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This is a general discussion about income, assets, employment history, and how this information is viewed by a lender. There are four major items which a lender must consider to protect himself in loaning money to a prospective borrower.

• The credit history of the borrower,
• The income (stability and quantity) of the borrower,
• The assets of the borrower,
• The property itself (which the lender is loaning against).

The system works in such a way that if one of these first three items is a bit lacking, the others can compensate to some extent, (the fourth one, the property must ALWAYS appraise) but generally, you have to be up to par in all these issues. The purpose of this section is to give you some insight as to just what "par" is!

Credit History

For some time now, the lending industry has relied on a scoring system for credit histories. This system was once secondary, and you could still explain certain late payments and collection accounts to an underwriter who could still approve your loan. Now however, minimum scores are required to even be considered.

The benefit in the scoring system is the simplicity in underwriting. The drawback is that no one has much control over this scoring system which is very very sophisticated. Each loan has it's own loan parameters, and certain scores earn certain interest rates in some cases. Each of the credit bureaus keep their own scoring system as well. In reality, it could go like this.... one lender has a loan which requires a minimum score of 620, and all three credit bureau scores must exceed that amount. Well, you have two scores over 670, but one score is 605. Another lender will use the highest two, another will use the middle score... it is complicated at best. Generally speaking, if your credit is "clean", your scores will exceed 680 (assuming you have credit at all, if not, that's another problem!),and a 680 score will work for most loans (some no-income documentation loans will need higher scores).

If there is a problem on your credit report causing a score to be low, it may take 60 days to clear it up. 30 days to make the correction, and another 30 for the score to change. It doesn't just change immediately with the correction, another company keeps the scores, and it takes time to filter through the system. There is an elaborate and expensive process to make repairs for clearly wrong or inaccurate information, but it is expensive! $ 25 per line item per bureau reporting, and some corrections will not improve your score. Call us for more information on the "bureau direct" method of correcting your credit report. Needless to say, this is yet another reason to get with a lender and get pre-approved right away!! Find these problems and get them fixed as soon as possible.

Borrower Income

There are two issues in income that the banks are concerned with. Certainly the amounty of money you make is important, but the bank is also concerned with the quality of that income. Consistency over time and the likelihood of that income to continue. The bank requires at least two years of stable income in the same position, or at least in the same line of work. The longer time you are at the job and in the same business makes you look more solid to the bank. If you work for someone else, be prepared to show W-2's, possibly tax returns, and your employer will have to complete a form called an employment verification (no big deal, they do them all the time) If you operate your own business, be prepared to provide complete tax returns, profit and loss statements, proof of business assets, any number of financial statements. Remember, the bank is going to loan you hundreds of thousands of dollars! They are simply going to want to know everything about you, period.

The amount of money you make in this solid job/business determines how much you can borrow. The amount is calculated through a "ratio" system, with a certain percentage of your monthly income being allowed for your over all "housing expense" (the total of all monthly costs for your house, mortgage payment, taxes, insurance, mortgage insurance if any, homeowner's association and land lease in the rare case that you don't own the land under the property you are buying). When you add all of those costs up, the bank likes to see that amount not exceeding a certain percentage of your overall monthly income. In the past (and it's still the basic guideline), this ratio (called a front-end ratio was not to exceed 28%, but lately it has stretched to being typically OK as high as 40%. Then, there is another test. Your total housing expense PLUS all of your long term monthly debt (credit cards, child support, alimony, boat loans, student loans, personal loans are all typical items to fall into this catagory) should not exceed a ratio of 36% of your overall monthly income, but, again, this is being stretched lately to 45% and higher. The reason that the ratios are being stretched is complex, but to keep it simple, money is "loose"; the banks are trying to boost the economy, and competition is tough with lots of money to loan. It definitely will not always be this way.

More importantly, what difference does it make if the bank will loan it to you if you feel you can't afford the monthly payment? Don't let "payment shock" get you. If you are used to only spending 20% of your income on housing expense, remember that something else will have to give in your budget! Don't let the bank "loan you into poverty"!

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Assets: What is required?

Assets are the one area that you don't necessarily have to show the bank everything if that bothers you. If you need a boost in the other areas, showing more assets will help, but generally, you only have to show enough assets to cover the costs of closing the transaction including the down payment, plus some amount of cash reserves. It is best to show at least six months of cash reserves for most loans, although four months is usually all that is required to prove. Now, there are some instances when you'll need to show more, such as a situation where your income far exceeds your expenses, in which case, if you have little in assets, the bank is going to wonder why you make so much money and can't seem to save anything (relative to your income). Of course, if it doesn't bother you, show all of your assets and make yourself appear as good as you can for the underwriter.

Pacific Southland Properties is here to help you guide you through any financial transaction relative to a real estate purchase or refinance. There are many different options, so why not let us help you sort through the opportunities? Thanks for reading this material.

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