Loan Guidelines

Overview
Property Considerations
Borrower Considerations
Credit
Income
Assets
Debt Ratios
Summary

Overview

Home loan lenders rely on rules and guidelines that have been developed
over many years. These guidelines are based on investigation and analysis
of why some loans are not repaid.

The guidelines that have evolved are designed to identify people who
have managed their finances in a way that demonstrates that they can
handle the responsibilities of a home loan and the monthly expenses
associated with home ownership. Of primary concern is the individual
borrower’s ability and willingness to repay the home loan on a monthly
basis, and secondarily, the condition and character of the property on
which the loan is secured.

What lenders are looking for when approving a loan …

The documentation needed for loan approval for a home loan varies based
on the type of loan which fits the unique individual situation.

Both the property and the borrowers must be approved for the financing.

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Property Considerations

An independent appraisal is performed and the results analyzed. The
property must be habitable, have no health or safety concerns, and be
suitably zoned and constructed for residential use. There must exist
suitable compelling evidence of the value of the property based on
recent sales of similar properties. Lenders will require an appraisal
report prepared by a licensed California Appraiser.

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Borrower Considerations

Copies of various items of personal paperwork are collected to document
the financial situation of the borrowers/buyers. There are various
levels of scrutiny needed, depending on the loan desired. "No
documentation" loans only need a credit report, appraisal, title and
homeowner’s insurance, as well as third party verification that a
reliable source of income exists. "Limited documentation" loans
typically only need asset verification in addition to the needs of a "no
documentation" loan. "Full documentation" loans need verification of
the items needed for a "no documentation" loan, as well as asset and
income verification. These different loan processing types have
different down-payment/equity requirements, with a larger down payment
allowing for less documentation.

The lowest rate fixed rate loans usually require proof of stable income,
proof of seasoned assets (deposited in an account in the name(s) of the
borrower for two or more months), and a good credit report.

The only way to find out what options are available is to actually have
your credit, income and assets analyzed by a competent loan officer,
such as The Loan Guy.

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Credit

The credit is analyzed for patterns of debt repayment. Usually three
credit repositories are accessed and the results analyzed. Each of the
three credit repositories uses a mathematical algorithm to derive what
are known as credit scores. Lenders use the credit report and scores,
along with verification of debt repayment not shown on the credit report
if not all debts are included (such as rent or private loan payments) to
determine whether the borrowers are likely to repay the home loan
without late payments. The credit repayment patterns demonstrated over
the past two years are given the most consideration, since they are more
reflective of current trends in debt repayment.

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Income

For other than "limited documentation" loans, lenders verify income in
many different ways, depending on how the borrower(s) are paid.

For self-employed people, copies of the last two years of federal tax
returns (all pages) are usually needed. After analysis of these two
years of tax returns, other forms are often needed, sometimes including
K-1 forms from limited partnerships for the last two years, partnership
or corporate federal tax returns for the last two years, year-to-date
profit/loss statements, and rental agreements.

For employed individuals, usually the past 30 days of pay stubs along
with the past two years of W-2 forms are needed. If there has been a
gap in the last two years of employment of more than 4 weeks, an
explanation letter is usually needed. If borrower(s) have been full
time students during the past two years, school transcripts are usually
needed.

Income from other sources is verified as having been stable for the past
12 months and expected to continue for the next three years or more,
such as promissory note income, alimony or child support, or trust fund
income.

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Assets

Lenders often must verify that the money used to purchase a home is not
borrowed money, and if it is borrowed, that the buyer can afford the
payments on all borrowed funds. Many loans require that the borrower
use their own savings to pay all or part of the down payment on the home
being purchased.

This verification requirement is usually satisfied by providing copies
of the two most recent bank and stock statements, along with the most
recent retirement account statement(s). Sometimes the lender will send
a written request to the depository to verify amounts and average
balances for the past two or three months if bank statements cannot be
located and copied.

Many of the low interest rate low down-payment loans require that at
least 5% of the purchase price used as all or part of the down payment
are verified as having been in the control of the buyer for the past 60
days. Not all loans have this restriction, but this is illustrative of
the type of lender asset verification requirements that apply to most
purchase transactions.

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Debt Ratios

Lenders often perform a mathematical analysis of verified income (or
stated income on a "limited documentation" loan) to determine whether
the borrower meets ratio guidelines for the loan program being
requested. Typically, lenders don’t want the ratio of income to debts
(installment loans, lease payments, revolving debts like credit cards,
court ordered payments, and housing expense including loan payment,
property taxes and insurance costs) to exceed about 40%. Sometimes the
lender will go higher, but the income must be stable and the credit very
good.

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Summary

Lending guidelines are just guidelines, and the typical requirements
mentioned above, if all are met, do not alone assure loan approval.
Similarly, if not all are satisfied, this does not mean that loan
approval will be denied. Other factors are always considered, including
length of time on a job, proximity of home to work, family size and
situation, demonstrated ability to save money, amount of the new housing
expense compared with the current expense, amount of down-payment,
liquid assets in the bank after the purchase is complete, and
education. For best results, always contact The Loan Guy.

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