You need to know what makes or breaks a loan approval in order to maximize your financing potential. When you know what the banks/underwriter want, you have an edge on your competition. You should also know that the underwriter (also known as a UW) assesses the quality of the loan, banks and lenders create guidelines and computer models, known as ‘Automated Approvals’, analyze the various aspects of the mortgage and provide recommendations regarding the risk involved. You need to also realize that every Fannie and Freddie deal must be approved by this automated deal process. However, it is ultimately up to the underwriter to make the final decision on whether to approve or decline a loan.
The 3 C’s of Underwriting are:
- Credit, Capacity and Collateral
Credit reputation is what the underwriter uses to review how well a borrower manages his or her current and prior debts. Documented by a credit report from each of the three credit bureaus (Equifax, Experian and TransUnion), the credit report provides information such as credit score, the borrower’s current and past debts including: credit cards, loans, collections, delinquencies, repossession and foreclosure and public records (tax liens, judgments, and bankruptcies).
You can get by with a credit score of 680, but you really want to be at 700 or more to get the best deals financed, especially for your first four houses that you are having the bank finance. Even though the 680 to 699 range will still get you approved, the problem is that the automated approval will most likely add an extra approval stipulation to show that you, the investor, have two year’s experience in managing rentals to get a final approval. Financing home #5, and up, is a mandatory 720 score for approval.
If there are two people on the loan application, then they have to base the approval off of the person with the lowest median score, so the person with the higher score is irrelevant in this case.
Two of the bigger credit score tips I can give you to maximize your score potential are: 1) that you need to keep your credit card balances below 30% of their limit, and 2) you need to make sure that if you have a home equity line of credit that it is being reported as such, and not as revolving debt. It needs to report as a mortgage because if it is reported as a revolving debt it could bring down your score by 40 to 50 points. The reason is because credit reporting is not human and all it sees when it tries to determine your score is that you have a massive credit card and that it may be maxed out.
Many investors need help getting their score over 700. We recommend www.FixMyCredititstl.com for credit restoration.
Not sure what your credit score is? Go to www.CreditKarma.com to check your score.
Credit accounts are looked at by: type, age, usage, limits and the status of revolving accounts. Requests for new credit in the last 12 months are also taken into consideration. The goal here is to have a gleaming credit score, but it is still possible to do a transaction without it, thanks to various other types of funding, should you be declined for conventional financing.
The most influential aspect of the credit report is quality of the credit on a person’s current house. A lender will typically analyze the most recent 12 to 24 months of the borrower’s housing history. Credit scores are more important than ever in today’s tight lending environment. Even if you have great credit scores but do not have the minimum number of trade lines (that is open accounts on your report), which is usually equal to four accounts open for 12 months or more, then even if you have an automated approval, the underwriter will more than likely deny the loan.
Keeping the Three C’s in mind before you seek out your next financing option is crucial! For more information about financing your next investment, be sure to follow Starting Point Real Estate on Facebook, Twitter, Pinterest, and Google+.