The real estate and mortgage industries of late – April 2008 - have gone through some major changes. In real estate, there are many homes on the market for sale which is driving home values down for the first time since the Great Depression. In mortgages, many flexible loan programs are no longer available. Lenders have tightened up on their requirements for proving income and assets. They have also started to require better credit and higher credit scores. This is probably one of the toughest times in recent U.S. history to get a mortgage.
What is required to get a mortgage?
The general rule of thumb in today’s market is if you can’t prove it you can’t use it. And if you can’t use it you probably won’t qualify. So, to qualify for a mortgage, in general, you must prove your income and assets.
It was as recent as late 2007 that you could get 100% financing for most properties in the U.S. through Fannie Mae and Freddie Mac. Times have changed however. Fannie Mae and Freddie Mac have pulled back their approval of many of their 100% financing loans. They both now require 5 percent down payment on all of their home purchase loan programs where the property is located in an area that has declining property values. There are declining values in most metropolitan areas in the U.S.
In addition to needing a down payment to purchase a home, many other Fannie Mae and Freddie Mac loan products have changed too. The ever popular stated income, no doc, and stated income stated asset loans have all but disappeared.
What does it mean to prove my income and assets?
To prove your income and assets you must provide a couple of things. For your income, most loan programs require you to be employed for at least the past 12 months with no job gap. If you have a gap, you better be able to explain it so that it makes sense. For example, one reason could be that you had a child and switched jobs after your maternity leave was over. Another could be that you went back to school to get some sort of degree or certificate and during that time you were not working.
To prove your employment, you will need to provide your last couple of paystubs to cover the most recent 30 days of pay. You will also need to provide at least your last year’s W-2 and possibly your last two years. To be on the safe side, make sure that you have the second year close at hand in case your loan officer asks you for it.
If you are self employed, you can get a mortgage too. In this case, you will need to provide your last two years of tax returns. Your income will be calculated based on an average of your adjusted gross income over the past few years. There are additional details to calculate your income if you are self employed, but we won’t cover them in this article. Make sure you check with your loan officer about how your income is calculated if you are self employed.
To prove your assets, no matter whether you are self employed or a W-2 employee, you will need to provide your last two months of bank statements for any checking and/or savings accounts you have. You will also need to supply your last quarterly statements from your retirement account statements. It is a good idea to provide this documentation even if you are not going to use these accounts for your down payment or closing costs.
In the case of an FHA Loan, you can use a gift from a relative or a non profit organization such as AmeriDream or Nehemiah. In any of these cases, there are very particular ways that you need to show the gift funds coming to you from whoever is giving them to you. Make sure you discuss this plan very carefully with your loan officer before any gift is given or received or you could delay your loan closing or worse have your loan get cancelled.
How Good Does My Credit Need To Be To Get a Loan?
In today’s mortgage environment, most mortgage lenders as well as Fannie Mae and Freddie Mac are going to be pickier about your credit payment history. In fact, in order to qualify for many loan programs you must have a middle credit score of greater than 680 to qualify. With this being the case, it is even more important to have good credit than ever before.
All is not lost in buying a home if your credit scores are less than 680. The same holds true if you do not have enough money to cover the required 5% down payment and closing costs as currently required by Fannie Mae and Freddie Mac.
The FHA home loan program is your answer. These loans are designed to help consumers who have little assets and lower credit scores to buy a home. See other articles in GetPreQualified.com for specific information on FHA loans.
Debt Free Dave has been in the mortgage and consumer finance business for over 10 years. He has a Finance and Real Estate degree from the University of Arizona.
This Article is designed to be of general interest and should not be considered legal advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.
