Posted January 22, 2014Tweet
The National Association of REALTORS® reports that roughly one-third of all homes are purchased with cash. The remaining two-thirds of buyers use mortgage financing.
For buyers using financing, getting a mortgage can be like everything else -- in order to get the "best deal" possible, you have to get prepared.
Getting prepared can start with answers to these important questions :
Then, once you can answer these questions, you'll likely want to know whether a bank will approve your mortgage request. There are two ways to find out -- one "good" way and one "excellent" way.
The good way is via pre-qualification. The excellent way is via pre-approval. Here's what you need to know about both.
Getting pre-qualified for a mortgage is a quick and easy process. Via phone, email or internet, your lender will ask you for some basic information about yourself and -- based on what you share -- you can know whether you qualify for a mortgage.
Pre-qualification questions vary by lender but often include the following :
Your lender may also ask whether you've had a bankruptcy, short sale or foreclosure within the last few years; and whether you're a U.S. citizen.
The answers to these questions can a help a lender determine for what mortgage programs you may be eligible. For example, if you have very little money in the bank and plan to buy a home with 2-units or more, your lender will limit your pre-qualification to FHA mortgages and VA loans.
Similarly, if your credit rating is high with no outstanding judgments or liens, your lender may pre-qualify you for a wide range of mortgage products which are unavailable to buyers with low credit rating.
Based on the information you share, your lender will also assign your purchase to a maximum purchase price.
The strength of a mortgage pre-qualification is that it's easy to process.
The weakness is that it's only as good as the information given to your lender. You may think you're telling your lender your income; or that you know your credit rating, but what if you're wrong like so many buyers before you have been?
This is why pre-qualification letters are only "good". They're a non-verified guess of how much home you can afford. Guesses will do you very little good.
Pre-approvals are a better approach.
Getting pre-approved for a mortgage takes more time than getting pre-qualified. The extra time pays off wonderfully, too.
In the mortgage pre-approval process, your lender will go deeper as compared to a prequalification. Instead of just being asked about your income, your assets, and your credit, you will be asked to prove it.
For example, your lender will ask about your money "in the bank" and whether it's from your job; or, from a 401(k) withdrawal; or, from a cash gift for downpayment; or, from some other source.
The funds will be verified with bank statements.
Your lender will also ask to review your most recent W-2s and tax returns in order to confirm your "eligible income". This figure is then compared to your credit report to determine your personal debt-to-income (DTI) ratio.
Debt-to-income is a key mortgage qualification standard.
Buyers with a debt-to-income ratio below 40% may be eligible for all available loan types include conventional financing, FHA and VA mortgages, and USDA. However, buyers with a DTI between 40-45% may be limited to products via the FHA or VA.
Pre-qualifications don't verify debt-to-income. Pre-approvals do.
Pre-approvals also uncover hidden collections, judgments and liens which may stand between you and your approval.
More than 25% of Americans are harmed by "errors" on their credit report. If you turn out to be one of them, finding a credit report error after you're under contract for home can carry significant costs -- including the loss of your earnest money.
For all of these reasons, home sellers and their REALTORS® insist that home buyers submit a valid pre-approval letter along with their initial offer for the home.
Sellers don't consider offers from people who haven't taken the time to determine if they can even get approved for a loan in the first place.
This is why pre-approval letters are important. They're typically required to even offer on a home.
Sellers don't accept an offer without an accompanying pre-approval letter. Thankfully, getting pre-approved is easy.
First, contact a lender. It can be any lender. It doesn't have to be your "hometown" bank and it certainly doesn't have to be the lender you'll use when you ultimately get your home loan.
The important part is that you speak to a lender, and get the letter.
When you contact a lender, then, be open and honest about your financial background.
Today's mortgage lenders perform tons of due diligence; much more than 10 years ago. Whatever you attempt to "hide" from a lender, they'll ultimately uncover -- and hiding information may be cause to deny your loan.
Even if it's something as simple as a side-business you've recently started which currently earns absolutely no income, share it with your lender. Ultimately, the business may not affect your approval but let your lender determine what's important and what's not.
You should also alert the lender if you're carrying non-credit reporting debts such as a personal loan from a friend or family member.
Lastly, allow the lender to "pull your credit".
Credit checks can reduce your score but they represent a very small percentage of your overall FICO.
Many people believe that a credit check will affect your credit score by less than 5 points on a scale of 850 points. Without the credit check, though, you can't be pre-approved, so let your pre-approving lender check it.
If you don't have a lender to issue a pre-approval, you can get started with one here. There's no cost to be pre-approved and there's no obligation whatsoever.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Ron Z. Real Estate Agent
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.