Do you want to buy a home? For roughly 70% of the population, the first step to buying a home is to meet with a lender and get pre-approved for a home loan. Meeting with a lender can be an intimidating experience for some. To help guide you in this endeavor, I've put together a list of FAQs and answers to make the process less intimidating and easier to understand:
How do I get pre-approved for a mortgage loan?
Talking with a good mortgage broker should be your first step in the process of buying a home. With my clients, I usually have a 20-30 minute introductory call to get some basic information from them but, more importantly, give them an opportunity to ask questions and get comfortable. Below is some of the information I gather:
What do you want to do?
What is your timeframe?
What does your income look like?
What are your monthly debt payments?
How much do you have for a down payment?
What do you want your payment to be?
How is your credit?
After the initial phone call, I'm able to quickly put together a quote to give the client an idea of what they'd be looking at, funds needed to close, payment, and approximate interest rate (which can change). After that, it's a matter of filling out an application, running credit, and getting me a few documents to verify income, and I can quickly get you pre-approved and out shopping if everything checks out.
What documents are needed to get a mortgage?
After doing the above and getting pre-approved, finding a house, and getting your offer accepted, I gather some/all the below documents and turn your information over to the underwriter, who goes through everything and approves your loan. Document needs vary by situation. A W2 borrower may only need a few of the below, while a business owner might need most:
Past 2 years W2’s
Past 2 years Federal Income Tax Returns (usually business owner/landlords only)
Past 2 years Business Tax Returns and K-1’s (usually business owner only)
1 month most current paystubs – last 2 paystubs
2 months most current bank statements – all pages
Most recent quarterly statement for retirement account(s) (if using for qualification)
Social Security and/or Disability income award letter (if retired)
Alimony and/or Child Support court decision (if applicable)
Copy of Driver’s license
Visa/Residency documentation *if non-U.S. citizen (if applicable)
FOR ALL PROPERTIES OWNED:
Most recent mortgage statement(s) (if applicable)
Evidence of insurance, reflecting annual premium amount (if applicable)
HOA monthly payment coupon (if applicable)
What is the difference between being pre-approved for a mortgage and being pre-qualified?
I get this question often, and I’m not sure that many people know the difference. Pre-qualified is often what online lenders do. They get you to enter as little information as possible and pre-qualify you on what you’ve told them. The info isn’t vetted, and to be quite honest, it’s worthless. Pre-approved means your credit has been run, and your loan officer or mortgage broker has gathered and reviewed all the necessary documents to validate what you’ve told them and put on your application. Time is put into this, and calculations are done to ensure you will qualify for the loan. Any listing realtor is likely or should require you to be pre-approved before they will accept your offer. As a buyer, you should want your mortgage broker or loan officer to invest the time and effort into pre-approving you.
How does my credit score impact my ability to get a mortgage?
Your credit score is an essential factor in getting a mortgage. A credit score of 740+ usually qualifies you for the best interest rate. That doesn't mean people with credit scores of 739 or lower are out of luck. You can expect your interest rate to go up slightly, but it is common for people with less-than-perfect credit to get approved for a conventional mortgage. Another option for people with lower credit scores is an FHA loan. This government-insured loan is designed to help lower-income and/or credit-challenged people get a mortgage. Your best bet is to discuss your options with a mortgage broker. They can help determine what the best course of action is for you and might even be able to help you increase your credit score.
How long does the whole process take?
The process can usually go as quickly as you need it to and depends on how fast you can get me what I need. If you've found your dream house and want to make an offer ASAP, if you can fill out the application and get me the required documents, I can have you pre-approved and making an offer within hours.
If you've got an accepted offer, once I have all the documents I need, I can get your loan done fairly easily, within 15 days in most situations. Sooner if needed.
How much home can I afford?
Often what you can afford and what I can approve you for are two different things. In most situations, I can get you approved with total monthly debt payments at about 48% of your gross income. Not only will the mortgage payment count as a debt payment, but your car payment, student loan payments, and credit card payment are all counted toward this number.
For instance, if you and your spouse gross $10,000 a month combined, have car payments of $1500 a month, student loan minimum payments of $500 a month, and no other debt payments, there's a good chance I can get you approved for a $2800 a month mortgage payment. That said, by the time you take taxes and other deductions out of the $10,000 income, you might not be comfortable having $4800 a month in debt payments. Yet someone whose income is likely to increase over the coming year might be okay with it.
So, in a nutshell, how much house you can afford depends a lot on your other debts, future income prospects, and your comfort level. The best way to find out how much home you can afford and what you're comfortable with is to talk to a mortgage broker about your situation. You can call or email me, and I would happily talk about your options and put together a no-obligation quote to help figure out what makes sense in your situation.
How much do I need for a down payment?
My personal recommendation is to put at least 10% down. Putting 20% down is optimal as you avoid mortgage insurance, but with 10% down, the mortgage insurance is usually minimal and can be removed once certain thresholds are met.
I do USDA and VA loans all the time with 0% down. These are both great loans that fill a need. I can do conventional loans for first-time home buyers for just 3% down or 5% down if you aren't a first-time home buyer and FHA loans for as little as 3.5% down.
How do interest rates affect my mortgage?
With higher interest rates come higher payments. An interest rate of .125% higher or lower may not mean much as far as your payment, but swings of .5% to 1% can quickly erode your buying power.
That said, timing your home purchase to get the very best interest rate is nearly impossible. During 2020 and 2021, we saw some of the most affordable interest rates ever. Today's rates, though higher, are still historically low, so though more expensive, it still represents a great time to buy.
There are things you can do to decrease your interest expense. A 15-year fixed-rate loan is often a good option and has a lower interest rate than the popular 30-year option. A bigger down payment can sometimes help get you a lower interest rate as well as reduce the interest you pay each month. Paying extra principal each month reduces your interest expense and will help you pay your home off sooner.
The good news is, if you do a 15 or 30-year fixed-rate mortgage, once you lock in your rate, interest rate movements will not impact you. You’re locked in for as long as you have that loan.
As a mortgage broker, my rates and fees are lower than most retail lenders. Contact me today to review your options and see a side-by-side comparison with a retail lender. Email Todd
What are mortgage points?
Mortgage points, or discount points, are fees paid upfront to reduce your interest rate. If you see an ad with a very low-interest rate online, you can bet they are charging you discount points to suck you in. Read the fine print.
A mortgage point is equal to 1% of your loan amount. So if you're getting a $500,000 loan and you have two discount points, you'll pay an additional $10,000 in fees to get the loan.
Unless you know for sure you'll have a loan for a long time, it doesn't usually make sense to pay for discount points as it usually takes too long to break even. You're usually better off putting the extra money toward your down payment. Talk to a mortgage broker, and they can tell you what makes the most sense for you.
What are closing costs?
Closing costs are comprised of several things. Below are bullet points with an explanation of each:
Pre-Paids: These are the property taxes, insurance, and interest you pay upfront when you get a loan. This is usually the biggest chunk of closing costs and would be the same with any lender.
Title: The Title Company manages closing, sets up your escrow account, makes sure the title for the home you are buying is clean, and facilitates signing, among other things. Their fees would be the same from lender to lender.
Lender Fees: Origination, processing, and underwriting charges are all examples of lender fees. These charges will differ from lender to lender.
Points: Discount Points, mortgage Points, and discount fees are all examples of the cost of lowering the interest rate. Again, be wary of online ads or lenders touting a rate that seems to be good to be true. Likely, points are being charged. They don't always make this obvious.
How do I lock my interest rate?
Interest rates change daily. Locking your rate is a crucial part of the mortgage process. Locking guarantees your interest rate for a specific period of time prior to your loan closing, usually 30 to 45 days. More extended lock periods are available but usually come with an increased cost.
In most instances, you get pre-approved, and once you find your home and get an offer accepted, you lock your interest rate. It is possible to float your rate (not lock in), so you can take advantage of small interest rate dips, but you're also on the hook if rates go up. If you value sleeping at night, I recommend locking in soon after you get your offer accepted. We have tools to help if interest rates decrease dramatically between locking and closing, but it's rare that they go down enough to make it worth it.
What does my monthly mortgage payment include?
Your mortgage payment. What are you actually paying? It would be nice to think it was all going to pay down your principal balance, but that's not the case. Below is what the typical monthly mortgage payment includes:
Private mortgage insurance (PMI), if you put down less than 20% on your home
What exactly is an escrow account, and what does it do?
You can choose to have additional costs for your homeowner’s insurance and property taxes added to your monthly payment. The money you pay each month for these costs goes into your escrow account, which is managed by a third party to ensure payments are made on time.
I just accepted a new job; can I get a mortgage?
Often yes. If your new job is in the same line of work, you can usually get a mortgage. We'd need your paystubs from your departing employer and an offer letter from your soon-to-be employer to show proof of income. The new job has to start within 60 days of closing. I often encounter this scenario when someone is moving from out of state. I'm very familiar with what's needed and can help.
I’m retiring soon. How do I get a mortgage without a job?
Often retirees are the easiest clients. Social security, pension, and IRA income are better than a job. You aren’t getting fired from it. The documents needed for social security and pensions are very accessible. For IRA income, I often work closely with a client’s Financial Advisor to get what’s needed to get my client approved for a mortgage.
What is the difference between a Loan Officer and a Mortgage Broker?
A mortgage broker has access to many different institutions to find their client the loan that works best for them. I am a broker, and in my case, I have 25 lenders I work with to get my clients the best loan and deal for them. A loan officer works for a bank, credit union, or other mortgage lender and only has access to the loan programs and mortgage rates available through their employer.
Other essential mortgage tips?
You’ve likely heard it before, don’t make any big purchases during or leading up to getting a mortgage. The Underwriter will require further explanation, and they could possibly impact your approval.
If you envision buying a house in the near future, start putting aside the documents you’ll need to make your life easier.
If you want to buy a home and have collections, talk to a mortgage broker before paying them off. We have tips that can help!
The rule of thumb is 2 years on a job to qualify for a mortgage. It’s a good rule of thumb but not always the case. Talk to a mortgage broker.
The lender will need your last 2 months bank statements. You’ll need to explain any large deposits or deductions they are able to see in those statements. So if you want to sell a car and deposit $ in your account, or give your child $10,000, you are best to do it outside the 2-month window if possible.
Reach out to a mortgage broker well before you plan to start looking. Not only can they help you get pre-approved they can also help you figure out your price range, get your credit in order, advise you on ways to come up with the down payment, let you know how much you’ll need to put down, and put together a plan to make homeownership a reality.
How do I start the process of getting pre-approved and buying a home?
Talk to a mortgage broker or loan officer. If you don't have one or just want to compare a quote you've recently received, I'd be happy to help. Email me or call me today to get started. firstname.lastname@example.org / 971.275.2465
That's it! 18 mortgage FAQs and answers. If you have other questions about mortgage or buying a home, reach out. Happy to help. Email me at email@example.com or you can comment/ask question in the comment field below.
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