When I meet a new home buyer client, the first thing I ask is “are you pre-approved for a mortgage?” If not, I tell them to get their pre-approval right away. You need to know what you can afford before you go looking for your dream home.
There are lot of questions new home buyers have, so I sat down with a top mortgage broker to get the answers. One word of advice: A new home is likely the biggest purchase you will make, so don’t be a focused solely on the interest rate. Focus on service. Get recommendations from friends, family or your realtor. When possible, I always recommend working with local lenders.
Q: What are the first few questions you ask a buyer?
Every situation is different but I want to know what they are looking for and what are their expectations?
Q: What do you need from the buyer for a pre-approval and how long does it take?
Sometimes we don’t need any documentation, we just need to pull a credit report. Other times it depends on if the borrower is salaried, self-employed, etc. For a salaried borrower, we need two pay stubs, two years of W2’s and two months of bank statements. For a self-employed borrower we need federal tax returns, business returns, personal asset statements and possibly a current P&L. A pre-approval could take anywhere from 1 hour to 1 week depending on the complexity.
Q: What does the bank consider when approving a loan?
Credit score, ability to repay, post-closing liquidity, appraisal, and overall risk of the transaction.
Q: Do you need great credit to get a mortgage?
Not necessarily, depending on the size of the loan there are different options including Fannie Mae, Federal Housing Administration, VA, and portfolio loans.
Q: How much of a down payment do you recommend and why?
I don’t recommend a down payment. I gather information and educate the borrower so that they can make an informed decision on how they want to structure the transaction. If the buyer puts down less than 20%, there may be PMI which is Private Mortgage Insurance.
Q: When should a buyer lock in the rate?
They can lock the rate at application or float the rate until they feel that it’s the best time to lock. I would say that 90% of people do lock at application.
Q: What are discount points?
Discount points are a percentage of the loan amount that you would pay to reduce the interest rate for the life of the loan. Typically one point costs 1% of the loan amount as a fee. One point usually buys down the rate .25%, but it can vary based on market fluctuation.
Q: What’s the difference between a pre-qualification and pre-approval?
A pre-qualification is based on a conversation without verifying the borrower’s financials. A pre-approval will have the borrower’s credit pulled and a full credit approval would be a full underwrite of the loan verifying the borrower’s income, assets, liabilities and credit.
Q: How long does it take to get a mortgage commitment and what are the steps for closing?
If the borrower is able to submit a complete financial package upfront, it speeds up the process. A commitment is typically issued within 7-10 days. Once a conditional commitment is issued the loan officer would work with the borrower to satisfy any outstanding conditions on the commitment until the file is clear to close. Then, a closer will work with the bank attorney, who contacts the seller’s attorney and the title company to prepare the closing disclosure for all parties.
Q: What’s included in the mortgage payment? Please explain escrowing taxes.
Typically principle, interest, taxes, and homeowners insurance. An escrow is set up when the lender pays the taxes. The borrower contributes 1/12 of their tax payment each month so the lender can pay the next tax bill. Typically the borrower will put 2-4 months of tax payments in the escrow account at closing.
Q: What should a buyer not do while applying for a mortgage or thinking about it?
They shouldn’t make any large purchases, run up or cancel credit cards, or transfer money unless they keep meticulous records.
Q: Why are rates different between lenders?
Rates are different based on the bank’s production and operations. You definitely want a competitive rate but you also want good service. Purchasing a home can be a very stressful time and you don’t want to add to that stress by using a subpar lender.
Q: What does a property need to appraise for and what happens if it doesn’t appraise?
A property needs to appraise for the contracted sales price or higher. A lender will use the value of the contract or the appraisal, whichever is lower. If a property appraises for less than the contracted sales price the borrower can dispute the appraisal by providing three better comparable sales, renegotiate with the seller, pay the difference out of pocket or walk away from the deal if they are still in the contingency period.
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For all my fellow realtors, this column is for you too. Need to vent or want to suggest a topic? Like me, you can remain anonymous so send your suggestions and feedback.