Mortgage Credit Analysis

It is in short a procedure to evaluate what you own, what your owe, how you pay your obligations and how much money you have left after paying the new projected housing payment and debt.

Own-owe-residual- meaning what you own, what you owe and how much money you have left each month after all obligations are paid.

The Credit Report Evaluation

A lender must pull your credit report to see how much credit you have, what type of credit you have and how you have paid these obligations and if they have been paid in a timely manner. The Mortgage Credit Analysis cannot be completed unless all your credit is verified and reviewed for your past history.

Your credit score is calculated in part by the following:

• how long your accounts have been open
• how many accounts you have
• the balance of your accounts versus the high balances
• how many accounts are installment
• how many revolving account, and
• how many mortgage account to include open end accounts.

The most important of these is how you have paid your accounts and the amount of liabilities you have.  This determines you true credit rating and your debt to income ratios.

The underwriter in mortgage lending when evaluating and completing the Mortgage Credit Analysis, he/she will always focus on consistency of how someone pays their obligations. If there is a one time late payment or is there a history of not meeting obligations in a timely manner. An explanation is required in writing if there are several late accounts within the past 12 to 24 months. The reason must be documented and back up documentation to confirm if is sometimes warranted. When there has been a job loss, medical issues without insurance and extenuating circumstances, these kinds of reasons may be acceptable. Normally if there are only 1 or 2 delinquent payments and the current credit scores can be approved. There may be exceptions to the rules with other unique circumstances and as long as it does not restrict the quality of, or saleability of the loan.

Over extension of debt can cause you to lose your credit rating in a hurry; especially if you have unexpected expenses arise and you can't meet your obligations. When an individual has over extended themselves it will be brought to light when the debt to income ratios is calculated.  This is why it is so important to have little or no debts over and above your housing and major necessities such as vehicles.

Your good credit is one of the best gift you can give yourself for any extension of credit.   Keeping every account paid in a timely manner with as little debt as possible. If you have excellent credit, you can easily get more...that is not to anyone’s benefit if they are over extending themselves to live a free and joyful life. It is no fun to struggle to make a mortgage payment and all obligations even when the house is the most beautiful on the block.

What you should consider when applying for a Mortgage Credit Analysis:

• how much more can I afford to pay above over and above what I am paying now for rent/mortgage. Am I increasing my housing expense by more than 25%
• what are the taxes and insurance premiums on this house
• will I receive a raise in salary in the near future
• do I have sufficient residual income left to cover miscellaneous expenses and unexpected expense
• do I have child care to pay *not included in ratio analysis but it is a debt
• have I thought about how much gasoline I use within a month
• have I thought about how much my groceries are each month
• what will I be paying for my utility bills over and above what I am paying now
• will I need to make a major purchase in the near future such as vehicles, appliances
• have I made a list of “all” my monthly expenses; children lunches, dues, fees, food, dining out, clothing, medicine, and vacations

There are only a few of the questions that are important and it is not meant to sound first grade, but sometimes people get excited and forget that like to go out to dinner occasionally. If housing expense is increasing over and above what is normally being paid for rent; trouble could be pending.  Here is why: 

• you will have taxes to pay; if you have been renting
• you will have full coverage insurance added in your monthly payment to be escrowed
• you may have mortgage insurance if the loan to value is greater than 80%
• Even though the utilities are not included in the debt analysis, you must remember "ALL" the expenses that come out of your net income. If you forget something, you could be putting your freedom to carry on your life as you are accustomed to.  Not anyone wants to eat hot dogs for a month.

Just some words of advice; know what you are paying out each and every month.  Just because the mortgage company does not add all of this in your debt ratio does not mean it does not exist.

Your good credit is one of the best thing you can do for yourself. Keeping every obligation paid in a timely manner and making sure you are not allowing yourself to obtain more credit than you need is also crucial. Sometimes if you have excellent credit, you can easily get more...that is not to your benefit...you do not want to get where you have to struggle to keep it all paid.

There is always a reward for most good things we do for ourselves and keeping our credit practices stable is one of those things. Not just how we pay our debts but how much debt we have versus our income. The essentials have to come first, we have to live and we live by nourishment and we have to pay the other bills.

Debt ratios for conventional lending financing = 29% housing ratio; 36% total debt to income.

FHA (Federal Housing Administration)= 31% housing ration; 41% total debt to income.

In this explanation for a Mortgage Credit Analysis please note that, every detail may not have been mentioned.  There are always exceptions to exceptions. Everything is not set in stone.  These are merely guidelines and important basic rules to be considered when applying for a mortgage loan.  Changes in mortgage lending were implemented due to the fall of the housing system.  It is becoming more like the days of old and new restrictions are being implemented every day.  This is not all bad; a lot of it is actually for the benefit of the applicant; so that they do not buy something they cannot afford. 

Making Wise Choices…..

*There could be specific lender guidelines.  The lender gives the final approval of all loans; FHA does not make loans, they insure and make guidelines to follow.  Each lender may have their own rules which they may or may not make exceptions to.

Policies and guidelines change almost daily.  Check with your lender with ANY questions you may have.