Non-Qualified Loan

Documents Required for a Home Loan

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If you are self-employed, work on commission, or otherwise have irregular income, you might think it’s impossible to get a mortgage with full documentation. If you can’t prove regular income, a lender won’t want to give you a loan, right?

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Luckily, there are ways around it. While you may not be able to get conventional financing, you may be able to get a home loan with limited documentation.

Just what does this mean? Keep reading to find out more.

Verifying Your Income

The largest piece of the puzzle when applying for a mortgage is typically your income. It makes sense; lenders need to know that you can pay the loan back in full. They don’t want to give a loan to someone that might have trouble making the payments.

But what happens if you have irregular income or you can’t verify your self-employment income with your tax returns because of the write-offs that you take? You can use limited documentation. While this doesn’t mean ‘no documentation,’ it just means that you verify your income in some other way.

The traditional way to verify income is with your pay stubs, W-2s, and/or tax returns. If you know these documents won’t help you look like a ‘stable borrower,’ you may be able to verify your income with your bank statements instead. Lenders are able to accept bank statements for borrowers that regularly deposit their income in one bank account and that can provide proof that it’s their income.

Just why would bank statements be better than tax returns? It’s for one good reason – deductions. As a self-employed borrower or even borrower that works on commission, you have the right to take many deductions on your taxes. Unfortunately, mortgage lenders must use your adjusted gross income according to your tax returns. If you take so many write-offs that you make your AGI zero or negative, it would be impossible to qualify for a loan.

When you can use your bank statements, you can show lenders the amount of money you actually bring in because it’s deposited in your bank account. As long as lenders can tell that it’s your income and not money from any other source, they can use it.

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Verifying Compensating Factors

Accepting limited documentation is a big risk for lenders. In order for them to allow it, they need to see other compensating factors or factors that make your loan less risky. These include:

  • High credit score – show lenders that you are a good risk by having a high credit score. Lenders want to know that you pay your bills on time and don’t overextend your credit. A high credit score will give them this reassurance.
  • Low debt ratio – Lenders want to know that your monthly income isn’t spread thin. They want you to have disposable income in order to cover the cost of living. They also want to know that you aren’t in over your head in debt.
  • Assets – If you have money in savings or even in liquid investments, they can count as reserves. This is money the lender counts as what you could use to make your mortgage payment should your income decrease or stop. The more money you have available in reserves, the better your chances of approval become.

Finding a Lender

The hardest part of getting a limited documentation loan is finding an appropriate lender. You won’t get a conventional or even government-backed loan with limited documentation. Instead, you’ll need to use an alternative or subprime lender.

Don’t let the name scare you – they are literally just lenders that write their own programs and keep the loans on their own books. In other words, they don’t have to answer to any other investors. They can make their own rules, which may or may not include the ability to accept limited documentation.

You should shop around with at least three lenders to see what they have to offer. Since this is a portfolio loan program, you may find the terms and costs of the loan very different between lenders.

Getting a home loan with limited documentation is possible, you just have to be diligent in your efforts. Make sure to set up your qualifying factors as well as you can before you apply so that lenders see you as a good risk right from the start.

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What are the Benefits of a Fixed Rate Mortgage?

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If there’s one type of mortgage that is the most popular, it’s the fixed-rate mortgage. Perhaps it’s because of its predictability or because it’s the loan most people know about. Either way, you need to decide if it’s the right choice for you.

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Learn the pros and cons of this type of mortgage to help you make your decision.

The Pros of the Fixed-Rate Mortgage

  • Predictability – This goes without saying. Your interest rate never changes. You know from day one how much you will owe in principal and interest. The only amount that may change is your escrow payment. Real estate taxes and homeowner’s insurance costs may change, which could alter your mortgage payment slightly.
  • Simple comparison shopping – If you shop around with different lenders (which we recommend), it’s easy to compare apples-to-apples. You look at the two interest rates for the same terms and see which one is higher. You don’t have any calculations to perform or other factors to consider.
  • No worrying – You don’t have to watch the market during the months leading up to your adjustment rate to predict what your interest rate will do. No matter what happens in the market, your fixed-rate stays the same.
  • A variety of terms – Fixed-rate mortgages come in a variety of terms compared to other mortgage options, such as the ARM. You may be able to choose between the 10, 15, 20, 25, and 30 year term. This allows you to play with the payments a little to determine which one suits your budget the best.

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The Cons of the Fixed-Rate Mortgage

  • Higher starting rate – The adjustable rate mortgage often has an introductory rate that is lower than the fixed-rate loan. In exchange for the predictability, you may pay more interest on your loan for a few years. But, you don’t have the worry of an increasing rate down the road.
  • Pressure when locking the rate – Locking in your interest rate for a purchase or refinance is stressful. You have to choose just the right time, but that can be impossible. You cannot predict if rates will go up or down within the next hour let alone the next few weeks. This could leave you with buyer’s remorse if you lock in a rate and then rates fall.
  • Must refinance to lower rate – If rates fall and your friends with ARMs start to enjoy lower rates, you’ll still be paying your higher fixed rate. The only way out of it is to refinance, which costs money and isn’t always in your best interest, depending on the situation.

Choosing the Right Program

The best way to determine if the fixed-rate mortgage is for you is to compare all of your options. Ask several lenders which loan programs you qualify to receive. Then you can figure out which one works best for you. Don’t look at just the interest rate, though. That is deceiving. Instead, look at the big picture.

Lay out the quotes from each lender and compare closing costs, interest rates, and closing fees. An easy way to do it is to look at the APR. This gives you the breakdown of the cost of the loan over its entirety including all costs. This way you’ll have a better idea of which one suits you the most.

Of course, only you know what you can afford and what you are comfortable with taking. For example, if you have a stable job with a known income, taking a fluctuating ARM might not be the end of the world. If, however, you have a less stable job or you work on commission, you might want the predictability that a fixed-rate mortgage offers.

Consider all of the pros and cons and all of your options before making your decision.

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Pros and Cons of Homeownership

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Homeownership can be expensive, there’s no doubt about it. Dealing with repairs or just regular maintenance can be downright costly. Sometimes it might feel like you are constantly paying out without gaining any benefits in return.

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While you probably won’t see the financial benefits of being a homeowner right away, in time, they will be very apparent. Following are the most common benefits you’ll see.

Natural Appreciation

Even if you don’t make any changes to your home, but you keep it well maintained, your house may appreciate over time. It may not be a lot and it may even fall from time-to-time, but eventually the values usually come full circle. We saw this with the housing crisis. So many homeowners lost tremendous value in their homes. But, those that stuck it out are seeing those values come back again.

If you are in your home for the long haul, chances are you will see a return on your investment just with natural appreciation.

Building Equity With Monthly Payments

Every time you write that large mortgage payment check, you build equity in your home. Just how much depends on many factors including your interest rate and the term of your loan. Every payment, however, gets you that much closer to owning your home free and clear.

You can look at your amortization table from your closing documents to see just how much of your payment goes towards the principal and how much goes to interest. No matter how much goes towards the principal, though, you make gains with every mortgage payment you make. In other words, your investment gets larger with every passing month.

An Emergency Savings Plan

While we don’t recommend using your home’s equity as your emergency savings plan, it could work in a pinch. Because you reduce your principal with each payment you make, you increase your investment. Once you hit the point where you owe at least 20% of the home, if not more, you can tap into it with a cash-out refinance. If you end up in a serious situation where you don’t have the money to pay for, the equity in your home can be your ‘back up’ plan.

Tax Deductions

Many homeowners enjoy the tax benefits of owning a home. While you do have a lot of expenses as a homeowner, many of them can reduce your tax liability including:

  • Interest paid on the loan
  • Interest on a home equity loan (up to the first $100,000)
  • Real estate taxes
  • Points paid on your loan

You can often use these deductions if you itemize your tax deductions each year. The interest deduction alone could be a rather large deduction for you, as could your real estate taxes depending on where you live.

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Capital Gains go Untaxed

Usually capital gains are the first thing you worry about when paying taxes. You want to avoid too much of a profit as you know it will get eaten up by taxes. With your primary residence, though, this isn’t the case. If you are single, you can keep up to $250,000 profit from the sale of your home tax-free. The only stipulation is that you must live in the home for 2 years in order to qualify.

If you are married, you get an even larger profit as you can make up to $500,000 before being taxed on your capital gains. Again, however, you must live in the home for at least 2 years as your primary residence.

Homeownership Can Increase Your Credit Score

You might think even think of the ramifications of your mortgage on your credit score, but if you pay it on time, it can help in a big way. Credit scores are comprised of many factors including timely payments, the type of debt, and the age of the debt.

If you keep the same mortgage for many years and make regular payments on it, it could help improve your credit score. In the same respect, though, if you miss payments or default on the loan, it could have a drastic negative effect on your credit score. The best thing to do is only take a loan that you know you can afford to avoid anything negative from occurring.

There are many financial benefits of homeownership, and each person is different. Even if your home’s value drops or you don’t see your home appreciate fast, it will. Investing in real estate is meant as a long-term investment. It’s not going to have a quick turnaround or make you a quick profit. In time, though, it can be one of the most lucrative investments you make in your lifetime.

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Buying a House With Low Income

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If you have low income, you may think you can’t buy a home. Lenders look at your income, assets, and debt ratio, right? So how would you ever qualify if you don’t make top dollar for your area?

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Luckily, there are programs out there catering to borrowers with a small income. In fact, the USDA program is only for those borrowers with low monthly income. You can actually make too much money and not qualify for that particular program.

Keep reading and we’ll teach you how to take advantage of the programs available for borrowers with little income.

What Does Low Income Mean?

First, we must discuss what low income actually means. No one will be able to secure a mortgage if they don’t make enough to afford the payments. You must have enough income that you can cover the mortgage and your existing debts. You should still have some money left over too. Lenders verify this fact by looking at your debt ratios.

Each loan program has its own debt ratio requirements. They are as follows:

  • Conventional loans – 28% front-end ratio and 36% back-end ratio
  • FHA loans – 31% front-end ratio and 43% back-end ratio
  • VA loans – 43% back-end ratio
  • USDA loans – 29% front-end ratio and 41% back-end ratio

As you can see, each program differs in their requirements. You’ll even find different requirements between lenders regarding the same loan program. Lenders must use the program’s guidelines at a minimum. But, they are free to add to those requirements if they want to tighten up the restrictions on the loans they write.

Low income in this case, means a small income for your area, but enough to cover the debts you must cover.

The USDA Loan for Low-Income Borrowers

The most common low-income loan is the USDA loan. In order to be eligible for this loan, you must buy/refinance a home in a rural area. The USDA sets the rural boundaries, though. You may be surprised to see which areas qualify, as we may not consider them rural.

You must also have a total household income that is less than the allowed amount for the area. Every adult in your household that makes an income must disclose the amount they make. You then total this amount and deduct any of the following allowances that apply to you:

  • $480 for each child under 18 or over 18 and in school full-time
  • $480 for each disabled relative living with you
  • $400 for each elderly person living with you

If after deducting the allowances your income fits within the guidelines for your area, you may be eligible for the program.

Once you are eligible, you must qualify for the loan. This pertains only to the borrower and co-borrower now. You must be able to prove you have the income to cover the proposed housing payment, with a debt ratio no higher than 29%. You must also prove that your total debt ratio doesn’t exceed 41%.

If you meet these requirements and the house meets the USDA appraisal requirements, you are well on your well to securing a USDA loan.

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The VA Loan for Veterans

The VA provides 100% financing to veterans of the military, including those serving in the National Guard or Reserves. You do not need a down payment for this program and the VA doesn’t focus on your debt ratio.

Instead, the VA looks at your disposable monthly income. You have left this money after paying your monthly bills, such as the mortgage, installment loans, and credit card bills. Each area has a specific amount of disposable income required based on your family size.

As long as you have the income to cover your housing payment and existing monthly debts, you may qualify. You don’t have to make a certain amount of money for the program. The size and price of the house are what determine how much you must make to afford it. As long as your total debt ratio doesn’t exceed 43% and you have enough disposable income to meet the VA guidelines, you are in good shape.

The FHA Loan

The FHA program is also great for borrowers with low incomes. This is another government-backed loan program with flexible guidelines. The FHA requires borrowers to have a maximum 31% housing ration and 43% total debt ratio.

You do need a down payment for FHA loans, but only 3.5% of the purchase price. If you bought a $150,000 loan, you’d need $5,250 down. But, the FHA does allow you to accept gift funds from relatives, friends, or even your employer. The seller can also help you with the closing costs. It’s possible to come to an FHA closing with no money and still walk away with keys to your new home.

Don’t make the mistake of thinking you can’t buy a home if you have low income. Several programs cater to buyers just like you. The key is to shop around and find the best deal. Talk to lenders about the different programs that apply to you. This way you can receive quotes for each program, allowing you to choose the loan that works best for your financial situation.

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How to Manage your Debt Ratio to Obtain Bank Statement Loans

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Are you recently self-employed? Maybe it occurred as a result of the economic disaster that occurred after the housing crisis of 2007. Whatever the case may be, if you own your own business and are making a good living, you are back on the track to good things. What if you obtained your mortgage right before the housing bust and took an adjustable rate mortgage that is about to adjust now and you need to refinance? Your situation is completely different, going from someone’s employee to self-employed. In the eyes of the bank, this is a riskier move, but that does not mean it is impossible to refinance. There are many lenders out there willing to help you out, but you should do these three things first to make sure you are good and ready.

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Make your Business Legitimate

Your business might seem legitimate in your eyes, but in the eyes of the banks, it is not until you do a few things:

  • Have a licensed CPA prepare your taxes right from the start, if you can. If you have already been in business for a while, get a licensed CPA right away. This ensures that a non-interested third party handles your income and can vouch for the validity of it.
  • Have a business license with your name on it. It is not enough to hang a shingle outside and call yourself a business. You have to be a legally recognized business, which is done by registering your business and receiving a license to prove it.
  • If you do not have a business license or your business does not need one, be prepared to have your CPA write a letter on his letterhead stating that you have been in business for the last 2 years or longer and that he has been handling your taxes for that period of time.

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Have High Credit Scores

This could be the hardest step when trying to refinance as a self-employed borrower. Your credit scores probably took a hit as you started your business. With extensive credit being granted, applications being filled out, and money flying around, your credit score is likely to be all over the place. Generally, lenders want self-employed borrowers to have a credit score over 700. There are simple ways to get this going on your end if you are not there right now:

  • Minimize your utilization rate, which means try to pay down as much of your debt as possible. Using more than 30 percent of your available credit gives your credit rating a good beating.
  • Make your payments on time all of the time, especially any housing or installment payments.
  • Take care of any collections or judgements reporting on your credit report, whether you have to pay them off or just straighten them out, getting them removed from your credit report if they were already satisfied.

Save Money

Money talks in the mortgage industry. The more liquid money you have available and can prove to a lender, the less risky you become. Being self-employed adds a layer of risk to your mortgage application because you do not have steady income, like you would have if you were a salaried employee. Because of this, lenders need factors that will make you less risky – or factors that will help you continue to make your mortgage payments should your business suddenly begin to falter. Liquid assets, meaning money that is not tied up in any type of investment or collateral can serve as a compensating factor, lowering the risk your self-employment brings. If you do not have adequate savings yet, start saving now and wait to refinance until you have several months to one full year’s worth of reserves on hand.

Lenders want to see that the self-employed have their ducks in a row, so to speak. They want to know that you are not a high risk and that you can continue to pay your mortgage no matter what is going on in your business world. When you have a third-party to vouch for you; have high credit scores; and have plenty of reserves, there are many options for a self-employed mortgage out there for you. Whether you get a stated income loan, bank statement loan, or qualify for a conventional loan with your last two years’ tax returns, there are many alternatives out there – start getting yourself ready today so you can apply!

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Can You Take Cash Out of an Investment Property’s Equity?

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If you have investment properties that have equity in them, you may want to tap into that equity, and it may not be a bad idea.

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Leaving equity in an investment property may leave money on the table. You can repurpose those funds to fix up the investment property to secure more rent or to sell it for a higher value. You can also use the funds to purchase more investment properties, enhancing your real estate portfolio.

So how do you take cash out of your investment property’s equity? Keep reading to find out more.

Conventional Loans are the Answer

The only loan program that allows you to purchase and/or use a cash-out refinance is the conventional loan. All government-backed loans, including the FHA, VA, and USDA loans are only for owner-occupied properties. Conventional loans are a bit more lenient in that respect, but there are lower LTV allowances and stricter requirements.

We’ll start with the allowed LTV or loan-to-value ratio. Conventional loans allow you to borrow up to 75% of your home’s value if you take a fixed rate loan. If you opt for an adjustable rate loan, you may only borrow up to 65% of the home’s value.

The above guidelines are for Fannie Mae loans. Some lenders offer another alternative – Freddie Mac conventional loans. While Freddie Mac allows the same LTV on fixed rate loans, they do allow investors to borrow up to 75% of their home’s value with an adjustable rate loan as well. Freddie Mac loans are good for borrowers that need that slightly higher LTV.

The Required Waiting Period

One thing you must know about taking cash out of your investment home is that lenders require a waiting period. You must wait six months from the time that you purchase the home to tap into the home’s equity.

You probably think this isn’t a big deal since most people wouldn’t refinance before six months anyway, but it’s a different story with investment homes. Many people buy run down homes as an investment. They put the time and money in to fix the home up and then they want to tap into the home’s equity to take the cash out of it to further their real estate portfolio. You’ll have to wait six months after purchasing the home to do this, though.

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Qualifying for the Cash-Out Loan

Here’s where things get stricter. Because you have two risks at play here, an investment property and a cash-out refinance, lenders have strict guidelines:

  • High credit score – You’ll typically need a credit score around 700 if you want to take cash out of an investment property
  • Good debt ratio – Conventional loans have low debt ratio requirements in order to lower the risk of default. Most lenders allow a 28% housing ratio and a maximum 36% total debt ratio.
  • Adequate reserves – In order to lower the risk of default on your cash-out investment property loan, lenders require that you have reserves on hand. Exactly how much you will need depends on the loan amount and your credit score, but expect to need between 2 months and 12 months of mortgage payments on hand.

Other Options

What happens if you don’t qualify for a conventional loan for a cash-out refinance on your investment property? While you can’t turn to government-backed loans with more flexible requirements, you can turn to subprime loans.

Don’t let the name subprime loan scare you. These lenders have alternative options for people just like you. Unlike conventional loans, there aren’t guidelines that fit all loans. Each lender can set their own requirements since they keep your loan on their own books – they don’t have to answer to any investors. This often means less strict guidelines.

We recommend shopping around with a few lenders. Get quotes for a conventional loan, but also see what other lenders have to offer as well. You may be surprised to find that the subprime loans are more affordable than you thought.

Delayed Financing Options

There is one exception to the Fannie Mae/Freddie Mac rule requiring you to wait six months to refinance. If you bought your investment home with cash, but now want to tap into the equity to either fix up the home or buy another home, you can do so days after buying the home – you don’t have to wait six months.

As long as you can prove that you paid cash for the home from your own funds and that you didn’t use any type of financing, you can get a cash-out loan as soon as you want. This allows you to free up some of your cash in order to further your investment.

The bottom line is that you can get access to your equity in an investment home. Whether you put a lot of money down on a home to buy it or you fix up the home and it increases in value quickly, you can get access to it after just six months as long as you qualify for the loan.

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3 Things the Self-Employed Need to do in Order to Refinance

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The dreaded debt ratio holds many borrowers back from obtaining a mortgage, especially those that are self-employed. Because your income is not as straightforward as someone with a consistent salary and W-2 to prove it, you have to be more creative with your monthly debts in order to get your debt ratio down. The typical maximum for a Qualified Mortgage is 43 percent, but you have to have other factors that fall into line, such as predictable income in order to qualify under those guidelines. Lenders that are willing to offer alternative documentation loans, such as bank statement loans, are able to be a little more flexible with the debt ratio, but they still want it as low as possible. Here are a few simple ways to ensure your DTI is not out of control in order for you to get approved for a more unique loan program.

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Refinance your Debts

You can have outstanding debt and still get a mortgage. What lenders care about most is the monthly payments you must make. If your current payments take up a large portion of your monthly income as they figure it based on your last 12 to 24 months’ worth of bank statements, then you may have a harder time qualifying. If this is the case, try refinancing those debts. A few examples include:

  • Student Loans – If you have numerous student loans that were previously deferred or that you are still paying on despite having them for many years, they can really take up a large portion of your monthly income. Rather than paying several loans per month, try to refinance them into one loan with one low payment. This might extend the length of time it takes to get the loans paid off, but with the lower payment, you have more income available for a mortgage payment.
  • Credit Cards – Minimum credit card payments can add up when you have many of them going on at once. If you are able to apply for one card or even one personal loan that can pay off all outstanding credit cards, leaving you with one payment, you will likely free up some of your money for your mortgage payment.

When you refinance your debts, make sure the terms are favorable to you and that your new payment will be less than the combined payment of the multiple debts it is paying off. If you refinance credit cards, make sure to close out those cards so that they are not providing you with more available credit than is necessary as that can have an impact on your overall credit score, which plays a role in your eligibility as well.

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Pay Debts Off

If you recently started your business and have a lot of outstanding credit because of the costs necessary to start the business, try to get those debts paid off as soon as possible. The quicker you pay the debts off, the higher your credit score will rise and the lower your debt ratio will become. The more bank statements you are able to provide the lender with for a bank statement loan, the better your rate will be, so try to get those debts paid off in the beginning stages of starting your business, allowing your income to accumulate after the fact. This way when you show the lender 24 months or more of banks statements, you are able to have a lower debt ratio because you paid off those initial debts that helped you get started.

Wait Until you are in Business for a While

Along with the ability to have fewer debts, being able to show at least 24 months of bank statements will help you be able to have a higher qualifying income. When you just start your business, income can fluctuate quite a bit during that first year. If you wait 2 years and your income steadily increased, your 24-month average income will be higher than the 12-month average, which means you will have more income to use for your debt ratio, bringing it down even lower.

Managing your debt ratio in order to qualify for bank statement loans is one of the most important ways to get a loan as a self-employed borrower. There are many lenders that offer alternative documentation loans, giving you plenty of opportunity get a mortgage even though you are self-employed. The key is to have all of your documents in order and your debts as low as possible in order to maximize your qualifying income. Apply with a variety of lenders for a bank statement loan to ensure that you get the best rate and terms available today!

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Why do you Pay Higher Interest Rates on Alternative Documentation Loans?

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Lenders base your interest rate on the risk of default you pose. That’s why conventional loans and government-backed loans often have lower interest rates than alternative documentation loans. Fannie Mae, Freddie Mac, FHA, VA, and USDA loans all require full documentation. A lender can’t give you a loan unless you document your income, employment, assets, debts, and credit score. Lenders can tell beyond a reasonable doubt what type of risk you pose.

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With alternative documentation loans, there may be a missing piece to that puzzle. While you still verify things like your income, assets, employment, and debts, you do so in an alternative format. You don’t provide your paystubs or your tax returns for example. An alternative lender is willing to accept other forms of documentation.

Keep reading to see what makes lenders give you higher rates.

Lack of Income Verification

On a fully documented loan, you provide your paystubs for the last 30 days and your W-2s/tax returns. This shows lenders verification of your income from a third party. Now if you use an alternative documentation loan because you can’t verify your income with paystubs or tax returns, you may need to verify it with bank statements. You show the lender your bank statements for the last few months that show the deposit of your income.

While your bank statements show that you have the money and that you deposited your income, it’s not the same as third-party verification. Lenders take a risk when they give you a loan based on your income according to your bank statements. While this may be perfectly acceptable for some lenders, they generally charge you a higher interest rate to make up for the higher risk of default.

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Lack of Proof of Employment

Oftentimes the borrowers with a high risk of default are those that are self-employed. These borrowers don’t have paystubs to verify their income. They may have tax returns, but they often show a loss or lower income than you actually make because of the large number of write-offs that you can take. This lack of proof of income and/or employment is risky for lenders. If a lender thinks you have/make enough money to qualify for the loan, they may allow it, but with a much higher interest rate.

Lower Credit Scores

Because alternative documentation loans are a portfolio loan, lenders keep them on their own books. This means that lenders can come up with their own qualifying requirements. In other words, they don’t have to follow the Fannie Mae, FHA, VA, or USDA guidelines. This could allow a lender to give you a loan even if you have a lower credit score.

Each lender will have a specific credit score that they require, which may or may not be lower than what other loans require. If you do find a lender willing to accept say a 620 credit score, you can bet that they will charge a higher interest rate. The lower credit score lets lenders know that you are somewhat of a high risk of default. In order to make up for that risk, lenders typically charge points on the loan as well as higher interest rates.

The Overall Risk of Default

Alternative document loan lenders just take a higher irks of default. They want to avoid that risk by making sure that you qualify for the loan, but there’s still that element of risk. If you don’t have the highest credit score or you can’t verify your income for one reason or another, the lender will charge you a higher interest rate to make up for the risk that you pose.

The best thing that you can do is make sure that you minimize your risk of default. If you need an alternative documentation loan, try to increase your credit score, keep your debt ratio down, and have verification that proves beyond a reasonable doubt that you have the income to qualify for the loan.

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Mortgage Commitment Letter and Pre-Qualification Letter: The Differences

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When you apply for a mortgage, you will hear a lot of different terms thrown around. Understanding these terms and how they affect your bottom line will help you get the mortgage that you need. Two of the most confused terms in the mortgage industry are mortgage commitment letter and pre-qualification letter.

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Below we help you differentiate between the two terms.

What is the Mortgage Commitment Letter?

The mortgage commitment letter is often confused with the pre-qualification or pre-approval letter, but it is neither of those things. The mortgage commitment letter is a final commitment from the lender that they plan to give you a loan barring any unforeseen circumstances.

Typically, the lender doesn’t write up the mortgage commitment letter until your loan file goes through the following:

  • Complete the loan application and provide the proper documentation including your paystubs, W-2s, tax returns, asset statements, and credit report
  • The underwriter evaluates your application and supporting documents. The underwriter will make sure everything matches what you said. They may ask for more documentation during this time or ask for more clarification on what you did provide.
  • The underwriter evaluates the appraisal. They need to make sure that the home is worth at least as much as you agreed to pay for the home. The underwriter must also make sure that the home passes any of the specific loan program requirements.

Once all of these steps are complete, the lender may be able to write up the commitment letter. The letter may include a few conditions, but they aren’t anything major, like the appraisal. The conditions may be about your proof of insurance, an additional bank statement, or one last paystub just to prove that you are still employed by the closing.

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What is the Pre-Qualification Letter?

The pre-qualification letter is almost the exact opposite of the mortgage commitment letter. The pre-qualification a lender provides you with has no merit behind it. The lender gives their best estimate on how much loan you can afford based on the information you provide.

The main difference between the pre-qualification letter and the mortgage commitment letter is that there isn’t any substantiating evidence behind the pre-qualification letter. You don’t have to provide the lender with any evidence of your income or assets. You tell the lender how much you make each month, how much you have saved for a down payment, and what debts you have. The lender will pull your credit to see your credit score and to check your debts, but that’s the only official evidence they have with a pre-qualification.

Basically, the pre-qualification letter is a lender’s intent to provide you with a loan of a specific amount, but it is contingent on a large number of conditions. It’s often the first step in the process, but it doesn’t hold any weight, even when you shop for a home.

The Pre-Approval Letter

The step in between the pre-qualification letter and the mortgage commitment letter is the pre-approval letter. This letter is proof of the lender’s intent to give you a loan, but it’s typically based on a few conditions that don’t have anything to do with the borrower himself, but rather the property.

In order to get a pre-approval letter, you must apply for the loan and supply any borrower-related documents, such as your paystubs, W-2s, tax returns, and asset statements. The underwriter will review these documents and conditionally approve you for the loan. As we stated above, the conditions are usually related to the property including:

  • Appraisal
  • Title work
  • Homeowner’s insurance
  • Flood insurance

The pre-approval letter is what sellers want to see because it helps them know that you are a serious buyer. Without the letter, they don’t know if you can even get the financing that is necessary to buy the home. While it’s not the mortgage commitment letter, it’s more than just a prequalification letter.

If you are ready to buy a home, you want the pre-approval letter. If you are just starting out and have no idea what you can afford, the pre-qualification letter will suffice. If you already signed a purchase contract and have a closing date, that mortgage commitment letter is the only way you will get to the closing.

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Buying a House With an ITIN – What You Need to Know

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You can buy a house with an ITIN. You may even find several lenders willing to give you a loan even without a social security number. But, there are some things you need to know so that you can get the best possible loan for your situation.

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You Need a Credit History

Here’s the thing – you need a credit history. That might seem hard to do if you don’t have a social security number, but there are ways.

The most common way anyone starts with a credit history, whether with or without a social security number is with a secured credit card. These credit lines are typically easy to obtain because you are required to put down a security deposit. The credit card company gives you a credit line that is equal to your security deposit. This way, if you default on your credit card, the credit card company can use the security deposit to pay the bill.

Before you accept a secured credit card, check with the credit card company on their procedures regarding reporting the credit card debt to the credit bureaus. If the credit card company doesn’t normally report secured credit cards to the credit bureaus, it won’t help you establish a credit score, which is the point in getting the credit card.

Consider an Alternative Credit History

If you can’t get a secured credit card or you can’t find a credit card company that reports to the credit bureaus, consider an alternative credit history. This is a history of your regular monthly bills that don’t report to the credit bureaus. Think of bills like:

  • Tuition
  • Rent
  • Insurance
  • Utilities

If you pay any of these bills regularly, you may be able to build a history that way. You’ll need a 12 – 24-month history of these bills in order for lenders to use them, though. They use the alternative history as a way to gauge how well you handle your finances.

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You Need a Large Down Payment

Lenders don’t like to give loans with high LTVs (loan-to-value ratios) to those without a social security number. What if you have a reason to leave the country quickly? If you don’t have a lot of your own money invested in the home, it could be easy to just walk away from the home, leaving the lender without their money.

Just how much you must put down will depend on the lender and your qualifying factors. It’s a good idea to have at least 20% saved for a down payment, but there’s nothing wrong with putting more than 20% down on the home. The more money you can put towards the home, the lower your risk of default becomes. This could make lenders more willing to give you a loan or even more willing to give you better rates and terms for the loan.

You Need Employment That Continues

You probably figured you have to prove an employment history. Lenders like to see at least a 2-year history at the same employer. This shows the lender consistency and reliability. While that’s great, lenders need to see that the employment will continue for the foreseeable future.

No one is able to predict whether you will have a job a few years from now, but the lender needs to know that the potential is there. You can prove that your job will continue by providing your contract with the employer. If the contract doesn’t expire within the next three years, most lenders will accept that as proof of continued employment.

You Need a Low Debt Ratio

Giving you a loan when you are a foreign national is a risk for a lender. Proving that you have the money to put down on the home and that you have a decent credit history is a start. But, lenders also like to see that you have a low debt ratio. They want to know that your income isn’t already spread thin. If you have a high debt ratio, it could leave you with difficulty paying your mortgage on time. Lenders want to avoid this as much as possible, so they will favor those borrowers with an ITIN that have a lower debt ratio.

You can buy a house with an ITIN almost as easily as someone with a social security number. You need similar qualifying factors, but with a little boost. You need to show lenders beyond a reasonable doubt that you are a good risk.

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