Underwriting Guidelines for the Average Mortgage

Income

Income is one of the most important variables a lender will examine because it is used to repay the loan. Income is reviewed for the type of work, length of employment, educational training required, and opportunity for advancement. An underwriter will look at the source of income and the likelihood of its continuance to arrive at a gross monthly figure.

Salary and Hourly Wages - Calculated on a gross monthly basis, prior to income tax deductions.

Part-time and Second Job Income - Not usually considered unless it is in place for 12 to 24 straight months. Lenders view part-time income as a strong compensating factor.

Commission, Bonus and Overtime Income - Can only be used if received for two previous years. Further, an employer must verify that it is likely to continue. A 24-month average figure is used.

Retirement and Social Security Income - Must continue for at least three years into the future to be considered. If it is tax free, it can be grossed up to an equivalent gross monthly figure. Multiply the net amount by 1.20%.

Alimony and Child Support Income - Must be received for the 12 previous months and continue for the next 36 months. Lenders will require a divorce decree and a court printout to verify on-time payments.

Notes Receivable, Interest, Dividend and Trust Income - Proof of receiving funds for 12 previous months is required. Documentation showing income due for 3 more years is also necessary.

Rental Income - Cannot come from a Primary Residence roommate. The only acceptable source is from an investment property. A lender will use 75% of the monthly rent and subtract ownership expenses. The Schedule E of a tax return is used to verify the figures. If a home rented recently, a copy of a current month-to-month lease is acceptable.

Automobile Allowance and Expense Account Reimbursements - Verified with 2 years tax returns and reduced by actual expenses listed on the income tax return Schedule C.

Education Expense Reimbursements - Not considered income. Only viewed as slight compensating factor.

Self Employment Income - Lenders are very careful in reviewing self-employed borrowers. Two years minimum ownership is necessary because two years is considered a representative sample. Lenders use a 2-year average monthly income figure from the Adjusted Gross Income on the tax returns. A lender may also add back additional income for depreciation and one-time capital expenses. Self-employed borrowers often have difficulty qualifying for a mortgage due to large expense write offs. A good solution to this challenge is the No Income Verification Loan. NIV loan programs can be studied in the Mortgage Program section of the library.

Most lenders require a residential merged credit report (RMCR) from the 3 main credit bureaus: Trans Union (800-888-4213), Equifax (800-997-2493), and Experian (800-392-1122) . They will order one report which is a blending of all three credit bureaus and is easier to read than the individual reports. This "blended" credit report also searches public records for liens, judgments, bankruptcies and foreclosures. See our credit report index.

Credit report in hand, an underwriter studies the applicant's credit to determine the likelihood of receiving an on-time mortgage payment. Many studies have shown that past performance is a reflection of future expectations. Hence, most lenders now use a national credit scoring system to evaluate credit risk. If you're worried about credit scoring see our articles on it.

On the positive side, the mortgage lending process is very forgiving! An applicant with 12 plus months positive credit, will usually qualify for an A paper loan. However, the guidelines require an applicant to explain why payments were previously late and why current circumstances are different. In addition, any unpaid judgment, collection or charge off must be paid prior to closing a mortgage. Here are some rules of thumb most lenders follow:

• 12 plus months positive credit will usually equal an A paper loan program, depending on the overall credit. FHA loans usually follow this guideline more often than conventional loans.
• Unpaid collections, judgments and charge offs must be paid prior to closing an A paper loan. The only exception is if the debt was due to the death of a primary wage earner, or the bill was a medical expense.
• If a borrower has negotiated an acceptable payment plan, and has made on time payments for 6 to 12 months, a lender may not require a debt to be paid off prior to closing.
• Credit items usually are reported for 7 years. Bankruptcies expire after 10 years.
• Foreclosure - 3 years must elapse to be considered for an A paper loan program.
• Chapter 7 Bankruptcy - A borrower is eligible for an A paper loan program 4 years after discharge, provided they have reestablished credit and have maintained perfect credit after the bankruptcy. In some cases, 3 years out of a BK with a good reason will be acceptable.
• Chapter 13 Bankruptcy - 12 months continuous on-time payments, and a letter from a court trustee, can result in an approved A paper loan.
• The good credit of a co-borrower does not offset the bad credit of a borrower.
• Credit scores usually range from 400 to 800. A credit score above 640 usually results in an A paper loan approval. 660 or more usually is the minimum required for an A paper No Income Verification loan.
• A credit score below 600 may require an Alternative Credit mortgage program.
• Misinformation on a credit report can be repaired! For more information see our credit repair section.
• The FTC states, "Credit repair companies take your money and vanish." Anything a credit repair company does for a fee, a consumer can do for free. Be wary of these guys!
• If a borrower falls behind on a payment, the creditor should be contacted as quickly as possible. Most creditors will work with a borrower who makes an initial good faith effort to communicate with them.