What's a Scenario???

Mortgage like any profession has a large vernacular of acronyms and jargon used by professionals like me to communicate the many issues relating to origination of home loans for our customers.

It’s important as a prosumer (educated consumer) to know what your trusted advisor is talking about especially when it pertains to the largest financial decision in your life.

One of the key terms I use quite a bit in discussing mortgages with my clients is their “Scenario”. So what is a scenario… Well it’s basically a simple word that relates to your loan and how it is represented to the many banks a trusted advisor will shop to obtain you the best possible loan and rate available the day he/she obtains a rate quote on your behalf.

So what makes up a scenario and why should it matter. I feel the more my customers know about what I do and how I do it the greater their trust in my capabilities and the higher their comfort level in dealing with professionals like me to handle this important transaction on their behalf.

So let’s talk about what makes up your scenario.

The base components of your scenario as follows:

Credit History and FICO scores (Fair Isaacs Score)
There are actually three primary reporting agencies that use three different proprietary methods to arrive at a three digit scores that reflects your credit worthiness to lenders. Each has it’s own name (the most well know is Fair Isaacs Score or FICO I commonly used by brokers like me) but they all produce similar scores when pulled. In mortgage traditionally your middle score is the one used to determine your actual score for use in putting together your loan scenario.

It’s also important to note late payments, collection activity, charge offs and other negative items such as liens, bankruptcies and court actions all effect your credit rating or overall score and thus impact your scenario as well.

It’s always good to note that most lenders would like every borrower to maintain 3x24. That’s three tradelines at least one of which is over $5,000 in value that have been open (the first month it reported on your credit report) and active meaning it is not closed and has reported in the current month. There are some lenders who will approve credit reports with less but in most cases you will pay higher rates with this lenders as well.

Income
Simply stated this is the money you earn before taxes from your various sources of income such as your primary employer or job, investments, rental properties, retirement, alimony, child support etc…

Generally to qualify for a home loan you will need at least two full years of employment in the same line of work. If you are fresh out of college it may take a little time on the job to get you in to your first home but not necessarily depending on the lender and program you are shooting for. Generally you must be gainfully employed to secure a home loan especially if you are a first time home buyer.

Debt To Income Ratio
Once we pull your credit report we can access you current debts when compared to your income. This calculation is termed your DTI or debt to income ratio. It is the actual percentage of money dedicated monthly to paying/servicing all existing debts when compared to your overall income. In most cases lenders will want this ratio to be no more than 45% to 50% of your total income but some programs allow for higher ratios as well some as high as 65% for conforming loan amounts ($417K today).

Current Home Value
To evaluate your homes value the best-case scenario is to contract with a licensed appraiser which costs $350 approximately nationwide. An appraisers job is to evaluate and present an opinion of value on a given day. They traditionally visit your home, calculate square footage, lot size, they verify title compared to your actual home and the amenities and upgrades presented in the home, check recently sold homes in your immediate area that are like-for-like properties and then calculate an overall value based on your home square footage and lot size. There are various methods to provide an appraised value but the most common uses comparative sales (of like-for-like properties) to calculate value of your home.

Documentation Type
There are a few ways to document your income when you approach a lender for pricing. The various documentation types are as follows:
· Full Doc (2 most recent pay stubs, 2 W2s, Reserves documented with one or two bank statements from sources such as checking/savings, IRA or 401k quarterly statement etc…)
· Stated/Verified which means you state your income and provide no income support documents. A verification of employment or CPA letter may be required by the lender to verify your job or business. Also for sole proprietors your business license, evidence of incorporation may be requested. You also will need to verify personal assets (Reserves). This is money you can evidence that shows you have two to six months of payments or PITI (principal, interest, taxes and insurance) payments saved somewhere at your disposal. Most commonly the bank would like to obtain a verification of deposit or VOD to evidence these or a bank statement containing all pages that does not show income deposits would work as well. You can also use IRA, 401K, savings accounts and investments as well. In certain case pension accounts may work as well.
· Stated/Stated in this scenario you state your income and state your assets. It can be costly to do but in certain circumstances may be the easiest way for self employed individuals or people in unusual positions to work their loan through the process. Normally higher credit scores are required for these types of loans. Today a 700+ FICO would be most desired.
· No Ratio in this scenario the lender does not require any income to be placed in the loan application and they do not use the DTI ratio to evaluate the loan application. This too can be more costly form a rate standpoint but may be one way a borrower with higher debt loads gets their scenario approved. Strong assets is a much needed item in this scenario.
· No Doc this solution is good for borrowers with very low Loan to Value ratios. Meaning they have lots of equity stored up in the value of their home so the banks has very little risk of default.

Dwelling type
Most borrowers don’t realize the significance of this little acronym on their overall scenario. Lenders will generally charge more to loan on condos/town homes, condotels (over three levels high) compared to single-family dwellings or SFR’s. Manufactured homes are too evaluated differently from what I call sticks and bricks or SFRs. If you are a first-time homebuyer you should take care when seeking your first property. You should know manufactured home loans will require more money down generally speaking when compared to single family dwellings and condos/town homes, condotels as well will generally gain equity more slowly and conversely lose equity more slowly then single family dwellings and finally single family dwellings most often sell more quickly then all other types of housing.

In all of these scenarios it’s important to note the lenders are simply assessing risk of the potential for you to default on this new home loan given the documentation and information the lender has to evaluate. Generally speaking the greater the risk the higher your interest rate.

As you seek guidance and loan information from your trusted advisor you should keep these items in mind and always take care to properly review and maintain your credit rating. In the Internet age it is now more important than ever to keep a guarded eye on your critical data contained in your credit report. You never know when accidental information will be posted to your credit profile and of course there is always a threat identity thieves will strike.

Best Regards,

Kenneth Knapp
Your Trusted Advisor
949-294-0403
kknapp [at] signaturecapital.net