Smart Borrower Blog

Quirky Guidelines You Should Know

Oct 24th, 2007 @ 10:50 AM by MortgageMentor

One of the reasons we tell consumers to get pre-approved BEFORE shopping for a house is so we can avoid any last minute financing issues.   Often times, consumers are unaware of the little underwriting rules that could potentially sink their deal.   Believe me, there are a lot of them.   What usually happens is someone thinks they are adequately qualified only to find out the bank won't do their loan for some obscure reason.   You should be aware of these common little quirks.

Here are a few that I see most often:

Gifts as Down Payments: Buyers will often just tell the loan officer that they have 5% for a down payment.   What they leave out is that the down payment is a gift from a parent.   Lenders will allow gifts as down payments, but some guidelines require that you still contribute a 5% down payment of your own money.   If all you wanted to put down is 5% and all of it comes from a gift, then depending on the bank, you may need to go with 100% financing.   However, if the gift is 20% or more, no contribution from the borrower is needed.

This rule is generally for Fannie Mae backed loans.   Freddie Mac allows gifts with no restrictions.   Unless you know to ask, it is unlikely that your loan officer is going to tell you if your loan is following Fannie Mae or Freddie Mac guidelines.

Citizenship: Lenders treat US Citizens differently than non-permanent residents or foreign nationals.   The reason is that non-US citizens can just pick up and leave the country and the lender may not have any recourse.   In other words, you are leaving the country and never coming back, so why pay the mortgage?   Some people do think this way.  

Depending on your residency status AND visa type you could be treated exactly as a US citizen or you may be required to have a larger down payment.   Typically, borrowers on H1-B visas are treated as US citizens, but a foreign national is not.

Self-Employed/Commission Income/Bonuses: If more than 25% of your income comes from commissions or bonuses, you will have to show at least a two year history and the commissions are averaged.   We often have borrowers say they make $100,000 per year, but after further due diligence they may have only been on their job for one year and half their income comes from commissions or bonuses.   The lender may only give them credit for their base salary.

Most lenders also require that self-employed borrowers have their business for at least two years.   I know some lenders that require five years!   You will also have to be able to show a full two years of tax returns and your adjusted gross income after your write-offs will have to qualify you for the mortgage.

Condominiums:   Besides evaluating you as a borrower, lenders also evaluate the property you are buying since it is the property that will be securing the mortgage.   Banks require that condo developments meet certain guidelines regarding the number of rental units to owner occupied units.   They will also be looking to see if there are any pending liens or lawsuits against the homeowners' association and if the development is adequately insured.

If you are buying in a new constructed development, lenders may have "pre-sale" requirements.   Typically, lenders require at least 50% of the units be sold or under contract.   Some lenders require as high as 70%.

How much the lender will evaluate the development also depends on your credit and down payment.   With good credit some lenders may only require a "limited review" which may only consist of verifying the property is complete and no liens have been filed.

While this list of underwriting quirks is not exhaustive, as a borrower you need to take the time and talk in detail with your loan officer about how the bank will view you as a borrower.   It is also important to be as specific as possible with the loan officer in regards to your income, assets, and credit so you are not blindsided by these little quirks.