How do you start buying your first Omaha NE home? The hardest part about buying…
How do I qualify for a home loan in Papillion NE?
Are you looking to purchase a home in Papillion NE? If so, the first step (yes even before you start looking at homes) is figuring out what type of financing you qualify for. There are several loan programs each with pros and cons depending on your situation. The only way to know for sure which one is right for you is to speak with a local Papillion mortgage lender (like us!), but there are some things to know up front to get a head start on the process.
To qualify for a home loan in Papillion NE, a lender will take three main areas into consideration. They will review your credit score and credit history. The lender will verify income and two year work history. They will also document and source all assets used for the loan. Once these are calculated, a loan officer can determine if you qualify and what loan program is best for you.
There are three areas a lender will examine to see if you qualify for financing
Qualifying for a home loan is a bit like a mini audit of your credit and finances. Your loan officer, and eventually an underwriter, will typically require information and documentation on your income, assets and credit history. I know from my own experience as a home buyer that collecting all of the required documentation can be tedious. However, there are things you can do to prepare.
Qualifying income
All loan programs will look at your last two years employment to verify income. This does not mean you have to be at the same job for two years, but they will want information about all jobs over the last two years.
Verifying income
If you are salaried or hourly, verifying your income is pretty straightforward. We will take your current gross salary or hourly pay times average monthly hours to calculate your income. If you receive commission, overtime, or a bonus in addition to your hourly or salary income we will use a 2 year average of that income as well. If you have not been at your employer for two years we likely will not use any bonus, commission, or overtime in your qualifying income.
For self-employed borrowers it is a bit more complicated. We will use a two year average of your adjusted gross income (your income AFTER all write offs) unless your most recent year saw a decrease in income/profits. If your most recent year decreased in income and profits we will use the lower 12 month average. You must be self-employed for at least two years to use any self-employment income. There are a few exceptions to this rule so contact a local mortgage lender if you have less than two years self-employment.
Verifying employment
You do not need to be at your current job for two years to qualify for home financing. But there are some rules about employment that could cause issues with your loan approval. If you had a gap in employment longer than 6 months we would need to document a good reason for that large gap. Were you on maternity leave? Or perhaps you had an illness or injury that prevented your from working. These would be considered legitimate reasons. Taking a long summer break would show an inconsistent work history and that would be an issue. If you have had many job changes over the last two years we would need to explain these as well. If we can show an increasing income with each job change that makes sense and is legitimate. But someone job hopping to different fields would show an inconsistent job history.
Verifying for recent graduates
Most loans need a two year work history. It does not have to be a consecutive two years, but you must have worked two years in your life to buy a home. This creates some rare, but interesting, situations. For example, if you took 10 years off to raise a family and recently started working again you may still qualify. But in that situation we would have to document that you worked a total of two years before that long break. We would have to document your job from 10 years ago.
If you were in school prior to starting your first job we can consider that part of your work history as long as it is in your field (nursing school graduates must work in the medical field). However, high school does not count as part of the two year history. If you did not work a part-time job in high school (yes we could count that fast food job you had for two years) we cannot qualify you for a home loan until you have worked for two years. Doesn’t matter how much income you have at that new post high school job. You still need two years of work.
Qualifying assets
All loan programs will require that at least the cash needed at close is documented. This is a point of frustration for a lot of buyers. All funds must be documented by underwriting well before closing and any large non-payroll deposits (a large deposit is more than 50% of your gross income) must be sourced and explained.
Documenting and sourcing funds
If you received a pile of cash at your wedding and recently put it into your account there is a good chance we will not be able to count that as your funds available to close. This the part of the loan that seems a bit invasive to most people. We will have to go through your last 60 days of transactions on all accounts used to qualify for the loan. If there are large deposits we will need you to explain and document them. If they were a transfer from another account we will need statements on that account as well. For gifts from a relative we will need a statement on the relative’s account. If we cannot trace these large deposits we have to “back them out” of your account.
For one of the more crazy examples, I once had a lady with a $70,000 cash deposit into her account. She said she took the money out of one account and walked the cash over to the other bank. This is unfortunately money we cannot use since cash cannot be sourced and documented.
Allowable sources of funds
The reason we source and document funds is because there are allowable sources and unallowable sources of funds to close. Allowable sources are obviously the funds sitting in your bank account for longer than 60 days. We can also use retirement funds assuming we document the transfer to your bank account and the retirement fund provides the Terms and Conditions for the withdraw. The reason we need the terms and conditions is to make sure the funds allow you to withdraw the money and to determine the penalty.
A gift from a relative is permitted as long as we can provide the donor’s bank statement showing the withdraw of funds. The relative will also have to sign a gift letter confirming the money is not a loan. Finally you could sell personal property to get funds as long as we can document the estimated value of the property. You cannot sell your 1995 Honda Accord for $50,000. The amount you sell it for will have to make sense either with a blue book value or an online search to approximate the value.
Unallowable sources of funds
This is the reason we have to trace all funds. Some funds cannot be used towards your loan and we have to make sure you did not get them from these unapproved sources.
You cannot take out unsecured debt for your cash to close. An unsecured installment loan and cash out on a credit card are not allowed. If you have to borrower funds they must be secured by property. In most cases you cannot get a gift from someone who has no interest in the property. A co-worker cannot “gift” you funds for your closing. Some loan programs, like FHA, restrict gift donors to just immediate family. You cannot use cash! Doesn’t matter where the cash came from because we cannot document the source. If you sold your car for cash we cannot use it. If you moved money from one account to another by physically depositing cash (see my crazy example above) we cannot use it.
Reserve requirements
In most cases we just need to document that you have the funds needed to close. But in some loan scenarios additional funds will be required. You will not have to use these additional funds towards the loan but we will need to verify them in an account. These additional funds are called “Reserves” and the are needed to show that you have the ability to repay the loan. They are most often requested for buyers with low credit scores or high debt ratios. The only way to really know if you need reserve funds is to have a local loan officer run your complete application and see what the automated approval systems require.
Qualify credit
This one is a bit more tricky. There are minimum credit scores for each loan program, but just meeting those minimums does not mean you will qualify for financing. All loan programs will look at your entire credit history to determine loan approval.
Bankruptcy and foreclosure
All loan programs have a minimum wait period after a bankruptcy and foreclosure. They can be any where from 2 to 4 years on a BK and 3 to 7 years on a foreclosure. On a Chapter 7 bankruptcy we will go by the date it was dismissed. For Chapter 13 we will go by the date it was dismissed, but you may also qualify for a loan while in an active Chapter 13 if you meet the additional guidelines. On a foreclosure we will go by the date the bank took ownership of the house. The date the bank takes ownership can be months after the foreclosure so getting this date is important.
Collections and charge offs
Collections and charge offs do hurt your score, but if you already have collections and charge offs do not pay them until speaking with a loan officer. Paying them off can actually hurt your credit and it is often not necessary to qualify for a loan. Too many times potential buyers come in with all of their collections paid thinking they are now good to buy when they may have disqualified themselves for financing.
Maxed out credit cards
This is a little trick to quickly increase your credit scores. If you have maxed out credit cards they are greatly hurting your scores. Paying them down to 50% or 30% could give you a 50 or 100 point bump in a few weeks. A good loan officer can take a look at your credit and make recommendations for items to pay down. Obviously the earlier in the home buying process we are the more time we have to get your scores ready.
Student loans
This is becoming an issue for a lot of young buyers right now. Even if your student loans are in deferment we have to use a payment. This payment is typically 1% of the balance so if you have 250k in student loans, we have to add $2500 in monthly debt to your application. Some loan programs allow income based payments so if you think you have a lot of student loans lets review to see if there is something we can do to get those payments down.
How can you keep this all straight?
There is a lot of rules to home financing. The rule book for FHA is over 1000 pages and Fannie/Freddie’s clocks in at just over 850. It is hard for even a seasoned loan officer to know them all. The best thing you can do as a new home buyer is contact a trusted local loan officer well before you plan to buy. We are biased here, but using a local loan officer gives you someone to meet with if needed and is the best option for new buyers.
It is also important to meet early in the home buying process. Trying to piece together your credit, income, and assets over the weekend so you can submit an offer on a home will only create issues during closing. We are all built to find the item we want first and figure out how to pay for it after, but it is important to go over home financing before you find your dream home. That is the single most important rule of qualifying for home financing.
If you are looking to purchase a home in Papillion NE we can help. We are local, know the area, and have relationships with other local real estate professionals.
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