. Income
You need income. You need to be able to afford the home. But what is acceptable income? Let’s just say that there are two ratios mortgage underwriters look at to qualify you for mortgage payment:
First Ratio – The first ratio, top ratio or housing ratio. Basically that means out of all the gross monthly income you make, that no more that X percent of it can go to your housing payment. The housing payment consists of Principle, Interest, Taxes and Insurance. Whether you escrow or not every one of these items are factored into your ratio. There are a lot of exceptions to how high you can go, but let’s just say that if your ratio is 33% or less, generally, across the board, you’re safe.
Second Ratio- The second ratio, bottom ratio or debt ratio includes the housing payment, but also adds all of the monthly debts that the borrower has. So, it includes housing payment as well as every other debt that a borrower may have. This would include, Auto loans, credit cards, student loans, personal loans, child support, alimony….basically any consistent outgoing debt that you’re paying on. Again, if you’re paying less than 45% of your gross monthly income to all of the debts, plus your proposed housing payment, then……generally, you’re safe. You can go a lot higher in this area, but there are a lot of caveats when increasing your back ratio.
What qualifies as income? Basically, it’s income that has at least a proven, two year history of being received and pretty high assurances that the income is likely to continue for at least three years. What’s not acceptable? Unverifiable cash income, short term income and income that’s not likely to continue like unemployment income, student loan aid, VA education benefits, or short term disability are not allowed for a mortgage loan.
2. Assets
What the mortgage underwriter is looking for here is how much can you put down and secondly, how much will you have in reserves after the loan is made to help offset any financial emergencies in the future.
Do you have enough assets to put the money forth to qualify for the down payment that the particular program asks for. The only 100% financing or no money down loans still available in Kentucky for home buyers are available through USDA, VA, and KHC or Kentucky Housing Loans. Most other home buyers that don’t qualify for the no money down home loans mentioned above, will turn to the FHA program. FHA loans currently requires a 3.5% down payment.
Kentucky Home buyers that have access to putting down at least 5% or more, will usually turn to Fannie Mae or Freddie Mac mortgage programs so they can get better pricing when it comes to mortgage insurance.
These assets need to be validated through bank accounts, 401k or retirements account and sometimes gifts from relatives or employer.. Can you borrower the down payment? Sometimes. Generally if you’re borrowing a secured loan against a secured asset you can use that. But rarely can cash be used as an asset. FHA will allow for gifts from relatives for down payments with little as 3.5% down but Fannie Mae will require a 20% down payment when a gift is being used for the down payment on the home.
3. Credit Scores
- Kentucky FHA Mortgage loan credit score requirements:
- The minimum credit score is 500 for Kentucky FHA loans. However please keep in mind these two things: 1. Lenders credit their own overlays to increase the credit score threshold, most being 620, and secondly, if your credit score is below 580, you would need 10% minimum down payment, and if the credit score is over 580, then you can go with the minimum 3.5% down payment.
- Obviously if you have a higher credit score, this will increase your chances of getting approved for a Kentucky FHA Mortgage and possibly better rates and closing costs options.
- Kentucky VA Mortgage loans requirements :
- VA does not have a minimum credit score requirement, but if the credit score is below 620 few lenders will do the loan, but I am set up with several Kentucky VA lenders where I have closed them down to a 560 credit score, but the borrower had good compensating factors such as: large down payment, low dti ratios, good job history and good residual income with no previous bankruptcies or foreclosures.
- I would suggest if your credit scores are below 580, I would suggest on working on getting the scores up before you applied for a VA mortgage loan.
- A lot of lenders will do a rapid rescore which in some cases can increase your credit scores in as little as 7-10 working days.
- The federal Department of Veterans Affairs (VA) guarantees loans for current and former members of the military and their families. VA loans provide very favorable terms to eligible borrowers and have limited qualifying requirements. You can get a VA loan with no down payment so long as the home isn’t worth more than you pay for it, and there’s no minimum credit score to qualify. You also don’t have to pay for mortgage insurance, although you do have to pay an up-front funding fee of of between .5% and 3.3% of the loan amount unless you fall within an exception for disabled vets or military widows or widowers.
- Kentucky USDA Mortgage credit score requirements:
- According to their guidelines, USDA will go down to a 580 credit score, but most lenders will want a 640 credit score. USDA uses an online system to underwrite the risk of the loan, and scores under 640 are very difficult to get approved.
- Validating the Credit Score. Two or more eligible tradelines are necessary to validate an applicant’s credit report score. Eligible tradelines consist of credit accounts (revolving, installment etc.) with at least 12 months of repayment history reported on the credit report. At least one applicant whose income or assets are used for qualification must have a valid credit report score
- The Rural Housing Service (RHS) operates under the federal Department of Agriculture to guarantee loans for rural home-buyers with limited income who can’t obtain conventional financing. The upside is that Kentucky USDA loans require no down payment. The downside is that they charge a steep up-front fee of 1% of the loan amount (which can be paid off over the entire loan term) and an annual fee of 0.35%.
4. Appraisal
Generally, there’s nothing you can do to affect this. Bottom line here is…..”is the value of the house at least the value of what you’re paying for it?” If not, then not good things start to happen. Generally you’ll find less issues with values on purchase transactions, because, in theory, the realtor has done an accurate job of valuing the house prior to taking the listing. The big issue comes in refinancing. In purchase transactions, the value is determined as the
Lower of the value or the contract price!!!
That means that if you buy a $1,000,000 home for $100,000, the value is established at $100,000. Conversely, if you buy a $200,000 home and the value comes in at $180,000 during the appraisal, then the value is established at $180,000. Big issues….Talk to your loan officer.
