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Soon will come the day in the lives of most readers when purchasing a new home will be a desire realized or a necessity placed on them by the demands of life. Even those who already own a home may be faced with the decision or necessity to refinance a current home loan. Sadly most home buyers and owners plan more for their next vacation or even a family picnic than they do an upcoming mortgage.
Mortgage planning really is a science because it is based on numbers instead of emotions. While the buying process itself may be driven by more than numbers the actual financing of that property, or even the decision to purchase with cash, is primarily a series of numeric calculations. As such there are ways for anyone to plan for their next mortgage in order to receive the best possible rate and terms available.
The four sins
Negative impacts on the applicant’s ability to borrow loans are not always of their own doing yet some are. Clearing one’s history of these three sins, if they exist, will greatly improve their likelihood of not only being approved for a home mortgage but getting the best rate and terms.
1. Foreclosure/pre-foreclosure – this one is the worst. If the applicant has had a foreclosure (outside of bankruptcy) within the last seven years there is a greatly decreased likelihood of being approved for a home loan. Even if the loan approval is granted there may be a higher interest rate due to the risk factor based on historical data. Applicants may be able to challenge with a well written story of financial hardship submitted to the underwriter yet even with the most appreciable of stories the waver may not be granted. In the majority of cases only time can overcome this.
2. Bankruptcy – when completing a standard Uniform Residential Loan Application (URLA) the applicant must also answer the question “Have you been declared bankrupt within the past 7 years?” Although the question gives the impression this would be an automated denial that is not the case. In fact with a good explanation letter from the borrower an underwriter can approve a loan after as little as 12 months from the date of discharge. If you have any doubts find a direct lender who can give you an underwiter’s determination on the bankruptcy history prior to submitting everything.
3. Judgments and liens – in the public records section of all major mortgage credit reports there will be information about any public records including judgments against the borrower or liens against the borrower. At times liens and judgments exist but do not appear on the credit report. Judgments must be satisfied before underwriters will approve the loan an only a few liens may be subordinated to the new mortgage agreement. One such lien is a federal tax lien which is in a repayment period and evidence of the repayment schedule being satisfied can be provided.
4. Late payments – during the last 12 to 24 months any payments that have been made more than 30 days after their due date are referred to as simply “lates”. They can be late payments on any consumer debt which is reported to the credit bureaus including autom loans, school loans, credit cards, revolving store accounts, mortgages, or any other payments. Some loan programs will allow a couple of lates in the last 12 months and others will not. For conventional loans these lates can either prevent the loan from being approved or result in a higher interest rate for the applicant.
Those four items are often “deal killers” and more difficult to overcome than some smaller “sins”. Planning ahead for a mortgage by knowing just these four things which can result in a negative outcome should help you if you are affected by them. As always, with any mortgage advice, the best thing to do is to speak with a trusted mortgage professional who will take responsibility for their answers to you.
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— Ken Cook NMLS ID 208452