Hello,
After over 30 years of working with customers, I have found that CIA (Credit, Income, and Assets) are still not clearly understood and how they are considered in approving a loan. I will address them as concisely as possible here.
Credit: As seen by the mortgage industry, credit is a reflection of the likelihood of paying the loan on time. Your most recent history, the last 12 months, is the most critical. Lenders prefer a clean report for the last 24 months. However, if the last 12 months reflect all accounts current, then this is generally considered sufficient time to overcome past situations that may have caused previous late payments. So review your credit report and if there are any late payments in the last 12 months, this will have a major impact on your eligibility. I will not address credit scoring now but in a later article. The key is showing the lender that you are in a position to make a timely payment.
Income: The guidelines are very specific on how income is calculated. The income document requirement are generally, paystubs, W2s, and personal tax returns. One of the biggest misunderstandings is when an applicant’s income increases based on bonus or commission income. Many applicants are promoted and their pay structure changes to a bonus or commission which will eventually provide them with a higher income. Applicants unknowingly accept the position without understanding that a 2-year history is needed before considering the bonus or commission income for loan purposes. Without the 2-year history, only base income can be considered which usually means the amount of a loan that they will be eligible for will be greatly affected. Also, applicants who are self-employed have a greater challenge because most businesses indicate significant deductions (correctly and accurately) which results in indicating low income in their personal income tax return. Based on the income on the tax return, they would not be eligible for the amount of loan requested. This is a major challenge for self-employed applicants. Lastly, some applicants confuse income with assets. For example, many customers have indicated to me when applying for a loan that they have over $1.0 million dollars in their retirement account. This is important not as income but as an asset, unless they are receiving a distribution that must also have a history and likelihood of continuation documented.
Assets: The primary purpose of assets under the guidelines is that document you have the funds for closing the transaction and the ability, not the requirement, to access funds to make your mortgage payment if necessary (reserves). Since there are no means to require an applicant to use these funds for payment, this is more of a compensating factor (meaning a favorable consideration) when reviewing the overall applicant’s financial ability to repay.
There are so many more guidelines about, CIA, but if you understand this overview, you will have a better understanding as to why the lender may ask for more information or documentation to satisfy each of these areas.
This explanation is primarily for the traditional lending guidelines (Fannie Mae, Freddie Mac, FHA, and VA). There are other non-traditional lending programs (creative financing solutions) that may help in buying real estate and provide the flexibility to CIA to purchase a new home or investment property. We will go into more detail in future articles.
If you have any questions, please feel free to reach out to me!
