and lengthy underwriting process with seemingly endless requests for documentation. In contrast, working with a lender who understands the new underwriting guidelines enables you to organize all required documents up front. This will save you time and allow you to close in a matter of weeks instead of months.
Step Two: Pre-Approve Your Loan – This is now the most important step of the loan process. Your lender just can’t use the ten-minute credit pre-qualification any more. Full-documentation loans require a complete review of your finances. Your lender must review your credit report, tax returns, paystubs, W-2s, real estate documents, and other asset information to know what you will need to qualify.
- Complete the loan application. Include each income source and asset type for each borrower.
- Review your credit report for accuracy, loan adjustments, and potential score improvements.
- Calculate your income, assets, and liabilities according to current underwriting guidelines.
- Provide documentation to verify your numbers and identify any alternative document options.
Pre-Approval Tips – To avoid the most common mistakes:
- “Gross up” tax-free income. Add 25% to child support, disability, retirement, certain military pay etc.
- Add back any depreciation deduction on your taxes to the income on your loan application.
- Exclude installment loans with less than 10 remaining payments from your debt to income ratio.
- Be ready to document payments for mortgage, taxes, and insurance for each property you own.
- If you own property outright, be prepared to provide a title search to prove there is no loan.
At this point, you know how the new rules will affect your loan. You prepared accordingly and you can move forward with confidence. Your loan should close as planned saving you time, money, and headaches.