Overview of the Colorado Mortgage Process
This series of pages is designed to provide an overview of the mortgage process, including details about how mortgages work, what is evaluated in the qualifying process, down payment assistance, what closing costs are and how to avoid paying for them, the steps to getting a mortgage, and much more.
A mortgage is like a table with four legs
Each of the four legs is equally critical in holding up the table.
Leg number one: Your gross monthly income (GMI), which is determined differently for salary, hourly, commissioned, and self-employed workers. GMI is an evaluation of income prior to withholdings, such as taxes. The reason gross monthly income rather than net monthly income (income after taxes, etc.) is evaluated is that tax brackets differ from person to person. Gross monthly income is a way of leveling that playing field.
Leg number two: Your credit, which is a combination of your payment history, and, depending on type of mortgage, your credit score. Your credit score depends on the length of time you've had credit, the type of credit you've had, and what you've done with your debts. Be wary of pulling your credit online with any credit outlet - the mortgage process will look at all three credit repositories and may use a different scoring system than what is publicly available. In fact, lenders may use different scoring systems. Talk with your mortgage consultant for more information.
Leg number three: Your minimum monthly payments on your recurring debts, such as credit cards, car payments, student loans, and child support.
Leg number four: Your financial assets, such as checking and savings accounts, stock, and 401(k) accounts. Gift funds may also be an option, depending on the type of mortgage you choose. Your ability to save money on a monthly basis may also be included as a financial asset. Please talk with your mortgage consultant about properly documenting these funds.
Why is an evaluation of assets so important?
First, you must decide how much you're going to dedicate to your purchase transaction. The size of your down payment and your total cash to close are important considerations when evaluating your total investment. The source of the money you'll be using and the length of time you've had this money under your direct control are both critical questions. With few exceptions, every loan program requires detailed information about the money you'll be using to buy your new home. In addition to gift funds, you may also be allowed to borrow money against your retirement accounts. Please talk with your mortgage consultant for help in evaluating your options.
Second, the amount of money remaining after completing the purchase or refinance transaction can be critical for being approved for a mortgage. This money is called reserves. Many mortgage solutions have a reserves requirement for loan approval.
There is a fifth leg: the appraisal of the home you are buying. This doesn't happen until you are under contract to buy your new home. The reason for the appraisal? The lender wants to make sure that the house is worth what you are paying for it because the lender will own a large percentage of your new home. For example, if you put 5% down on a $100,000 house the lender's interest in that house will be $95,000. If the house is worth less than the agreed upon purchase price, the lender will require a lager down payment (to avoid owning more than 95% of the house).
Just as a table can have fewer than four legs, so too can a mortgage. There are even mortgages based exclusively on credit where the borrower does not disclose a job or income. Needless to say, this type of solution requires a very specific credit profile (type of credit and number of creditors as well as a minimum credit score).
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