Potential Issues When Prequalifying a Borrower

Credit

  • Has the borrower been late on a mortgage in the last 12 months?

    • If so, this is usually a deal killer. Ask for help.

  • Is the borrower’s credit score lower than 640?

    • If so, why - are they currently delinquent on accounts?

  • Are any of the borrower’s accounts currently in dispute?

    • If so, are they willing to get the dispute(s) removed (this will affect the credit score)?

  • Has the borrower had a bankruptcy or foreclosure?

    • If so, when? Does it fit the guideline timeframes?  

  • Does the borrower have unpaid collection(s)?

    • If so, can it be excluded or must it be paid? Ask for help.

  • Is there a non-occupying borrower and/or unmarried borrower on the loan?

    • If so, is the second person listed on separate/secondary tab and not the primary screen?

  • Has the borrower opened any new accounts that are not reflected on the current report?

    • If so, does the have borrower have documentation, & is it reflected on the excluded debt worksheet?

DTI

Is the borrower’s new housing payment significantly higher than what is currently being paid (payment shock)?

  • If yes, what are the compensating factors?

  • Does the borrower receive alimony/child support/adoption stipend?

    • If so, can we prove it has been paid for last 12 months & can we prove it will continue for 3 years?

  • Does the borrower pay alimony/child support?

    • If so, is it listed on credit report and/or correct sections on the application?

  • Does the borrower have deferred student loans?

    • If so, what are the projected payments & have they been counted in the liability section of application?

  • Are we excluding ANY debts?

    • If so, why? Have they been paid by another person for the past 12 months, & can this be documented?

  • Is the borrower an authorized user on a “bad” account?

    • If so, are we having the borrower removed from the account by the primary owner & obtaining a credit supplement?

  • Is the property going to be a primary residence?

    • If not, research the parameters for a secondary residence/investment property.

  • Does this loan fit the program-specific loan amount limits?

    • If not, what other programs are options?

Employment

  • Has the person been in the same line of work for 2 years?

    • If not, is there a commonality between jobs and/or schooling?

  • Has the borrower been a full-time student in the last 2 years?

    • If so, is it being included as employment on the application? Are transcripts available?

  • Does the borrower have a second job/overtime/commission income?

    • If so, has it been consistent for 2 full years AND is not declining?

  • Does the borrower have 2106 expenses on most recent tax returns (unreimbursed business expenses)?

    • If so, have the deductions been subtracted from borrower’s income?

  • Is the borrower self-employed?

    • If so, did we use the Income Analysis sheet & has a second person reviewed the calculations?

  • Is the borrower a US citizen?

    • If not, does the borrower have a permanent residence card (green card)?

Assets

  • Are 401K funds being used as down payment?

    • Do we have a copy of terms of withdrawal and proof of deposit?

  • Are 401K funds being used as reserves?

    • If so, are we counting only 60% of the vested value & do we have terms of withdrawal?

  • Are all gift funds being used for down payment?

    • If so, can they be sourced & is a gift letter being obtained?

  • Does borrower use a shared bank account?

    • If so, a full access to funds letter from the party not on the loan is required.

  • Is there real estate owned/retained that does not have a mortgage or escrow account?

    • If so, taxes & insurance on properties with no mortgage or no escrows must be represented on 1003.

  • Is current house (with escrowed mortgage) being retained?

    • If so, are we counting the mortgage payment value as negative rent?

  • Is the borrower obtaining subordinate financing (ex: Conventional 80/15/5)?

    • If so, do we have documentation from the other lender?

  • Does borrower have 2 months reserves?

    • If not, why, and/or is credit score high enough to compensate for lack of reserve funds?

  • Has borrower been living rent free?

    • If so, has borrower shown ability to save?

Contract

  • Will the borrower be putting down earnest money?

    • If so, advise they use personal check (not cashier’s check, money order, or funds from someone else).

  • Is the borrower asking for anything extra in the contract offer (ex: fence to be put up, carpet allowance, or personal property)?

    • If so, ask for help.

  • Are we adding or removing anyone from the original contract offer?

    • If so, we must have a fully executed addendum to remove or add someone to the contract.

  • Is the borrower requesting seller paids on contract offer?

    • If so, is the amount they want in line with program specific guidelines? Has it been included on the 1003?

  • Is the seller listed on contract an entity (rather than a person)?

    • If so, have you verified it is not a FHA flip situation?

Vivek Dixit