How to get your bank statements mortgage-approval ready
In April 2014, the Financial Conduct Authority’s Mortgage Market Review rules came into force, designed to ensure people only take out a mortgage they can afford, and to prevent irresponsible lending practices.
The rules mean your mortgage application could take longer to complete and may be more complicated. Getting your mortgage approved could also become more difficult.
According to Gary Festa, executive director at wealth management firm HFM Columbus, getting a mortgage approved now comes down to the contents of your bank statements. Lenders will ask for three months’ worth when you apply.
But what details will they look for?
The first thing lenders look for are overdrafts in your recent history (even if authorised, or within pre-agreed limits). There could well be questions about birthday, Christmas and holiday spending too – these are occasions when spending commonly increases, and credit cards can often enter the mix.
Festa says: “A lender will want to see clean and fully paid off credit cards, which are used to purchase a broad range of products and services, rather than simply meals out or holidays. This said, a card with a huge limit, or a 0 per cent card that you rarely use, could be viewed as unnecessary risk exposure by some lenders. On no account take out a payday loan.”
Discretionary spending is a key area of interest for lenders. This includes magazine or newspaper subscriptions, trips abroad, hobby memberships, pet insurance and gym membership.
“Sometimes, these can be listed as generic direct debits – so check your statements and ensure any non-specific outgoing is accompanied by an explanatory note,” Festa says.
“Interestingly, I know some lenders can treat a gym membership with caution – they assume it’s an item that people won’t cut in tough times. It may be worth noting in your application that it’s something you’re ready to part with if it comes to it.”
Regular payments to another account may be taken as an applicant maintaining a separate bank account. It is best to inform the lender of that account.
There are also some types of spending lenders view as discretionary that applicants may not; certain forms of insurance, for instance, or payments into a pension.
“You should put deposits into a pension scheme on hold for the three months prior to your application,” Festa suggests.
“Lots of lenders deduct it from their affordability criterion, even though it is a voluntary contribution.”
High spending in some regards – for instance, shopping and holidaying – can be mitigated by pledges to reduce spending in line with your new circumstances, if and when the application is approved.
“Let’s say you used to go for regular European city breaks prior to your application,” Festa says.
“With your new mortgage, you may be spending the odd weekend here and there in Cornwall, or Brighton. Perhaps you used to shop at Waitrose and M&S, but intend to shop at Lidl and Aldi when you move to your new home. Without a note explaining you intend to scale back, a lender will assume your previous outgoings in those regards are the norm, and it could cost you – so include an undertaking in your comments.
“A lender will also look for ‘vice’ spending. This ranges from alcohol and tobacco on a weeknight, to club visits at weekends. High ‘vice’ outgoings could be viewed as an indication that an applicant lacks monetary discipline. A common giveaway is a succession of cash withdrawals, staggered throughout the same night. This will be viewed as proof that an applicant can spend irresponsibly when under the presumed influence.”
Such spending will be viewed in a particularly dim light if an applicant has failed to make bill payments or entered overdraft territory during the same period.
If your statements reveal high pub spending during a single month – and this is attributable to a one-off event – include a note in your application explaining why this is. Contrast it with a lack of comparable spending in other months, and invite the lender to ‘average’ the spending out across the three month period.
Gambling and betting falls into this category, too – and such expenditure will be viewed poorly.
“Even if you ‘only’ spend £10 per month on betting, this sends out the worst possible signals,” says Festa.
“I’ve come across the odd person who’s thought that their gambling wins will be viewed positively by a lender – but even an entirely spotless win record will suggest a lack of self-control.”
It is also important to note that lenders employ “plausibility indicators”; barometers based on projections of average or typical spending nationwide, used to gauge the reasonableness of some spending. Many lenders use average spending habit stats published by the Office of National Statistics (ONS) as “plausibility indicators”; they will look for instances where spending in a particular field is lower or higher than average, and will want to know why this is.
“As a result, it makes sense to familiarise yourself with the ONS figures – and contrast these with your own spending. If your monthly spending on electricity is lower or higher than the national average, add a note explaining why.”
Self Employed 12 Month Bank Statement Mortgage Loan Program
These are the guidelines for one of our low doc programs. We have several to offer our clients in CA, WA and OR.
■ Owner-Occupied (Primary Residence)
– No maximum number of properties
– The total indebtedness to a single entity may not exceed $2.4 million.
– All simultaneous transactions must be identified and submitted concurrently
■ SFR, Townhomes, PUDs, Condos
■ Attached PUDs, Condos Project must be approved by Lender
■ Fully amortized 5/1 LIBOR ARM only
■ Greater of the fully indexed rate or the note rate
■ Owner-Occupied (Primary Residence) : 50%
■ Second Home : 50%
■ Investment Property : 50%
**Exceptions may be granted for higher than 50% DTI with compensating factors
■ Minimum: $ 100,000 / Maximum: $ 1,000,000
■ Lawful Permanent Residents
■ We accept borrowers with certain visas that permit work and residency in the US but we have document requirement; Copy of passport, visa I94, I485 and verification from attorney on green card processing and expected status adjustment date. We do require these borrowers to have established credit and escrow for taxes.
■ Foreign National not eligible
■ Non-Occupant co-borrower is not allowed
NON ARMS LENGTH TRANSACTION
■ Gift of equity, Sale by Owner and any other non-arm’s length transactions are not permitted
■ Minimum credit score of 700 (middle score of 3)
■ Credit scores must be based on a minimum of 3 tradelines Open & Active for at least 24 months
■ Non-traditional credit – Not permitted
■ Mortgage Payments History : 0x30 within last 12 months , 1×30 within last 24 months
■ Housing Payment History : 0x30 within last 12 months
■ Revolving Credit Lates : 0x30 allowed in the last 12 – Months
■ Installment Credit Lates : 0x30 allowed in the last 12 – Months
■ Bankruptcy , Foreclosure, Short Sale, Deed-in-Lieu: 7 years
– exception may be granted with a satisfactory written explanation and/or at reduced LTV
■ Consumer Credit Counseling – Treated same as bankruptcy
■ Judgments, Charge-offs – Must be released and over 24 months old
■ Liens, Collections – Must be paid thru escrow with borrower’s own funds : Exception Of Cash Out Transaction
MONTHLY DEBT OBLIGATIONS § HELOC Payment:
– Principal and interest payment using fully indexed rate for full line amount regardless it has been used or not
– Deferred Student Loans: Use Payment reflecting on credit report. If a payment is not indicated on credit report, a copy of the borrower’s payment letter or forbearance agreement is required to determine the payment amount to use in calculating the borrower’s total monthly obligations
– Payments on installment debts with more than 10 months of remaining payment must be included in the DTI.
– Installment debts may be paid off or paid down to 10 or fewer monthly payments for qualifying, unless monthly debt obligation significantly affects the borrower’s ability to meet their credit obligations. *Limited to One installment debt being paid “down” per borrower/loan application-Unlimited if paying “off” *
– Document that the borrower has sufficient funds to cover the unpaid balance of all 30-day charge accounts. DU will include the balance of all 30-day charge accounts in the Total Funds to be verified.
– The lease payment must be included in the DTI regardless of the remaining number of payments.
– Evidence the primary obligor has made payments as agreed for the last 12 months (Provide copies of 12 month canceled checks)
– No history of delinquencies in the last 12 months
§ Debts paid by Business for Self-employed borrowers:
– Debts paid by business for self-employed borrowers may be excluded from the monthly obligation when all of the following requirements are met.
ü No late payments in the last 12 months and no more than 1×30 in the last 24 month period.
■ Evidence, such as 12 months canceled checks, that the debt has been paid out of company funds
■ The underwriter may condition for CPA or borrower to prepare P&L (Cash Flow Analysis) that the business took the payment of the debt into consideration.
– Use the monthly payment shown on the credit report. If not available, use the greater of $10 or 5% of the
■ Payoff of Revolving Accounts
– In order to qualify without the monthly payment on the current balance, a revolving account must be paid off and closed.
■ Revolving account paid thru escrow is acceptable, however must provide a credit supplement or letter from creditor to evidence the account is closed prior to funding.
■ If the revolving account is paid off, but not closed, the monthly payment shown on credit report (or the greater of $10 or 5% of the outstanding balance, if there is not payment) must be included in the DTI.
■ Self-employed is defined as borrower owns 25% or greater of ownership interest in a business.
■ The business may be a sole proprietorship, a partnership (general or limited), an S corporation or a corporation.
■ Borrower is paid 1099 and files a Schedule C
■ Realtors are considered Self-Employed
■ Borrower must be self-employed for at least 2 years in same line of work
■ Business phone number must be verifiable via 411 or internet
■ Self-employed business license or CPA letter verifying borrower’s ownership of business for last two years
■ 12 consecutive month’s personal bank statements to verify ability to repay
– Personal Account (only one account maybe used to determine qualifying income you cannot mix checking and savings)
– Deposits must be consistent and typical
– Large Deposits higher than 25% of the total monthly qualified income and/or typical deposits must be sourced to determine if funds came from a business source
– If another person other than the borrower’s spouse is on the bank statements (and not on the loan), only 50% of the total deposits can be used for calculating income
– Non borrowing spouse on the bank statements you must determine which portion of the income is the borrower
– Determined total monthly average deposited and divided by 12 to determine the qualifying income
■ Deposits that CANNOT BE USED in the average of the total S/E qualifying income are as follows
– Credit back from credit/Debit returns
– Direct Deposit for spouses income
– Direct Deposits for VA/SSI/Disability
– Transfers from another account (if borrower transfers money from his business account to pay themselves the transfers must be consistent and not on off’s)
– Child Support or Foster Care income
– Large Deposits by more than 25% of total income that can’t be determined as an income source * NOTE: No NSF, Returned Item or Negative Balances to be reflected on any bank statement.
■ May allow Business Bank statements to be used in calculation of qualifying income in the following circumstances
– The borrower(s) use their personal bank account as their business bank account
– The borrower is 100% owner of the business and uses business account for all transactions including paying personal liabilities
– The borrower is paid 1099 and files a schedule C
– Rental income: For existing investment property : a copy of the Schedule E must be provided
(Note: Please exclude rental income deposited on personal bank statements to calculate Self Employed income)
– For new investment property – fully executed lease agreement must be provided
■ Checking, Savings, Time Deposit, Money Market: Must be verified by 3 months bank statements or VOD with 3 months average balance
■ Mutual Funds and Stocks: When used for reserves, 60% of the value of stock and mutual funds may be used
– Vested funds from individual retirement accounts and tax-favored retirement savings accounts may be used as a source of funds for the down payment, closing costs or reserves.
– When funds from these sources are used for the down payment or closing costs, any applicable withdrawal penalties or income tax must be subtracted so that only the net withdrawal is counted.
– To account for withdrawal penalties and estimated taxes, include only 60%, less any new or outstanding loan(s), of the vested amount in its determination of the borrower’s available reserves.
– When a retirement account only allows withdrawals in connection with the borrower’s employment termination, retirement or death, do not consider the vested funds as reserves.
– The borrower must have 100% ownership of the business. The Company CPA to verify that withdrawal of funds has no adverse effect to business.
■ Gift Funds: Not Allowed
– Any large deposit not consistent with the borrower’s employment and/or over 25% of borrower’s earnings must be fully explained and sourced with acceptable documentation in order to be eligible for down payment, closing costs, earnest money deposit and reserves.
– All funds used for down payment, closing costs, earnest money deposit and reserves must be from an acceptable source and clearly not be a result of undisclosed borrowed funds or incentive from an interested party such as a seller, real estate agent or developer.
– A large deposit could be a single deposit or multiple deposits over a period of time that in aggregate, result in a large deposit.
– A review of the borrower’s financial profile must be conducted in order to draw a conclusion that a deposit must be sourced.
■ All loans require 6 months PITI in verified liquid reserves
■ Borrowers who own additional rental properties must have 6 months PITI for each additional financed property
INTERESTED PARTY CONTRIBUTIONS
■ 3% regardless of LTV/CLTV
SEASONING REQUIREMENT BY LOAN PURPOSE
■ Purchase , Rate/Term Refinance
– Payoff of the current mortgage (Principal balance plus accrued interest, and any required prepayment penalty only)
– Payoff of any subordinate mortgage lien, used in its entirety to acquire subject property.
– Maximum cash back to borrower may not exceed 2% or $2,000 whichever is less
– Max. 10% increase in appraisal value if less than 6 month ownership
– Min. of 12 month ownership required. Less than 12 month ownership must use acquisition cost to calculate LTV
DELAYED FINANCING REQUIREMENTS (if applicable)
■ Initial/Original purchase transaction must be ‘Arm Length Transaction’
■ Source of all funds went into Initial/Original purchase transaction must be from borrower’s own funds and must provide Final HUD 1
■ Properties must be withdrawn from MLS 6 months prior to initial loan application date
MULTIPLE PROPERTY OWNERSHIP
■ No maximum number of properties
■ The total indebtedness to a single entity may not exceed $2.4 million.
REAL ESTATE OBLIGATION
■ The current primary residence is being converted to an Investment Property
– At least 30% equity in the existing property derived from an AVM, must be supported by Drive by Appraisal Report (Form 2055), then 75% of the rental income can be used to offset the PITI to qualify
– Rental income must be documented with a copy of fully executed lease agreement
CONTINUITY OF OBLIGATION
■ The borrower must be the existing lien holder for refinance transaction
■ All appraisals must be completed by a state-certified appraisal
■ Subordination agreement is mandatory, if applicable
Our goal is to find you the best financing available to save the most money. Just ask the experts at PMC. Email your scenario to [email protected] .
Make sure to visit our website: www.pmccanhelp.com
FOR A FAST PRE-APPROVAL: Complete a loan application on our website APPLY ONLINE