There are three specific criteria that make any loan work. They are:
1. Collateral - What you have of value (assets) to place at risk if you should default on the loan.
2. Capacity - Your ability to pay back the loan over time. This includes income reporting such as IRS Form W-2 or 1099. Capacity also includes credit. You got to have it for banks to consider your loan with any hopes for approval. Banks will review your most current credit rating at the time of the loan application and sometimes one more time before closing. Credit reports will list several trade lines and the more you have in good standing, and at least 12-24 months since the trade line was opened, the better. Trade lines considered are home loans, car loans, student loans, credit cards, cell phones and more. There is also a numbered scoring process that determines your overall credit worthiness. Credit could also be argued as a form of collateral as I will explain further into this article.
3. Capitol - Banks look for a down payment to lessen their risk of defaulted loan. This money will usually come from a gift by relative, personal savings or proceeds from equity on a previously sold property.
There are three types of loan programs available
Full Doc Loan - This concerns Full Documentation. Most people use this loan because it's the only loan type available through their bank. I't also the least expense to originate not because it's easier, but because it's more competitive in the marketplace. Also due to the strict underwriting FHA guidelines and verifiable documentation of the loan.
Low Doc Loan - These loans are also known as streamline. For Military Veterans using VA loans, the cost is almost nothing (except for pre-paid escrow fees) because of the rebate paid to the loan originator by the bank. The rebate is broken down on your Settlement Statement some where on Page 2. Typically it's called Y.S.P. or yield spread premium. Good lenders will usually cover the upfront costs of VA Streamline loans such as appraisals, closing costs, etc. Only the client can pay their own prepaid escrow accounts by law. Often within three months, the old pre-paids from the previous mortgage loan's escrow account and refunded. So it's really a no-brainer. The only underwriting guideline for the veteran is to demonstrate current mortgage payments for the last 12 months.
For civilians that use Conventional loans by banks these loans will usually be slightly increased in either point origination fees or interest rate or both depending on your mortgage research shopping. Low Doc loan criteria for the first time homeowner or the long time renter producing a clean rent history for the last 12 months and copies of cancelled rent checks both from and back. Sometimes a letter or a phone verification from the present landlord is a requirement but very easy to do. Another could be a phone verification of employment. They cannot ask for income wage, just that you work there and maybe how long you've been employed. Privacy Act Statements prevent employers from disclosing too much information. No Tax Forms are needed. Usually just the last three months bank statements will suffice. What determines the best overall rate and cost of the loan is going to be if your loan is considered prime or sub-prime. That is determined either by the middle of three credit scores or the lesser of two credit scores. These scores are generated by the three major credit bureau agencies: Experian, TransUnion and Equifax.
No Doc Loan - If you can fog a mirror, you can get this loan in most cases! The loan can also be coined as 'Tell me a (believable) story and I will give you a loan.
Sometimes referred to a NINA (No Income, No Asset) loan, this loan can either have 20 percent down payment or less with excellent middle credit score. There is no proof of income and no proof of assets. This loan will cost more to originate and in interest rate but is the easiest lon to obtain.
No Doc loans are great for people who are in transition. They have not been at the same job for two years but they have been in the same industry. They have relocated, married, divorced, out grown the home with new family members, downsized as empty-nesters or just have to have that signature trophy home.
So there you have it in a nutshell. Go find the right lender and level the playing field to your advantage. It's your money.
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