Just the thought of the mortgage process is often intimidating to some people, and understandably so. Even if you have been through the pre approval process before, chances are things have changed a lot since that last time you obtained a mortgage. I’m going to give you some basic information everyone should know before starting the search for a new home.
The first step in a home search is speaking with a lender to get prequalified. This is critical in order to know how much you can afford, what payment you are comfortable with and where to begin your home search. Most Realtors will require you to be prequalified before showing homes as well because most sellers want to make sure they have a qualified buyer before they accept a contract. A prequalification letter shows them you are serious about buying.
You may be thinking you can’t afford or qualify for a mortgage. Why would you want to buy instead of rent? The benefits of homeownership include building equity as part of a long-term investment, as well as possible tax advantages. Owning the home also means you can design and complete your own renovations and create your own homeownership experience. The truth is, you may be able to buy a home sooner than you think – and in some cases, you may even save money over renting!
Here’s a cheat sheet of 10 acronyms provided by Freddie Mac® that you can reference as needed to navigate through the mortgage process.
Can I Get Prequalified For A Mortgage Online?
I would personally stay away from online sites that promote shopping lots of lenders at once. It has been found that your information is then immediately distributed to multiple companies, putting you in a position to be bombarded with phone calls and emails to no end. I certainly don’t like that, and I don’t think most consumers do either.
Communication And Setting Expectations
The most important part of the mortgage pre approval process is communication and setting expectations. With my clients, I typically start with a brief introductory phone call – even though many people prefer to text or email. I feel like this initial phone call is critical to having an exceptional mortgage experience. Once the initial phone call is completed, I typically have the borrower complete a simple 20-30 minute online application.
If your lender doesn’t have an introductory call or at the very least send you a very detailed email outlining what to expect, how the process works, what items will be needed, etc. be very wary. It could be the start of a long, inconvenient and painful process. This is just my opinion – but after 23 years in the industry, I’ve found the customer experience is directly tied to communication and expectations set at the very beginning. You may want to get a second opinion or talk to someone else and see if they provide you with a better idea of what to expect from them and what is expected of you.
What Information Does A Mortgage Broker Need?
Once a client completes the online application, I review it to make sure no information was missed or skipped. Details are extremely important, and even something as small as a child support obligation or another owned property can sometimes make or break a deal. Once I’ve verified the application is fully complete, I pull credit to determine the applicant’s credit score as well as compile a list of monthly liabilities.
The credit score plays a role in determining what program, if any, the applicant qualifies for. Most mortgage guidelines require a minimum credit score, however there may be some options that allow for a lower score in some cases. Those programs typically come with higher interest rates and require a larger down payment. In addition to having a minimum credit score requirement, your credit score can affect your interest rate. As you might think, typically the higher the score the lower the interest rate. It may also affect private mortgage insurance (PMI) rates and premiums. I’ll get more into that later.
Do I Need Proof Of Income To Buy A House?
You should be prepared to verify all information you provide on the application. It’s not like a credit card application where you list your information and no verification is required.
If your lender didn’t go over it upfront, at this point they will most likely ask for what I call your 2,2,2. It’s not a steadfast rule, but a general rule of thumb to provide the last 2 years W-2s, last 2 paystubs, and the last 2 months of bank statements. There are exceptions to this such as self-employed borrowers or applicants who are just entering the workforce, to name a couple. The good thing is, thanks to technology most everything can be scanned, emailed, and even e-signed. This is a huge time saver and convenience compared to the way it used to be! Many lenders embrace technology and encourage you to opt in to their verification services to simplify the process.
What Percentage Do You Put Down On A House?
Another area of confusion or misinformation is the big question of how much down payment is required. It depends on the loan program type, purchase price and other factors. The old standard of 20% down is debunked. In general, there are four major types of mortgage loans: Conventional, FHA, VA and USDA. VA loans are reserved for Veterans or surviving spouses of a Veteran. FHA’s primary focus is on first-time homebuyers and new homeownership (but anyone may be eligible) requiring a minimum 3.5% down payment. Some Conventional loans require a 3% down payment to borrowers who meet certain criteria, but it all varies so inquire for more information on your life situation.
What Is PMI Insurance?
Speaking of PMI, I promised I’d get back to that, so I’ll cover that now. With the exception of VA and USDA loans, if your down payment is less than 20%, you may be required to pay private mortgage insurance. This is sometimes referred to PMI, MI or MIP in the case of FHA. The purpose of this insurance is to protect the lender and help recover some of the loss they would incur if the buyer were to default on the loan. The good thing about Conventional financing is that after your balance reaches 78% of the original value, the PMI has to be removed by law with just a few exceptions.
What Is Mortgage Insurance Premium?
The FHA MIP premium is the same percentage, but Conventional premiums vary greatly depending on your credit score. So, for example, if someone has a 640 credit score, it might make more sense to go with FHA instead of Conventional because of the cheaper MIP payment. Most likely that person will either buy, move or refinance before they would lose money due to paying the MIP for the entire term. So, as a Licensed Mortgage Professional I show my clients both options and they can choose which one they want to go with.
FHA vs Conventional Debt-to-Income Ratio
The other main difference between FHA and Conventional is allowable debt-to-income (DTI) ratio and credit criteria. Typically, FHA allows for a higher debt-to-income ratio and is more flexible with credit than Conventional. Most mortgage loan programs use your gross income divided by your total monthly debt, including the proposed new housing payment, to determine your debt-to-income ratio. Your gross income is your income before taxes and deductions. Most programs typically don’t include liabilities such as cell phone, utilities, auto insurance, etc. to calculate this ratio. Regardless of what you can be approved for, you need to make a decision of whether the proposed payment will be comfortable with your budget.
I’ve covered a lot of information relating to the mortgage pre approval process and hopefully you’ve learned a few things. Ultimately the best thing to do is to get with a lender that you trust and go through the prequalification process. It isn’t difficult!
I should note that homeownership might not be a fit for everyone. Renting might be the best option for you at this stage in your life if you do not want to worry about maintenance, upkeep or other responsibilities that come with being a homeowner. I hope you’ve found this information useful so that when you are ready to look into buying a home you are well informed to start the pre approval process.