The 4 C’s of Mortgage Underwriting

With Spring upon us, and new buyers out looking for houses, I thought today might be a good time to review the basics of what lenders look for as they decide to approve (or deny) mortgage applications. For at least 25 years, I have heard them called “The 4 C’s of Underwriting”- Capacity, Credit, Cash, and Collateral. Guidelines and risk tolerances change, but the core criteria do not.

CAPACITY

CAPACITY is the analysis of comparing a borrower’s income to their proposed debt. It considers the borrower’s ability to repay the mortgage. Lenders look at two calculations (we call ratios). The first is your Housing Ratio. It simply is the percentage of your proposed total mortgage payment (principal & interest, real estate taxes, homeowner’s insurance and, if applicable, flood insurance and mortgage insurance – like PMI or the FHA MIP) divided by your monthly, pre-tax income. A solid Housing Ratio (often called the front end ratio) would be 28% or less; although, at times loans are approved at a significantly higher number. That’s because your front end ratio is looked at in conjunction with your back end ratio.

The back end ratio (referred to as your Debt Ratio) starts with that mortgage payment calculation from the Housing Ratio and adds to it your recurring debts that would show up on your credit report (auto loans, student loans, minimum credit card payments, etc.) without taking into consideration some other debts (phone bills, utility bills, cable TV). A good back ratio would be 40% or less. However, loans sometimes are granted with higher debt ratios. Understand that every application is different. Income can be impacted by overtime, night differential, bonuses, job history, unreimbursed expenses, commission, as well as other factors. Similarly, how your debts are considered can vary. Consult an experienced loan officer to determine how the underwriter will calculate your numbers.

CREDIT

CREDIT is the statistical prediction of a borrower’s future payment likelihood. By reviewing the past factors (payment history, total debt compared to total available debt, the types of monies: revolving credit vs. installment debt outstanding) a credit score is assigned each borrower which reflects the anticipated repayment. The higher your score, the lower the risk to the lender which usually results in better loan terms for the borrower. Your loan officer will look to run your credit early on to see what challenges may (or may not) present themselves.

CASH

CASH is a review of your asset picture after you close. There are really two components – cash in the deal and cash in reserves. Simply put, the bigger your down payment (the more of your own money at risk) the stronger the loan application. At the same time, the more money you have in reserve after closing the less likely you are to default. Two borrowers with the same profile as far as income ratios and credit scores have different risk levels if one has $50,000 in the bank after closing and the other has $50. There is logic here. The source of your assets will be examined. Is it savings? Was it a gift? Was it a one-time settlement/lottery victory/bonus? Discuss how much money you have and its origins with your loan officer.

COLLATERAL

COLLATERAL refers to the appraisal of your home. It considers many factors – sales of comparable homes, location of the home, size of the home, condition of the home, cost to rebuild the home, and even rental income options. Understand the lender does not want to foreclose (they aren’t in the real estate business), but they do need to have something to secure the loan against, in case of default. In today’s market, appraisers tend to be conservative in their evaluations. Appraisals are really the only one of the 4 C’s that can’t be determined ahead of time in most cases.

Now, each of the 4 C’s are important, but it’s really the combination of them that is key. Strong income ratios and a large down payment with strong reserves can offset some credit issues. Similarly, long and strong credit histories help higher ratios….and good credit and income can overcome lesser down payments. Talk openly and freely with your loan officer. They are on your side, advocating for you and looking to structure your file as favorably as possible.

If You need some more help on this or any other Real Estate subject, feel free to contact me and I'll put you in touch with my entire Real Estate Team of Professionals!

Neal Paskvan-Baird and Warner      neal.paskvan@bairdwarner.com

DARIEN DOWNERS GROVE Homes - On Average 12,551 Homes Sell Every Day in the U.S.

 

Here is a Breakdown of who the Buyers are.

The Facts Show  If you are FIRST TIME BUYER, Investor or CASH buyer, your investment will pay off.

If your Goal is to find a place of your own, and make it your Home, a Home where you can live the lifestyle you want to live, Now, may be the right time to take the first step.

Contact me if you would like to explore the the possibilities of having a home of your own. No cost consultation.

Neal Paskvan- Darien Downers Grove Homes for Sale-Baird and Warner

  neal.paskvan@bairdwarner.com

 

 

*No one telling you where to park of if you can have a pet.  No more waiting for the the washer and dryer to be available.. No more  concerns about who may is moving into the space  above or below or next to you. No one telling you when to turn the music down and well you get the idea.

Short Sale Success: What is an Acceptable Hardship?

 

A short sale, in most instances, is a complex transaction. However, there are two very simplistic characteristics that every qualified short sale possesses:

1. The house must be valued at less than the homeowner owes on their mortgage debt obligation. In other words, the home must be “underwater”.
2. The homeowner must have a qualified hardship.

It is the second characteristic that we would like to touch upon in this blog post.

One question that we answer frequently is “My house is underwater. Is this an acceptable hardship?” Unfortunately, the answer is always “No.”

The simple fact that a homeowners mortgage obligation is in excess of their house value is not an acceptable hardship. A Short Selling bank will entertain a short sale when and only when there is a hardship that will, now or in the future, affect the borrower’s ability to pay their mortgage.

The following is a list of acceptable hardships that may be used when submitting a short sale package:

• Mortgage Rate Adjustments
• Loss of Employment or Reduction in Wages
• Business Failure
• Medical Hardship
• Death in the Family
• Divorce/Separation
• Military Service
• Overwhelming Debt Obligations
• Job Relocation

As always, should you have questions as to the acceptability of a hardship scenario, you should seek advice from an expert that has been trained in the short sale field. Look for the REALTOR®  Designation.

    Neal Paskvan  a Downers Grove Real Estate Broker holds the SFR Designation and may be able  to help

Reach Neal with Barird Warner at 630-964-1855 or e-mail him at neal.paskvan@bairdwarner.com

Senators want higher g-fees to pay for Gulf Coast cleanup

A group of senators want to extend higher Fannie Mae and Freddie Mac guarantee fees to pay for continued cleanup from the British Petroleum Gulf Coast oil spill.
Opponents say the measure, if passed, effectively taxes potential homebuyers and consumers looking to refinance their mortgages.

Congress already approved raising the g-fees through October 2021 by 10 basis points from the average fee charged last year. The Congressional Budget Office estimates the raise would offset $35.7 billion for the costs of the extended payroll tax cut.
The amendment is being pushed to the Restore the Gulf Coast Act of 2011, which would establish a trust fund paid for only partially by fines levied against BP. Sens. Mary Landrieu, D-La., and Richard Shelby, R-Ala. sponsored the bill.

Get the rest of the story from Housing Wire

Energy Savings at Home | Energy Efficiency Tips | HouseLogic

 

Are You Looking for Energy Savings in All the Wrong Places?

Ack! Our energy costs are going up because too many of us are making the wrong judgment calls about how to save energy. Here’s why we’re having a disconnect.

Do you see your energy bills rising even if you’ve implemented up to three projects to save energy? In the first of our two-part Q&A with an expert on consumer attitudes toward energy efficiency, we look at the energy-saving truths many of us ignore. Hint: Replacing windows isn’t your best bet. Tomorrow, we’ll show you what you can do to actually start seeing some savings.
Suzanne Shelton is president and CEO of Shelton Group, a marketing agency specializing in sustainability and energy efficiency. Shelton Group’s annual Energy Pulse research report — released last fall — tracks consumer attitudes toward energy-related topics.

Read more: Read More from House Logic

 

Energy Savings at Home | Energy Efficiency Tips | HouseLogic

The Power of Assumability

 

One of the rarely touted advantages of people taking FHA mortgages today is the fact that they are assumable. What that means is, when the FHA homebuyer of today is looking to sell his home, a qualified purchaser can “take over” their loan.

Most people believe that interest rates will return to a “normal” range (between 6.5% and 7%) in a couple of years. When you assume a mortgage, the terms remain the same. This means that a buyer five years from now can enjoy a 4 – 4.5% mortgage by assumption rather than the 6.5% – 7% mortgage they would get without it. Since most people buy homes based on how the monthly payment fits into their personal monthly budget, this is extremely impactful.

As an example, a $300,000 loan at 4% today carries with it a $1,432.25 principal and interest payment on a 30 year fixed mortgage. If offered for sale in five years, the purchaser could assume the $271,858.56 balance with the same $1,432.25 payment and remaining term of 25 years. The total payments over the 25 years would be $429,675.

Compare that to a new $272,000 loan at 6.5% for 25 years, which would carry a monthly payment of $1,836.56 (over $400 more a month than the assumption and more than $120,000 more over the 25 year term).

At 6.5% for 25 years, to wind up with the same payment as the assumed mortgage, our borrowers would only be getting $212,000…$60,000 LESS!

The point here is that, when rates go up, homes with assumable mortgages will have more value and will sell at higher prices because they are more affordable. As an additional bonus, the closing costs on assumable mortgages are significantly less (especially here in New York where NYS Mortgage Tax is such a large component of closing costs).

The borrowers must be credit-worthy of course (have good credit, qualifying income, and necessary assets to close), but they would have to be credit-worthy to get a new mortgage too!

Besides the multiple other reasons to obtain an FHA mortgage (low down payment requirements, extended income ratios, lower credit scores, and easier sourcing of funds), there is another perk. In the future, there is a good chance that you may be able to sell your home for more money because of the FHA loan’s assumability.

credit Dean Hartman

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