So for a few years now, when I speak with potential home buyers and folks considering refinancing I explain that almost everything in the mortgage approval process falls under one of three important general areas to the lenders/investors who provide and service mortgage loans.
If you have a little bit of all three of these, you likely get approved. If you only have 2 of the three, you’re not getting approved for the best rates and products in the market, period, end of story.
The analogy or visual idea is that like a stool, your mortgage stands on three legs. If you have 3 weak legs, it’ll stand, a lender may be worried about its strength, but it will stand (be approved). But only two legs, no matter how strong they are and it falls over.
The first leg is your credit history. Yes, we generally use your credit score as a quick and easy way to understand basic creditworthiness, but there are also a few loan programs that allow you to show your credit history without a score. But for most folks, the score is the thing. It’s not just as simple as “I pay my bills” so I should be able to get a mortgage.
The second leg is your equity in the home. For home buyers, this is the down payment. Now you may need some additional cash to pay the closing costs, etc. but the most important first thing we look at is what is your cash on hand to pay the actual down payment. When refinancing, it’s the equity you have in the property. Remember that the equity is the difference between the value and the potential new loan balance.
Finally, is your debt to income ratio (DTI). DTI has been a hot button in recent years because both property values and rents have been rising off the charts. When that happens, for example, we see folks who are paying $2500 per month in rent unable to qualify for a mortgage of $2500. Lenders don’t want to loan you hundreds of thousands of dollars outside of their guidelines, even if you have shown over time that you can make a payment on that level.
So you cannot have great, documentable income, a strong credit history/score and no down payment. Nor can you have half down, good credit and “wink wink” I make a ton of dough but my accountant is fantastic so it doesn’t look good on paper. Two out of three does NOT get you approved.
That’s the simple story. All the other things in the loan process: appraisals, paystubs, bank statements, W2s, job verifications, business tax returns, etc. They all are details that support the big three. Knowing the ins and outs of those details is why you need a professional mortgage loan originator.
But the basics never change and should be fairly simple to figure out and for you to understand.
In fact, if your MLO can’t make it easy to explain, it’s either because they aren’t experienced enough or that they are trying to use your ignorance about this stuff against you for their benefit.
Either way, get a better MLO at that point.
