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How to Qualify for a Mortgage If You're Self-Employed

Tue, 29 Jul 2025 15:07:17 GMT

Why Traditional Lending Penalizes Self-Employed Borrowers

A Smarter Solution: The Bank Statement Mortgage

Good news—there’s a better way.

With a Bank Statement Loan , we qualify you based on your actual business cash flow. That means we look at your bank deposits from the past 3 to 24 months—not your tax returns.

This means:

No tax returns required
No W-2s or pay stubs
No need to amend or alter your filings

If you're self-employed, 1099, or a small business owner, you already know how frustrating it can be to qualify for a mortgage.

Even if you’re earning great money, most lenders rely on your tax returns —which often show far less income than you're actually bringing in.

Why? Because business deductions, write-offs, and expenses reduce your taxable income. Unfortunately, traditional lenders use that reduced number to determine your loan eligibility.

How We Calculate Your Income

Here's how lenders estimate qualifying income for bank statement loans:

We total your monthly business deposits
Subtract unallowed deposits (like transfers or personal funds)
Apply a standard expense factor (typically 30%)

Example :

Business deposits: $11,000/month
Minus $1,000 in unallowed deposits
Net: $10,000/month
After 30% expense factor → Qualifying income = $7,000/month

Use Our Free Income Calculator

Want to see what income you might qualify with? Try our Bank Statement Income Calculator — it does the math for you instantly.

No login. No sales pitch. Just clarity.

You’ll just need:

Your average monthly business deposits
Your business type (service, product, or real estate)
Number of employees

Next Steps Toward Pre-Approval

Once you see your estimated qualifying income, here’s what to do next:

Book a quick consult with our team
Start your pre-approval using bank statements
Know your buying power before making an offer

We specialize in helping self-employed clients navigate this process and get approved with confidence—without the headaches of traditional underwriting.

5 Secrets to Get Your Offer Accepted Today

Thu, 08 Sep 2022 15:28:04 GMT

Are you tired of the emotional roller coaster of house hunting, finding your dream home, only to have your offer rejected?

Demand these 5 things from your mortgage consultant to make your offer stand out from the competition:

1. Offer a 7-day Loan and Appraisal Contingency Period

Getting your loan approved and the appraisal completed and reviewed in 7 days assures the seller that you can move through the loan process quickly. Also, it means that if there is an issue, after your offer is accepted, it will be addressed quickly as well as early in the process, instead of the standard 21 days in. Saving everyone involved time and money.

2. Offer a 14-day closing

Showing the seller that you can close in just 15 days provides further assurance that, if accepted, financing won’t be an issue with your offer. More often than not, in a real estate transaction, all parties involved would prefer a quick and efficient close.

3. Guarantee your closing date with a per diem

Guarantee your closing date by requiring your lender to pay a penalty for everyday that you close after the proposed closing date. Adding a guaranteed quick close will add a ton of weight and appeal to your offer.

4. Have your file underwritten prior to making offers

Require that your lender underwrite your file with a “to be determined” property. This ensures that an underwriter reviews and approves your income, credit and assets prior to you starting to make offers. It will give you and the seller further peace of mind that your loan will close. Also, knowing your limits gives you the ability to respond to counter offers today, quickly, and decisively.

5. Agree to the cross qualification by the seller’s preferred lender

It is very common for a seller to request that buyers are cross-qualified by the seller’s preferred lender before accepting an offer. Assurance, from a trusted source, that they can be confident a buyer won’t have any financing issues, will put the Seller’s mind at ease. Make sure to provide permission to your lender to share your documentation with the seller’s lender, if requested by the seller.

Call now at (888) 273-8734 or Schedule a Consultation to discuss how we can help.

What You Should Know About the Legal & Tax Implications of Commission Credits

Thu, 19 May 2022 15:33:20 GMT

Buying a house is more expensive than ever. Home prices in California are 10% higher than a year ago and still increasing. As the Fed raises interest rates, the real estate market might cool off a bit, but prices won’t be dropping any time soon.

What are commission credits?

Commission is a common part of selling a house. In general, the agent working with the seller will set a commission rate, usually between 5 and 6% of the final sale price. Typically, the seller’s agent will then agree to split the commission with the agent for the homebuyer. The two parties can split the commission as they see fit, but it’s frequently equal or nearly equal.

Commission credits enter the equation on the buyer’s side of the deal. The buyer’s real estate agent can offer their portion of the commission as a credit to the buyer. In theory, the agent can even offer a credit that exceeds their commission, but they’d have to pay out of pocket, so it’s rare.

In practice, it’s an agreement to help defray a buyer’s costs and entice them to use a particular real estate agent. While the agent sees less commission on the deal, it helps increase their volume of deals and their overall earnings.

How do commission credits work?

While the concept is fairly simple—home buyers receive a small credit or rebate once the deal closes—the execution varies. The scenario outlined above with the selling agent and buying agent coming to an agreement is fairly common, but there are a couple of other widely-used models:

An agent negotiates a variable commission rate with the seller, depending upon how the final deal plays out. For example, if the selling agent recruits a buyer themself, without involving another real estate agent, they’ll reduce their commission, but then keep all of it since they worked both sides of the deal. They’re less apt to offer credits since the final commission amount is smaller, but they’re also more motivated to do the legwork to get a deal done.
Many discount brokers will give their prospective buyers a blanket guarantee that they’ll receive a commission credit. The promise of money back can be enticing, but the downside is that these brokers tend to be less involved in the process. They may skip inspections and meetings, won’t assist with paperwork, and you’ll be on your own to navigate the process. You might not even see them until closing, if at all.

Are commission credits legal?

A real estate agent can’t legally pay a direct commission to an unlicensed person. However, agents can offer rebates, and there are several common ways they can structure commission credits for homebuyers:

Credit towards closing costs on the transaction
Covering some of the hidden costs of a home purchase like home inspections or moving services
Gift certificates

Different states have slightly varying regulations for commission credits, but only ten states ban them outright: Alabama, Alaska, Iowa, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon, and Tennessee.

What are the tax implications of commission credits?

Fortunately, the IRS has ruled that commission credits are not taxable income. Instead, they view the rebate as an adjustment to your home’s cost basis. Some real estate agents are unaware of this ruling and will issue a 1099-MISC to homebuyers who received a rebate. However, this doesn’t change the fact that it’s not taxable income. If you find yourself in this situation, contact the real estate agent and ask them to issue a corrected 1099-MISC.

While the rebate itself isn’t taxable, the adjustment to your home’s cost basis can have tax implications down the road. If you eventually sell the home, the profit can be subject to capital gains tax. Since your cost basis was lower than it would’ve otherwise been, taxes will also apply to the rebate amount. However, many sellers can avoid these taxes thanks to the home sale tax exclusion.

Finding the right real estate agent

Real estate agents are not a one-size-fits-all solution, and you shouldn’t settle when you’re choosing one. Buying a house is one of the biggest financial transactions you’ll make in life, and it’s imperative that you trust your agent to give you sound advice and help you navigate the process. A high commission credit is appealing, but if it results in a bad deal, you could be losing more than the credit is worth.

At The Mortgage Hub, we believe commission credits should be mutually beneficial. We have a network of vetted, knowledgeable agents who we count on to help our clients find the right home. These agents offer a set commission credit to our pre-qualified clients, as we’ve already helped you through the process of financially preparing for a mortgage.

If you’re ready to see how we can help, call now at (888) 273-8734 or Schedule a Consultation

The rising cost of houses is a challenge on its own, but it also means homebuyers pay more in closing costs, which are a percentage of the total transaction. Considering these can range from 2 – 3%, that’s a hefty amount to add to a major transaction.

But what if there was a way to recoup some of those closing costs? Many real estate agents offer commission credits to entice homebuyers to work with them, sometimes amounting to thousands of dollars back once a deal closes. Let’s look at what commission credits are and how they can help you keep more of your hard-earned money.

Everything Self-Employed Borrowers Should Know About Bank Statement Programs

Sat, 09 Apr 2022 15:37:23 GMT

For most borrowers, proving income is the easiest part of the process. Submit a couple of pay stubs, perhaps ask your employer for a proof-of-income letter, and you’re all set.

What are bank statement loans?

Bank statement loans are a mortgage that uses a history of deposits to your bank account, rather than pay stubs or tax documents, to prove your income. They’re a type of non-qualified mortgage, which means they don’t fit the traditional underwriting guidelines that use W-2 income as criteria. However, the term is a bit misleading, as you’ll still need to meet several requirements to qualify.

Since they’re non-qualified, not all mortgage lenders offer bank statement loans. Banks and credit unions frequently shy away from them, but a dedicated mortgage broker can usually help with the process.

Requirements vary by lender, but you’ll generally need the following:

One or two years of bank statements
Two years of self-employment history
Minimum FICO score of 660
Enough liquid assets to cover several monthly payments
A letter from an accountant certifying your business expenses and tax status

How do bank statement loans work?

Once you submit your bank statements, the lender will determine your qualifying net income by your monthly average for deposits, and then apply an expense factor. The expense factor is typically 50%, but it can vary by lender, your industry, and whether you’re using business or personal bank statements.

Using that calculated income, the lender will determine what type of loan you qualify for. Since it’s a non-qualified mortgage that carries more risk, the terms are usually more restrictive:

You’ll need a 20% down payment, or 10% with private mortgage insurance (PMI)
Interest rates are higher than conventional loans
Lenders will typically offer fewer options and less flexibility in loan duration
You can use them for new purchases and refinancing, but cash-out options are frequently limited

The approval process can also take longer than standard loans. It usually takes three or four weeks to complete the process but can take up to two months if your finances are especially complicated.

Who’s a good candidate for this type of mortgage?

While anyone who’s self-employed is a candidate for a bank statement loan, there are some key qualifying criteria that fall into two categories:

Self-employment – You’ll need to prove that you’re actually self-employed. There are a variety of ways to do this, but it typically involves submitting copies of professional licenses and supporting documents. Supporting documents can be a range of things such as an online portfolio or company website, invoices and bills, or even a Yelp page.
Income – Requirements vary by lender, but being able to provide statements from a business bank account will make the process easier. Some lenders will accept personal bank statements for sole proprietors and freelancers, but it can complicate the process.

Bank statement loans are especially valuable if you have a lot of write-offs or deductions. In that situation, your tax documents will reflect lower income, but bank statements will show that you’re bringing in plenty of money and enable you to qualify for a bigger loan.

However, there are situations where the structure of your self-employment income can make a bank statement loan more complicated. For example, if you own real estate and have the revenue flowing to your personal bank account as Schedule E income, you’re going to need to use tax returns rather than bank statements. Similarly, if you’re self-employed but don’t have a corporation or LLC, it will be difficult to use the dividends and distributions on your personal bank statement as qualifying income.

Other options for self-employed borrowers

Bank statement loans aren’t the only avenue for self-employed people seeking a mortgage. You might qualify for other types of loans by using other ways of verifying your income — such as tax returns — or based on factors like credit score, military service, and the property you’re planning to purchase.

There are a few other common options for self-employed borrowers:

Conventional loans – The underwriting guidelines that Fannie Mae and Freddie Mac use for conventional mortgages have several options for self-employed income. If you can use one of them and have good credit, conventional loans will often have better terms than a bank statement loan.
FHA loans – Income regulations for Federal Housing Authority (FHA) mortgages are similar to conventional loans, but the credit and debt-to-income guidelines are a bit looser. However, you can only use an FHA loan on a home that will be a primary residence, so they’re not an option for investment property.
VA loans – If you served in the military, VA loans can be a great option thanks to low rates and fewer fees. Terms vary by lender, but in many cases, you can obtain a loan without a down payment or great credit, and you won’t need PMI.

Need help with a bank statement mortgage?

Qualifying for a mortgage as a self-employed borrower can be complicated. Bank statement loans are a great choice, but you’ll have to provide more documentation and details.

If you’d like to get a jump start on the process, apply now, speak with a Mortgage Consultant at (888) 273-8734 or Schedule a Consultation.

But what if you’re self-employed?

Whether you’re a freelancer or business owner, establishing proof of steady income is more complicated than it is for W-2 employees. Clients pay you on varying schedules, business can ebb and flow, and your earnings may vary from month to month. For anyone with these types of non-traditional income, a bank statement loan can be a great choice for purchasing a home.

We’ll cover what bank statement loans are, how they work, and whether they’re your best option for getting a mortgage.

How Real Estate Agent Commission Rebates Should Work

Thu, 03 Feb 2022 15:49:39 GMT

The average real estate commission in 2021 was 5.49 percent. On a $450,000 home, that amounts to $24,705—almost as much as the average price of a used car.

What’s driving commissions down

You can attribute part of the commission decline to a hot housing market. When homes sell quickly, home sellers have more power to negotiate with their agents.

But there’s another side to the coin: growing resentment among buyers about high commissions.

In a survey of more than 1000 U.S. consumers, the top grievance with the home buying process was that commissions were too high.

And discount real estate brokers like Redfin, Clever, and others are looking to capitalize on that resentment.

These companies tout 1% percent commission rates, target large volumes of consumers, and pare down their services.

Discount real estate brokers and the need for a middle path

The problem with discount brokers is that they often don’t show properties, attend home inspections, or answer anything other than the most basic questions.

In many cases, as a home buyer, you won’t meet your agent until your sale closes.

These companies rely on the flawed assumption that real estate agents are overvalued.

And as a mortgage broker that’s worked with hundreds of agents, I can tell you that this is a dangerous assumption. Good agents are worth their price, especially in slower markets.

At the same time, I also empathize with the buyer that’s seeking a commission discount and a good service experience. And that’s why I’m advocating for (and providing) a middle path.

Fortunately, many of the best agents I work with share my empathy. And they’ve adopted a new approach to their business wherein they offer tiered commission rebates to buyers.

So I’m teaming up with those agents to help homebuyers like you access commission rebates of up to 2.5% without discounting the quality of your service experience.

How commission rebates work at The Mortgage Hub

To ensure you receive high-quality service from a great agent, we (meaning you, your agent, and your mortgage broker) have to be efficient.

And the best way to begin an efficient home buying collaboration is by prequalifying with a mortgage broker and meeting with a reputable real estate agent.

Regardless of which rebate tier you choose, prequalification and an introduction to your agent is always the first step in our program.

By prequalifying with The Mortgage Hub, you’ll know precisely how much home you can afford. And by working with an agent within our network, we can ensure you’re supported from start to finish.

Your rebate amount will then depend on 1) how many properties you need to visit before you purchase one 2) whether you want an agent to accompany you to your property visits and 3) whether you’re purchasing a new or pre-owned home.

In the chart below, you can see our qualification criteria and the corresponding rebate amounts:

*Rebate amount is calculated based on a percentage of your home purchase price, i.e. if your rebate is 1.0% and your home purchase price is $500,000, your rebate amount is $5000.

As you can see, we’re so confident in this approach that you’ll receive at least 1% in commission rebates no matter what, so long as you prequalify with us and work with one of our preferred agents.

Interested? Get Pre-Approved for your commission rebate today.

That’s no insignificant sum of money, but commission rates are actually on their way down. And they have been since (at least) 2018.

According to Real Trends, a Colorado-based research firm, the average commission slid from 5.03% in 2018 to 4.96% in 2019 and to 4.94% in 2020.

As a homebuyer, this should matter to you. Even small commission reductions can result in thousands of dollars in savings. But those discounts shouldn’t come at the cost of great service.

So if you’re looking to save on real estate commissions without discounting your service experience, keep reading.

Understanding the Different Mortgage Lending Options: Brokers, Bankers, and More

Tue, 27 Oct 2020 16:00:33 GMT

If you’ve ever researched the mortgage process, you were—and maybe still are—completely confused by all the different people involved.

What Mortgage Brokers Do

Mortgage brokers operate as an intermediate between the homebuyer and the mortgage lender. It’s a mortgage broker’s job to assess your financial circumstances and budget, provide guidance, find a competitively priced mortgage product, gather documentation, and complete and explain the loan paperwork.

Mortgage brokers do not actually lend money. They match borrowers with potential mortgage lenders and earn compensation from the borrower or the lender (but not both) based on the size of the loan. Mortgage brokers serve borrowers by shopping around for the best rate, handling the application process, and providing financial expertise.

What Mortgage Bankers Do

Mortgage bankers borrow money from warehouse lenders to fund a home mortgage, which they then sell to investors, which are typically lenders or banks. Using the funds from that sale, the mortgage banker pays off their warehouse lender. They make money from the loan origination fees that they charge to home mortgage borrowers or premiums received from the investor.

In the United States, the vast majority of mortgage lenders are mortgage bankers. Wells Fargo, Quicken Loans, and Chase are a few examples of the nation’s largest mortgage bankers.

What Mortgage Lenders Do

Mortgage lenders are the ones who provide the money the borrower uses to buy their house. Mortgage lenders can take a credit union like Navy Federal Credit Union, or a retail bank like Citibank.

As mentioned before, mortgage banks are also mortgage lenders because (like credit unions or banks) mortgage bankers provide the money the borrowers use to buy the house. The difference is a credit union or bank often uses its own funds to fund your loan. Also, they don’t always turn around and sell your mortgage to an investor like a mortgage banker does.

Mortgage lenders can be further categorized into seven main types: mortgage bankers, direct, wholesale, warehouse, retail, correspondent, and portfolio lenders. The distinctions between these lenders mainly have to do with how they fund loans.

Or call now at (888) 273-8734 or Schedule a Consultation to get your questions answered from one of our Mortgage Consultants.

Mortgage brokers, mortgage lenders, banks, credit unions, mortgage bankers… it’s a lot to take in.

But understanding these different entities, what they do, and how they play into your financing process will help you feel much more confident when you’re shopping for a mortgage.

Who’s the Best for You: Mortgage Lenders vs. Brokers vs. Bankers

Mortgage bankers are simply one kind of mortgage lender. Other types of mortgage lenders include credit unions and retail banks, as described above.

Mortgage brokers, since they don’t actually lend money, are different entities entirely. So when you’re considering who to work with for your mortgage, first you must choose whether you’re going to use a broker or work with the lender directly.

If you work with a broker, you don’t have to worry much about the kind of lender you get your loan from. That’s your mortgage broker’s job; to find you the best mortgage product given your circumstances and desires.

Depending on your situation and the market, one type of mortgage lender—for example, a retail bank—may be more suitable than another.

But again, because your mortgage broker will shop around with multiple lenders, the type of lender (mortgage banker, credit union, or retail bank) is secondary in importance to who can offer the best deal.

If you don’t work with a broker, on the other hand, it’s important to understand the differences between different types of lenders. This enables you to more effectively search for the best deal.

For example, brick and mortar retail banks will typically have the most stringent qualification requirements but they might also offer great deals.

Because you’d be working with the lender directly, you’d have to shop around aggressively to ensure you’re getting the best deal.

Also, individual mortgage banks and credit unions typically don’t have a wide range of loan products which means, if you don’t shop around, you may miss out on products that are a good fit for you.

If you work with The Mortgage Hub, you get the cost and service benefits of working with a mortgage broker and lender because we’re a broker and correspondent lender. That means, we can shop around to get you the best deal and we can fund your loans ourselves to prevent any costly delays in closing.

Think “Functions”, Not “People”

Remember: Brokers, bankers, and lenders are not necessarily separate companies. In other words, mortgage brokers can act as mortgage bankers, even if they call themselves a mortgage broker.

And banks can do the same. In fact, banks often do act primarily as mortgage bankers.

So instead of thinking of brokers, mortgage bankers, and lenders as separate “people” or companies, think of them as functions. Bankers may broker deals. And some brokers, including The Mortgage Hub, may act as mortgage bankers on certain deals.

And if you’re still getting mixed up, use the chart below to remind yourself.

Components of a Home Mortgage Rate: Interest, Points, and Loan Costs

Thu, 24 Sep 2020 16:11:50 GMT

Mortgage Rate Series Part 1: Understanding the Cost Components of a Mortgage Rate

The Relationship Between Interest Rates and Discount Points

If you’re looking at a Loan Estimate, you can find the discount points on page 2, under “A. Origination Charges, “ and you can find your interest rate on page 1 under the “Loan Terms” header, as shown below:

Why Should Homebuyers Care About Discount Points?

To come up with your interest rate, mainstream lenders prepare tables of interest rates that they’re willing to accept on certain loans.

These interest rates are called “par rates”, which is the interest rate at which the lender will offer the loan without requiring the borrower to pay discount points.

Even if they’re not required to, borrowers can choose to purchase discount points to “buy down” the par rate. In other words, you can pay more upfront in exchange for a lower interest rate.

Using different combinations of discount points can be advantageous depending on your financial situation and the lender’s offer. For example, if you have extra cash and you plan on staying in your home for a long time, paying more discount points may save you money.

But keep in mind that there’s no standard amount by which one discount point reduces your rate. It may vary between lenders, based on the type of loan, and the mortgage market.

As NerdWallet points out, the rule of thumb is “the longer you keep the mortgage, the more money you save by buying points.”

You can do your own calculation using this calculator from NerdWallet to evaluate this decision using the following factors:

Loan amount
Loan term
Interest rate with points
Interest rate without points
Number of points

The calculator’s results will tell you your breakeven period—which is the time it will take for you to start saving money from the lower interest rate. If you think you’ll refinance or sell your home before this breakeven period ends, you’re better off avoiding discount points.

Sometimes, lenders will add discount points without you asking them to so their rates look lower. A simple way to avoid confusion here is to ask for a loan offer with zero discount points. Alternatively, you can use the mortgage annual percentage rate (APR) to make a fairer comparison between one loan with discount points and one without.

Want to Keep Getting the Inside Scoop on Mortgage Rates?

The total cost of your mortgage is a combination of three factors: the upfront cost (a.k.a. “discount points”), interest rate, and other loan costs.

But your mortgage rate is actually a combination of just two of those factors: the upfront cost and the interest rate.

To accurately compare the cost of one loan versus another, you need to know and understand the relationship between these two costs. Then you can understand how other loan costs play into the equation.

So in this post, I’m going to explain the different components of a mortgage rate, starting with discount points and interest rates.

Avoiding Confusion with Discount Points, Other Costs, and Fees

Remember: discount points change the timing and amounts that you pay for a mortgage. For example, you can elect to pay more upfront (in the form of discount points) in exchange for a lower interest rate over the life of your loan, and vice versa.

But discount points are not the same as the “Other Costs” you’ll see on page 2 of your Loan Estimate. Nor are they the same as the “Loan Costs” you’ll see on page 2 of your Loan Estimate in Sections B and C.

With some exceptions, “Other Costs” like taxes, homeowner’s insurance, recording fees, and mortgage insurance are typically standard. And whether you pay more or fewer “Other Costs” doesn’t affect your interest rate.

The “Loan Costs” on page 2, Sections B and C, may vary depending on the lender, but again, they don’t affect your interest rate… even though they do affect the total cost of your mortgage.

Comparing the Cost Components of Your Mortgage

It’s easy to get overwhelmed by the cost components of your mortgage. That’s essentially why APR was created. But APR has its limitations.

While APR does show you the total cost of your mortgage, it doesn’t tell you how much cash you’ll need to close a particular loan. Nor does it tell you how much you need to budget for monthly payments.

So if you want a true comparison of your mortgage options, make sure you understand how discount points, interest rates, and loan costs play into the equation. And if you need more help understanding or comparing your mortgage rates, schedule a free consultation with our loan experts.

And you can find your interest rate on page 1 under the “Loan Terms” header, as shown here:

This post is part one of a three-part series on mortgage rates.

I wrote this series to help homebuyers feel more confident in their financing by explaining (in plain English) the fundamentals of mortgage rates, starting with this post, which breaks down the cost components of a mortgage rate.

In parts two and three, I’ll explain how these costs are determined and why they change.

Next up in the series on mortgage rates is “The Fundamentals of Mortgage Rates: How They’re Determined and Why They Change.”

In that post, I pull the curtain back on the fundamental drivers of mortgage rates so you can get the insider’s perspective on mortgage rates and become a more educated, empowered home buyer.

How Different Property Occupancy Types Affect Your Mortgage Rate

Tue, 15 Sep 2020 16:20:09 GMT

Mortgage lenders don’t shy away from risk… so long as they can price that risk at a level that they can make a profit.

Why Occupancy Type Matters to Your Mortgage Cost

The 3 Property Occupancy Types Defined

Occupancy type is important because it indicates to a lender the lengths to which a borrower will go before they give up making payments on their mortgage.

To understand this, imagine you own two properties, each with their own mortgage.

One property is your home, where your spouse or kids live, or where you spend most of your time. This is your principal residence. The other property is a duplex that you rent out. This is your investment property.

Now, imagine you faced a significant financial hardship, and you could only afford to keep making payments on one of your two mortgages.

Which property’s mortgage would you stop paying first?

Statistically, most people would stop making payments on the duplex’s mortgage (the investment property).

This is essentially why occupancy type matters to your mortgage cost. The market perceives more or less risk depending on the occupancy type, so it prices loans (in part) according to the occupancy type of the property you plan to finance.

All else being equal, the cost of your mortgage on an investment property will be higher than it will be on a principal residence.

However, there’s a third type of occupancy , the risk of which falls somewhere between an investment property and principal residence: the secondary residence.

For the same reason a mortgage on a principal residence is less risky (and therefore less costly) than an investment property mortgage, a secondary residence mortgage is less risky than an investment property mortgage.

The image below illustrates this hierarchy:

Once you understand how occupancy type affects your mortgage cost, the next challenge is to remember their eligibility criteria.

When you talk to a mortgage broker or lender, you’ll want to be clear about which occupancy type your property will have. Of course, the broker or lender should be able to help you make this determination, but it always helps to be prepared.

The next few sections outline the definitions of the three property occupancy types.

And pricing the risk of mortgages accurately requires careful analysis of many factors.

These factors may include—but aren’t limited to—your credit score, property type, debt-to-income ratio, down payment amount, and the occupancy type of the property you plan to purchase.

Principal Residence

Fannie Mae and Freddie Mac define your principal residence as a one-to-four unit family home that you (as the borrower) occupy as your primary residence. You must occupy the property for the majority of each calendar year for it to be considered a principal residence for mortgage purposes.

In terms of documentation, your principal residence is the address listed on your federal and state tax return.

Second Home

Nolo explains that “A second home is a residence you intend to occupy in addition to a primary residence for part of the year.”

A second home is usually a vacation home, but it could also be a property you visit regularly. Below is a table that Fannie Mae provides with requirements for a property to be considered a second home.

Investment Property

If you purchase a property you’re going to use to make and profit and you don’t plan to use it as a personal residence, it’s an investment property.

For example, if you plan to use a property for one month and rent it out the rest of the year, it’s considered an investment property. That said, in some cases, you can earn rental income on a property without it being considered an investment property.

However, you won’t be allowed to use that rental income for qualifying purposes and you’ll need to meet all other requirements for second homes.

Other Important Considerations Related to Occupancy Types

So far, I’ve talked about occupancy type as it relates to the cost of your mortgage.

Keep in mind that these concepts apply whether you’re purchasing or refinancing. And different situations will require different considerations.

For example, if you’d like to convert the occupancy type of your second home, investment property, or principal residence, you’ll need to make sure you obtain the proper loan for that conversion.

Also, there are tax-related considerations related to occupancy types that you’ll want to be aware of. So we highly recommend that you talk to a tax professional about the tax implications of the occupancy type of your property.

Otherwise, if you have any questions about occupancy types, mortgages, or anything real-estate related, call now at (888) 273-8734 or Schedule a Consultation.

5 Questions New Homebuyers Should Ask Their Prospective Mortgage Broker

Fri, 04 Sep 2020 16:25:58 GMT

A good mortgage broker is a teacher, coach, financial advisor, and real estate financing expert all wrapped up into one.

1. What’s the Best Loan for Me?

2. Can You Guarantee an On-Time Closing?

This is somewhat of a trick question. In reality, if your broker knows nothing about your situation, they can’t accurately tell you what loan makes sense for you.

So if they do try to tell you a certain loan product is right for you without first learning about your financial situation, that’s a red flag. In other words, a competent broker won’t answer this question until they fully understand your situation.

What to look for : Once your broker has learned a bit more about you, ask this question again. The answer you get should be tailored to your personal circumstances and your financial goals.

If your prospective broker’s answer doesn’t make it clear why a certain loan is better for you, probe further. Ask them to explain why the loan type they recommend for you is superior to the alternatives and how that loan brings you closer to your goals than any other loan.

For example, if you’re considering either a fixed-rate or an adjustable-rate loan, a good mortgage broker will be happy to explain the benefits and drawbacks of each.

This is an important question because—while your purchase contract technically establishes the closing date—in reality, closing a deal is often dependent on the lender’s ability to close on time. If your lender doesn’t close on time for whatever reason, it opens the door to additional expenses, interest rate increases, or even a cancellation of the deal.

What to look for : Some mortgage brokers guarantee on-time closings (like The Mortgage Hub) but others don’t.

If your prospective broker says they don’t guarantee on-time closing, it’s not necessarily a deal-breaker. But they should still have policies that ensure they will cover or partially cover certain expenses you may incur as a result of a delayed closing.

Of course, no policy protects you from potentially losing out on your dream home as a result of a delayed closing.

But how do you know you can trust a prospective mortgage broker to help you buy your first home?

The key is to ask the right questions so you can find out if your potential mortgage broker is a good fit for you. Of course, finding a great mortgage broker requires more than just the right list of questions.

So in this post, I’ll reveal both the questions you should ask your mortgage broker candidates as well as the signals you should look for in their answers.

3. How Can I Get the Best Deal Possible?

With the right strategy and preparation, you can get a better deal on your home mortgage. And your mortgage broker should be able to help you formulate and execute that strategy.

So it’s important to ask him or her what that plan might look like, given your financial goals and constraints.

What to look for: How much you pay for your mortgage depends on many factors—your down payment, credit history, income, current debts, and more. All these factors are like levers that—when pulled—can help reduce how much you pay in interest, fees, taxes, and more.

A broker who’s acting in your best interest won’t just jam you into a loan as fast they can. Instead, they’ll look for ways you can make yourself a more attractive borrower which will reduce the cost of your loan.

4. Can You Explain Your Application Process?

Applying for a loan, even if you’re working with a mortgage broker, can be overwhelming. You need to ensure the loan will close on time, account for all fees, and time your rate lock, among other things.

So it’s a good idea to get familiar with your prospective broker’s approach to the application process.

What to look for: Great communication and a streamlined process are key to a successful loan process. For example, at The Mortgage Hub, setting expectations with our clients about documentation and deadlines is paramount.

You’ll also want to make sure your broker is transparent and upfront about any fees associated with the loan itself as well as the loan application process.

5. What Kind of Experience Do You Provide?

As a first-time homebuyer, you want a broker who can guide you through the loan process from start to finish. And while you should get a good feel for what to expect from your broker through your initial conversation, it’s good to ask this question directly too.

What to look for: You never know when an unforeseen issue or question may pop up in the homebuying process. So you’ll want to make sure your broker is accessible and responsive.

It’s also good to find out who you’ll be working with most of the time. Brokers may have a support team or they may work alone. This will impact your experience, so make sure you know what to expect.

Finally, make sure your broker’s communication preferences align with yours. If they aren’t comfortable communicating the way you do—whether it’s by text, phone or email—that could be a problem.

Not Sure? Seek Clarification

You don’t need to be a mortgage expert to get set up with an affordable mortgage in the house of your dreams. But it is important to ask questions.

Even a simple application process requires plenty of documentation, communication, and coordination. So it’s best to seek clarification anytime you’re not sure about anything.

When it comes to obtaining financing, everything’s in the details so if you need help, call now at (888) 273-8734 or Schedule a Consultation.

How to Prepare for Selling and Buying a Home at the Same Time

Tue, 25 Aug 2020 16:31:42 GMT

If you’ve purchased a home before, then you’re familiar with the investment of time and money that goes along with it. The prospect of moving into a new home can be even more exciting as you upgrade to a bigger house or a new neighborhood, this time with experience.

Buyers & Sellers: Evaluating the Local Housing Market

Understanding Your Numbers

The condition of the real estate market(s) in your location is the biggest factor when timing your sale/purchase process. Knowing whether it’s a buyers’ market or a sellers’ market allows you to optimize your process:

A buyers’ market has more homes available than those who’re looking to buy. This means finding a new house will be easier than selling your old one.
With a sellers’ market , a surplus of buyers means fewer homes are available. This gives sellers the upper hand.

An experienced local estate agent can help you evaluate the market, determine your home’s market value, and advise you about timing, strategy, and negotiation.

Now that you’ve evaluated the market, do a realistic review of your financial situation to understand how it will affect your options. Get solid numbers for:

Your home’s likely resale value – Get a pre-inspection so you can estimate your home’s resale value. A pre-inspection lets you know how much repair work should go into your home before you sell, what concessions you’ll need to make, and which repairs the buyer can cover.

The amount of equity you have in your home – Before you sell your current home with a mortgage, find out exactly how much equity you already have. Equity is the amount left over when you take the current market value of your home and deduct what’s remaining on your mortgage. See if you can purchase your new home without tapping into said equity, as it won’t be accessible until after the sale closes.

Other relevant factors to consider include how much liquid cash you have and which loan products you qualify for. A professional such as a mortgage lender or financial planner can walk you through that process.

The process can be a bit more complex, though, since you’ll likely be selling your old home and buying your new home at the same time.

To ensure that the process goes as smoothly as possible, we’ll lay out some key considerations and outline several potential approaches for buying and selling a home simultaneously.

Explore Your Options for Selling & Buying a Home at the Same Time

Buying a home first may be a safe option if you can afford two properties at once. This requires qualification from a lender, which means providing evidence you’ve got the means to afford both houses. For example, you may need to show that you have six months’ worth of payments in the bank. You’ll also need enough to cover your down payment and closing costs.

(Further reading: The Hidden Costs Of Buying A Home)

Once you have your new home, you can put your old one on the market. If you’re currently in a buyers’ market and your home takes longer to sell, you can still rent it out until you find a suitable buyer. Plus, if you choose to do so, you can use the proceeds of your home sale to to do what’s called a “mortgage recast.”

With a mortgage recast, you make a large lump-sum payment which is applied toward the principal balance of your mortgage. Your lender than re-amortizes the loan, which reduces your monthly payments. Best of all, the fee for doing this is usually only a couple hundred dollars at most, so it’s well worth it if you have a large sum of cash available.

Option #2: Make an Offer with a Sale Contingency

With this scenario, you’ll want to find a new home before listing the old one. When you find a house you want, you’ll need to work with an agent to submit the offer along with a sale and settlement contingency. This means you’ll buy the house, provided you are able to sell your current home.

While this may seem ideal, an offer with a sale contingency means that the sellers of your new home can still seek other offers. And, having this contingency makes your offer less competitive because there’s more risk to the seller that the deal will fall through.

This approach is riskier in a sellers’ market, but good for a buyers’ market since the seller is less likely to get another offer.

Option #3: Ask for an Extended Closing

If you already know that you’re in a sellers’ market, you can most likely count on selling your current home within a short period of time. Based on that, you can request to extend the closing date of your new home past the standard 30-45 days. Then use this extra time to sell your current home and use the equity to purchase a new one. Much like with a sale contingency, you’re more likely to have success in a buyers’ market.

Option #4: Get a Bridge Loan

If the first three options don’t work for you, a Bridge Loan can help to fill the funding gap between your new home purchase and old home sale. Visit the product page HERE to find out more.

Option #1: Buy a New Home First, Then Sell Your Old Home

Explore Your Options with a Free Consultation

Selling and buying a home at the same time can be a complicated process. The good news is that you don’t have to go at it alone. For extra help and insight, speak with a Mortgage Consultant now at (888) 273-8734 or Schedule a Consultation.

How to Shop for a Mortgage Without Hurting Your Credit

Wed, 19 Aug 2020 16:36:20 GMT

How shopping for a mortgage affects your credit is a top concern for many first-time homebuyers. For the most part, this concern is overblown… if you take the right precautions.

How Do Credit Inquiries Affect My Credit Rating?

The Importance of FICO Scores

First, let’s define “Credit Inquiries.”

Credit inquiries occur when an institution (bank, business, etc.) makes a request to credit reporting agencies. Whenever you apply for credit. you authorize the lender to request a copy of your credit report from a credit reporting agency. These inquiries may affect your credit rating. But there’s good news:

Only “hard inquiries” have a noticeable impact on your score. “Soft inquiries” have no impact.

But what exactly is the difference between a hard and soft inquiry?

Soft inquiries refer to standard actions that won’t impact your credit rating. For example, when your bank receives the updated FICO Scores of all its customers as part of a routine credit quality check, that’s a soft inquiry. Your cable, Internet or utility provider will also pull a soft inquiry before setting up your account.
Hard inquiries are when an organization pulls a full credit report on you. When you purchase a car from a dealership, for example, you’ll be asked to perform a credit check. Another common example is when you contact your credit card company to ask for a credit line increase. Since you are requesting more credit, this will have an actual impact on your overall FICO Score.

That three-digit number you see on your credit report is called a FICO score. The number is calculated based on the information contained in your reports; it signals how likely you are to repay a loan, and how much you can borrow.

The full FICO Score range is 300-850, with 850 being the top score. Each hard inquiry deducts several points from your score. The more hard inquiries you have, the more points you lose. Naturally, this affects how much money you can borrow.

For most borrowers, an additional credit inquiry only subtracts about 5 points from the overall FICO Score. Inquiries also only make up for 10% of the total credit risk assessment. Other factors have a greater impact when assessing credit risk, such as timely bill payment and the borrower’s overall debt burden.

That said, it is possible that your credit score could take a hit when you shop for a mortgage. However by learning a few key facts about credit scoring (more specifically, FICO Scores), you can mitigate or eliminate any impacts on your credit profile.

How Does Mortgage Rate Shopping Affect My Credit Score?

Generally, running multiple hard inquiries at once will lower your credit rating. A prime example of this is when someone applies for several credit cards at once. You may think that this also applies when running several mortgage rate inquiries, but we’ve got some good news:

You don’t have to worry about multiple inquiries for auto, mortgage or student lenders if you run them within a certain time frame. Inquiries run within the allowed timeframe will be treated as a single inquiry and don’t impact your score.

Also, remember that the exact impact a hard inquiry has on your credit score varies from person to person. Even if you have a bit of debt, your rating will still fare well if you keep the mortgage rate shopping period short and concise.

By now, you’ve probably realized that shopping for a mortgage rate isn’t going to impact your credit rating too heavily. Still, many home buyers want to minimize the impact as much as possible. Follow these tips to ensure that your score remains squeaky clean:

Shop Within a Short 14 to 45-day Timeframe: Don’t let your search drag on. A mortgage shopping period of 14-45 days is optimal. Since multiple mortgage inquiries in this time frame don’t impact your rating, you can take advantage of a focused period to get the best rate.
Pull Your Own Credit Reports & Check for Errors: According to a study by the Federal Trade Commission, one in five people has an error on at least one of their credit reports. Since lenders look at certain aspects of your credit history and financial situation, you want to make sure you clean up any errors that could impact you negatively. You can (and should) get a free copy of your credit report every 12 months from each credit reporting agency. If you find any errors, dispute them ASAP.
Get Pre-qualified: Pre-qualification is a lender’s estimate of how much you can afford based on the financial information you provide and is not considered a hard inquiry. Most real estate experts recommend getting pre-qualified before you even start shopping for a home.
Reduce Your Credit Card Debt: When it comes to credit scoring, the less debt you have, the better. You can speed up the process of reducing or eliminating credit card debt by making more than the minimum monthly payments on your cards.
Don’t Apply for New Credit: It’s best to hold off on applying for any auto loans or new credit cards until you’ve locked down your mortgage rate. When your credit report looks as clean as possible, there will be fewer red flags for lenders.

Shopping for a mortgage is an exciting step that puts you one step closer to being a homeowner. By understanding how mortgage shopping plays into your credit score and taking the right steps, you can avoid any negative effects.

If you need any further advice on keeping your credit rating clean while you shop for mortgages, book a consultation with one of our Mortgage Consultants.

How Desktop Underwriter (DU) and Loan Product Advisor (LPA) Impact Mortgage Applications

Thu, 18 Jun 2020 17:15:52 GMT

If you’re researching mortgages or in the process of applying for a mortgage, you’ve likely come across the names Desktop Underwriter and Loan Product Advisor. But if your lender or loan officer tries to explain what they do, it might leave you at a loss.

What are DU and LPA?

How Fannie Mae and Freddie Mac Are Involved

Both DU and LPA are automated underwriting systems (AUS), which are computer applications that verify your personal information and determine whether you should be approved or rejected for a mortgage.

Loan officers will almost always use DU or LPA to help them decide whether to approve your loan. It’s like a digital gut check to see if you’re a good candidate for a mortgage.

Now that you have a basic understanding of DU and LPA, it’s important to understand how Fannie Mae and Freddie Mac are involved in this process. Fannie and Freddie are massive government-sponsored enterprises that buy mortgages from lenders. So when you take out a mortgage to purchase a home, your lender turns around and usually sells that loan to Freddie Mac or Fannie Mae. Fannie Mae and Freddie Mac either hold these mortgages or package and sell them to investors.

Desktop Underwriter (DU) and Loan Product Advisor (LPA) are complex pieces of software that automatically assess your risk and use set guidelines to approve or reject your mortgage. But there’s a lot more to them than that. Below we’ll discuss DU and LPA, what role they play in the mortgage processes, how to get approved, and the value of approval.

This process allows your lender to use the proceeds from the sale of your loan to make more loans.

But Freddie and Fannie have to be careful about what loans they purchase, so they created DU and LPA to help assess risk.

Desktop Underwriter is the AUS run by Fannie Mae and Loan Product Advisor (formerly called Loan Prospector) is the AUS run by Freddie Mac. Both DU and LPA use algorithms to decide whether a mortgage meets Fannie Mae or Freddie Mac’s eligibility requirements.

Examples of what Freddie and Fannie’s algorithms look for in borrowers include:

Debt-to-income ratio
Cash reserves
Credit score
Collateral.

DU and LPA’s Role In Mortgage Approval

When you start a mortgage application, a loan officer collects information from you such as information about your income, employment history, credit score, credit history, assets, and more. Then that information is submitted to DU or LPA. Following this, those systems review the info, compare the data to Fannie and Freddie’s guidelines, and then approve or deny your application.

Initial DU or LPA approval from your loan officer doesn’t mean you’re guaranteed to be approved for the mortgage. If you do get initial approval, then the loan officer verifies your information one more time and submits it to the AUS again.

Finally, DU or LPA will issue conditions that have to be met. And once you satisfy those conditions, then your loan is ready to close.

A Better Chance at Mortgage Approval

While it may seem like a fairly simple step in the mortgage process, there’s a lot of weight placed on whether DU or LPA approve your application. You should do everything you can to meet requirements that will satisfy the AUS and a good loan officer should be able to help walk you through that. If you can get a DU or LPA loan approval early, it can also help differentiate you from other homebuyers because it shows you are more serious and prepared.

If you need help navigating through the mortgage process or have questions about getting approvals from an automated underwriting system, our team at The Mortgage Hub can help guide you. Find out more with a free consultation.

Glossary

Still feeling a little confused? Here are some terms that can help you sort it out:

Automated Underwriting System (AUS): Software that assesses whether you should be approved or rejected for a mortgage
Desktop Underwriter (DU): The AUS created by Fannie Mae
Fannie Mae: A government-sponsored enterprise that buys mortgages from lenders, which also goes by the name Federal National Mortgage Association
Freddie Mac: A government-sponsored enterprise that buys mortgages from lenders, which also goes by the name Federal Home Loan Mortgage Corporation
Loan Product Advisor (LPA): The AUS created by Freddie Mac
Loan Officer : Someone who works for a bank or lender who works closely with a borrower to get information and process mortgage applications

Need Help with Your Mortgage Application?

Schedule a Free Consultation or call now at (888) 273-8734 to get all your questions answered by a Mortgage Consultant.

The Hidden Costs of Buying a Home

Fri, 12 Jun 2020 17:31:56 GMT

When you’re in the process of looking for a home to buy, it’s easy to focus on the purchase price and not much else. However, buying a house or condo includes many additional costs that you need to plan for.

Closing Costs

Property and Transfer Taxes

When you begin the process of looking for a home, it’s easy to forget that there are a lot of additional costs at the end of the process. Closing costs typically include the following:

Appraisal fee — An out-of-pocket fee paid to an appraisal management company that appraises the value of the home you’re buying, which will confirm the fair market value of the property.
Earnest money deposit — To show that you are a serious buyer, you’ll often need to put down 1% to 3% of the total purchase price. This will go toward your down payment. While this isn’t technically an additional cost, it comes out of your pocket before you make your down payment, so it’s good to keep in mind.
Impound account deposit — Also known as escrow accounts, the impound account is set up by a mortgage company to make sure you have enough money to cover things like taxes and mortgage insurance. A reserve deposit stays in the impound account until the mortgage is closed/refinanced and you typically get a refund within 30 days. Some buyers may be shocked by how much they have to put into this account.
Inspections — You will want to have your home inspected by professionals to identify any potential problems, and that comes with an out-of-pocket fee. You will likely want to get a general inspection including structural, HVAC, and other assessments.
Land survey — You may need to pay a land surveyor a fee to verify property boundaries in certain states.
Processing fee — This fee is paid to the mortgage company for processing your loan. It typically costs between $500 and $700.
Title insurance policy — You’ll want to pay a title company to make sure the deed to your potential home has no other owners or people who can make a claim to the property.
Underwriting fee — You’ll need to pay an underwriting fee to your lender for determining whether it should approve your loan.

Homebuyers can generally expect to pay 1% to 2% of a home’s purchase price in various closing costs, outside of the down payment. In some markets, that percentage can be even higher. Consult your mortgage advisor for a more detailed estimate.

When you buy a home, you can’t forget that you’ll also be on the hook for local taxes. You’ll also owe specific taxes each year simply because you’re the owner.

Property taxes — County governments levy various property taxes on homes based on their assessed value. At the end of the home buying process, expect that you’ll need to pay a prorated amount of taxes upfront at closing. You’ll be on the hook for taxes owed during the time period from when you become the owner to when the current tax period ends. After the sale is complete, you’ll also owe property taxes each year. If you make improvements to your home, the value of your home may go up and this may increase your property tax bill.
Transfer taxes — When a title passes from seller to buyer, the homebuyer often must pay a transfer tax to a county, city, or state. The fee is due at closing for transferring of the title, but who pays the is determined in the purchase contract. For example, in Southern California, the fee is usually paid by the seller.

While county and other local taxes vary considerably around the country, you’ll want to do as much research as you can before buying your home. To get an estimate of what you’ll owe yearly, try using a free property tax calculator.

Especially among new homebuyers, and some move-up buyers, there’s often confusion about the real costs of buying a home. To clear up the confusion, let’s take a look at the less obvious costs. This way, you can more effectively budget for homeownership.

Costs You Pay After the Purchase is Complete

Finally, you should also be aware that there are many costs after you’ve closed. If you’re a first-time homebuyer, you may not be prepared for additional costs that were not associated with renting. After-closing costs include:

Home insurance — When you’re done buying your home, you’ll need to purchase insurance to protect from theft and damage like fire and wind. Also, keep in mind that payment of your first year’s worth of home insurance may be required at closing.
Home maintenance and repairs — Another big difference from renting is that you’ll also be on the hook for fixing issues with your home. Everything from HVAC to plumbing to structural repairs is all on you once the home is yours, and there’s a good chance you’ll need to do some maintenance in your first few years.
Moving costs — There’s a good chance you’ll need to hire professional movers if you’re settling into a new home. If you need to move a lot of possessions, movers can cost thousands of dollars.
Natural disaster insurance — Standard homeowner’s insurance does not cover damage from earthquakes and floods. If you live in an area with a history of earthquakes or flooding, you may need to purchase special insurance to protect your home.
Utility costs — Once you own a home, you’ll owe monthly utility payments for electricity, natural gas, water, and sewage. These costs can be underestimated, so be sure to fully understand the average utility bills before closing.

All of these additional costs could add up to tens of thousands of dollars in your first few years of homeownership.

For budgeting purposes, it would be ideal to calculate these costs (minus unexpected repairs) before or shortly after you buy your home. For example, there are several free energy-use calculators that can help estimate your utility bills.

Call now at (888) 273-8734 or Schedule a Consultation and get all your questions answered by a Mortgage Consultant.

Credit Scoring Models: How They Work and Why They Might Explain Score Drops

Thu, 07 May 2020 17:36:05 GMT

Despite reducing their debt balance, a client of mine recently noticed a drop in their credit score, which seemed counterintuitive. If they paid down debt, why would their credit score be getting worse?

What’s a Credit Scorecard?

What’s a Credit Scoring Model?

Credit expert John Ulzheimer writes that credit scorecards are effectively an engine that “analyzes the information on your credit report and then calculates a score based on that information.” Scorecards inform various credit models that then compute your credit score for each major company or service that measures your credit.

The credit scorecard is a type of credit scoring model that quantifies the risk level associated with various borrower characteristics. For example, a FICO credit scorecard could judge you based on income, age, credit history, marital status, employment history, homeownership, and more.

What’s included on a credit scorecard isn’t based on publicly available information, but an example of something that might be included is your age. In this case, depending on your age bracket, you’ll be assigned a certain number of points depending on the risk that the major credit bureaus associate with your age.

Statistically, older people present less of a credit risk, so they’ll get more points based on their age than a younger person would. So a 50-year-old will typically get more points added to their score than a 20-year-old.

However, in reality, many other factors besides age come into play and are weighted more heavily, such as credit history and debt-to-income ratios.

To arrive at a credit score, the scoring model then adds up all the points assigned to you based on your characteristics. But what exactly is a scoring model?

Now that we’ve explained credit scorecards, it’s easier to understand that these scorecards play a role in building a credit scoring model. The VantageScore scoring model, for example, is used by the three big credit rating agencies — Equifax, Experian, and TransUnion — to assign you an overall credit score between 300 and 850.

Outside of the big three agencies, there are many other credit scoring models in use. One that is noteworthy is the FICO scoring model, which has been used by financial institutions since 1989.

In the world of homeowners and future homebuyers, the FICO credit scoring model is particularly important. More than 90% of top lenders use FICO to suss out a borrower’s credit score, and FICO uses its own set of credit scorecards to evaluate your risk.

Both VantageScore and FICO scoring models take into account factors such as your payment history, credit utilization, credit usage, and new credit applications. Though exactly how each model weighs each factor is different.

Put simply, if you pay bills on time, don’t use too much of your available credit, and don’t apply for new credit frequently, you can stay in good standing.

As I’ve written before, keeping credit balances low is a key component of a good credit score because your debt-to-income ratio is an important factor for credit scoring models. Clearly, some other factor at play was bringing down my client’s credit score.

I reached out to the folks at CreditXpert and asked one of their representatives for an explanation of what was really happening here. CreditXpert explained my client’s credit score drop by telling me that, as of April 1, they were being scored on a different “credit scorecard.”

Now, unless you’re a credit expert, you probably haven’t heard of a credit scorecard. So let’s use this moment to break down credit scorecards, credit scoring models, and how they are related to your overall credit score.

Scoring Based on Different Credit Scorecards

While you now have a basic understanding of credit scorecards and credit scoring models, the original explanation from the CreditXpert representative still needs a little more detail.

CreditXpert said my client was being “scored on a different scorecard,” and that this was “expected to occur as they crossed a key boundary associated with the age of their accounts.”

This demonstrates something important you should know — people with different characteristics are evaluated on different scorecards. For example, someone with a bankruptcy on record will be evaluated using a different scorecard than someone without a bankruptcy.

And because these two people are evaluated on different scorecards, the actions they take, such as taking out a new loan or paying down a balance, are also evaluated differently. Basically, this means there are thousands of different scorecards in use because each person has a unique set of traits on which they are evaluated.

The underlying reason for this is that the credit bureaus want to be as accurate as possible in evaluating any given borrower’s credit risk. They can’t do that if they score every person in exactly the same way.

What Does This Mean for You?

Credit scores drop and rise, often for reasons that don’t seem clear or intuitive. Even the representative from CreditXpert admitted, “A scorecard change can result in an increase, a decrease, or no change at all. The outcome is often not intuitive.”

Thus, scorecards and credit scoring models can be difficult to interpret. But if you can wrap your head around how credit scorecards and credit scoring models work generally, you’ll understand common reasons why your credit score goes up and down.

My client’s score dropped because a change in the “age of their accounts” altered which scorecard they were evaluated on. (Most likely the average age of the credit accounts decreased, which can occur from closing a credit account.) On that new scorecard, everything in their credit history was now subject to a new scoring mechanism.

The same thing could happen to you at some point. But over the long term, you’ll always be better off reducing debt balances and paying bills on time and in full to maximize your overall credit score whether it’s from VantageScore, FICO, or another scoring model.

How to Get Help

At The Mortgage Hub, we’ve always helped clients navigate the challenges of credit scores and credit history when it comes to getting a mortgage. Call now at (888) 273-8734 or Schedule a Consultation to discuss how we can help.

Down Payment Gift Guidelines for Conventional, VA, Jumbo, and FHA Mortgages

Fri, 07 Dec 2018 17:40:12 GMT

While a few lenders still require borrowers to come up with at least 5 percent of their down payment, most allow you to use gift money from a donor to pay your entire down payment and/or closing costs.

Down Payment Gift Guidelines for Conventional Mortgages

Down Payment Gift Guidelines for FHA, VA and Jumbo Mortgages

The amount of documentation you need for a gift on a conventional loan depends on how, when, and to whom the donated funds are transferred.

If your donor transfers the funds directly to the escrow agent , the donor will not need to provide a bank statement. You will, however, need a completed and executed gift letter as well as the wire confirmation receipt from the escrow agent.

It’s critical that the account number on the wire transfer confirmation matches the account number listed on the gift letter. If those two numbers don’t match, you’re going to run into issues.

If your donor transfers the funds to the borrower and those funds appear on the most recent two months of the borrower’s bank statements, the donor will need to provide a full bank statement.

This is because, for any large deposit made within the past two months, lenders require documentation to verify the source of funds.

If you’re applying for an FHA, VA, or Jumbo mortgage, you will need to provide a bank statement from the donor regardless of when, how, and to whom the gift is transferred.

So even if the funds from a donor have been in the borrower’s account for two months or the donor transferred the funds directly to the escrow agent, you’ll still need to provide the lender with the donor’s bank statement.

However, no lender will allow you to use gift funds without proper documentation.

But what is “proper” documentation?

Well, you’ll always need a gift letter signed and executed by the borrower and the donor or donors. The donor may also need to provide bank statements, though that depends on the loan program and when and how the donated funds are transferred.

I’ve found that often times the donor doesn’t want to provide this information and this causes problems with the mortgage application. But with a little communication and preparation, you can easily avoid those problems.

That’s why, in this post, I’ll review gift documentation guidelines for the main loan programs.

By understanding these guidelines, you’ll also learn how to minimize the documentation required which may be seen as intrusive by the donor. As a result, you’ll avoid costly, last-minute delays in the mortgage application process.

Be Proactive and Discuss Documentation Requirements With the Donor

Understanding and discussing documentation requirements with your donor in advance so they know what’s going to be required of them is yet another reason I often write about the benefits of being a proactive buyer.

If, for example, you’re applying for a conventional mortgage and your donor doesn’t want to provide a bank statement, you can get ahead of it by ensuring those funds are deposited early. As mentioned, with a conventional mortgage, so long as your donor’s funds don’t appear on your two most recent bank statements, the donor won’t need to provide a bank statement of their own.

Similarly, when you know that your desired loan program is going to require a bank statement from your donor, you can have that discussion with them early and prepare accordingly. Otherwise, you could end up scrambling at the last minute… and that rarely leads to an ideal outcome.

If you need additional help navigating down payment gift guidelines, call now at (888) 273-8734 or Schedule a Consultation to discuss how we can help.

How to Provide Transaction Histories to Your Mortgage Loan Officer

Thu, 06 Dec 2018 17:46:01 GMT

Loan Officers work hard to get the most current, comprehensive view of your finances so—in addition to bank statements—they’ll often ask you to provide a transaction history. They need your transaction history for documentation of transactions that occurred after your most recent posted bank statement.

Selecting the Time Frame for Your Transaction History

You must pull your transaction history from the date of the last transaction line item on your most recent bank statement through to the present date.

So, for example, if the last transaction on your bank statement is dated October 28th and today is the 15th of November, you’ll need to set the date range to October 28th through November 15th. You can do this by accessing your online banking portal and selecting a custom date range, as shown in the image below:

You must do it this way so the lender can see that the last transaction on your full bank statement matches the first line item on your transaction history.

Since a transaction history only shows the last 4 digits of your account number, matching the transaction history’s first line item with the bank statement’s last line item helps lenders verify that the transaction history is yours.

For example, let’s say you received your most recent bank statement on November 1st and that statement included all your transactions from the month of October. Now imagine it’s November 15th and you’re applying for a mortgage and the loan officer needs to see your past two months of financial activity.

You could provide them statements for the months of October and September, but what about the 15 days since your last statement?

That’s where your transaction history comes in.

Knowing why your loan officer needs your transaction history is a good first step. But now you need to know how to provide this documentation in the correct format and over the correct time period.

The Proper Way to Document Your Transaction History

To ensure the documents they’re receiving are legitimate, lenders will require you to provide your transaction history in a certain format. That means no screenshots.

Instead, you can use one of the following methods:

1. Print and Scan with a Traditional Scanner

After you’ve selected the date range for your transaction history, your online banking portal should give you the option to print your transaction history. Once you print it out, scan the document and attach it to an email to send to your loan officer.

2. Print and Scan with a Virtual Scanner

If you don’t have a scanner, follow the same steps you would with a traditional scanner but use a virtual scanner such as TinyScanner to scan the document. Then email it as an attachment.

3. Save as a PDF

If you have the full version of Adobe, set the date range for your transaction history, select print, and adjust the print settings so that the destination of your print job reads “Print to PDF” or “Save as PDF” as shown in the image below:

Whether your “Print to” or “Save as”, when you click “Print” you’ll be brought to the following screen (Mac users will see a slightly different screen):

Make sure to save the document as a PDF or—as the image above shows—an Adobe Acrobat Document. After saving the file, attach it to an email and send it.

4. Print and Take a Picture

You may also take a picture of the document with your phone. Just make sure that you place the document on a flat surface with contrast and ensure the full document is included in the image. Then, attach the image to an email and send it to your loan officer.

A Final Reminder on Transaction Histories with Large Deposits

If you notice that your transaction history includes irregularly large deposits, you may need to provide additional documentation to your mortgage loan officer to explain those deposits. Read our post on bank statement documentation for more details on the type of documentation you’ll need to verify your source of funds for a large deposit.