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Mortgage Analysis

I own my home free and clear. I am on Social Security, and want a $15,000 mortgage. How can I qualify?

I own a home that is paid for - no mortgage on it in Louisville Ky. The PVA on it is $128,000. I am age 51, and receive SSA disability benefits totaling $822 monthly net income. However, I do not have any other bills so it is feasible for me to live on this amount (although I don't like it!) I also have a low credit score so the bank will not finance me. I have had an account with Chase Bank since 2001. If the loan had went thru it would have been a $15,000 loan with a payment of $150 monthly. If you could look into this and get back with me and let me know if you think you may be able to help. Of note: The money I am asking to borrow is to be used to pay off taxes due on the house, a couple of other bills, and to find a vehicle (nothing fancy of course)... But at any rate I really do need to secure this loan and I am able to repay at approximately $150 to $200 monthly. 

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Bill's Answer
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Highlights

  • A mortgage underwriter wants four things in a perfect mortgage borrower.
  • Focus on boosting your credit score to qualify for a prime loan.
  • Shop around for the best mortgage rates and terms.

Let us look at your situation through the eyes of a mortgage underwriter.

An underwriter wants four things in a perfect mortgage borrower:

  1. Stable income
  2. Attractive credit history
  3. Low debt-to-income ratio
  4. Big down-payment, or in your case, adequate equity

If a potential mortgage borrower is lacking in any one (or more) of these, the borrower will have a difficult time getting a loan. You may be wondering why these four qualities are important. The short answer is history shows borrowers who possess these four qualities pay their mortgage payments consistently and on time.

Today, mortgage originators rarely put up their own money when making a loan, at least not for long. Mortgage originators sell mortgages to investors that may be pension funds, foreign governments, or private investors who seek a consistent return and security. It is these investors who talk with their pocketbooks by picking and choosing the mortgages they want to buy. If your mortgage is not what a mortgage underwriter thinks an investor will buy, then the underwriter will deny your application.

Your Situation

Stable income: You mentioned a monthly net income of $822 from Social Security. Many mortgage underwriters will consider this a stable income source.

Debt-to-income ratio: I assume when you mean net this is after taxes, and not net as in after your monthly expenses. You wrote early in your message "I do not have any other bills" and then later wrote that you need the loan to pay taxes and "a couple of other bills," so I am unclear on your precise financial situation. My uncertainty makes calculating your debt-to-income ratio difficult.

Let us assume for the sake of argument you have no other debt. Mortgage underwriters do not like to lend to someone where the mortgage payment will exceed approximately 28 percent of their income. Here, you mentioned your monthly income is $822. That means the maximum payment you should consider is $230. Assuming a $230 payment, a 15-year loan, and a 5% rate, the maximum loan amount available to you is about $29,000. A $15,000, 15-year, 5% loan would result in a $119 monthly payment.

Equity: You mentioned you own your home outright, and that it has a PVA of $128,000, which I assume you mean Present Value Analysis. PVA is not a term used in mortgage lending customarily, in my experience, so I assume the $128,000 figure is what you think an appraiser will set as the market value of your home.

Ignoring the other three factors that go into qualifying for a loan for a moment, you would be able to borrow up to 80% of the value of your home. In your case, again ignoring the other factors, this means you could borrow up to $102,400 if its appraised value is $128,000.

Credit score: Now let us turn to your credit score. You mentioned you have a low credit score. Mortgage underwriters look warily at an application with less than 680. You did not mention how low your score is. If your score is below 680, then you need to work on the reasons your score is low.

Here are four steps to improve a credit rating:

  1. Pay off all debts and keep revolving lines below 25% utilization. Do not "max out" any loans or cards.
  2. Diversify you credit portfolio. If, for example, you have only a Visa, MasterCard, or Discover card, get a department store credit card or card from a gasoline retailer. Make your payments every month. Leave a small balance every once in a while to show that you are able to handle debt on more than one account.
  3. Keep your oldest credit account active.
  4. Pull your credit report and contest any inaccurate information so that it can be corrected by the credit bureaus. Go to the Bills.com debt self-help center for sample dispute letters. The credit bureaus must follow the rules set forth by Congress in the Fair Credit Reporting Act (FCRA).
get home loan quotes from pre-screened bills.com mortgage and refinance lending partners. it pays to shop for the best deal.

recommendation

based on the information provided and my many assumptions, you need to focus on boosting your credit score to qualify for a prime loan if your credit score is as low as i am surmising. subprime mortgages, which are loans for people with less than stellar credit, and private mortgages, which are loans for people with terrible credit, are available but are costly and i do not recommend them.

you mentioned chase mortgage turned you down for a mortgage. this is one area in life where shopping may be the solution to your problem. visit the bills.com mortgage saving center for no-cost, pre-screened quotes from mortgage lenders.

i hope this information helps you find. learn & save.

best,

bill

bills.com

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