HOME BUYER INFORMATION
Buying and owning a home is the American Dream. Owning a home is the first step toward financial security. Some of the advantages are: a place of your own, tax benefits, and a home is a good long term investment.
Most of us get excited when we decide to buy a home and we begin looking at homes, going into neighborhoods, and dreaming of ourselves living in a home. Looking is one thing, but being able to buy a home is another. If you are serious about buying a home, the first thing you should do is get pre-qualified. There is a difference between getting pre-qualified and getting pre-approved. We’ll cover them both so you understand the difference, and why pre-approval is better.
PRE-QUALIFICATION
Typically, pre-qualification takes place over the phone. This is when you speak with a lender on the phone, or communicate via email. At the prequalification stage, your personal data is not verified. If a credit check is done, it is not usually thorough or factual. There are three nationwide credit repositories: Equifax, Experian, & Trans Union. Often, at prequalification, the lender just checks one credit repository. This in file credit check may not reveal all the necessary information a lender needs to make a sound decision about your ability to repay a home loan.
NOTE: many times the information stated on a credit report is not accurate, whether it be an in file through one or all three credit repositories. This is one major reason it is better to be pre-approved, so that any issues with credit are settled before you put a contract on a home.
Putting a contract on a home before being pre-approved with a commitment letter from a lender, can result in disappointment & frustration for all parties involved: the buyer, seller, realtors, and lender. This is because none of your actual information has been verified or reviewed by the lender.
_____________________________________________________________ Rena Rogers..Helping People Get Further…Faster! 770-387-4504
PRE-APPROVAL
When a borrower is pre-approved, it means he is basically as good as a cash buyer. Obstacles have been overcome and problems are solved during the pre-approval process. At this point his financing is arranged, and a buyer can shop for a home with confidence. Pre-approval allows a borrower to negotiate his transaction from a position of strength.
Pre-approval begins when you provide the lender with a complete application, and all supporting documentation. Ideally, this happens in a face to face meeting.
Proof of income For example, supporting documentation means providing the lender with proof of income. Proof of income includes complete tax returns for the past
two years, every page & all schedules, as well as paystubs, if you are a W2 wage earner, meaning: does your employer take taxes out on you? If they do, you are considered a W-2 worker. A borrower can tell a lender anything on the phone or via email, but until the income is verified with documentation and a Verification of Employment, you cannot be certain your income is sufficient to qualify for the home you want.
If you are a commission salesperson or if you receive bonus income but your employer takes out taxes on you, the lender will still need your complete tax returns for the past two years. A sub-contractor, a worker who is issued a 1099 (employer does NOT take out taxes), or a self-employed borrower must provide complete tax returns for the past two years. Often the lender will ask also for a year to date profit & loss statement. This is your earnings year to date versus your expenses.
If you get a paystub, the lender must have a copy dated within the most recent thirty day period.
What if your income is too low to qualify? You may be eligible for one of the no income verification type programs. Ask a lender for details.
Calculating income can be complicated. Even if a borrower gets overtime, bonus income, shift differential extras, etc., the lender may not be able to use it when determining qualifying ratios. Additionally, those who write off expenses on tax returns may get a break on income taxes, but these write offs lower qualifying income.
Many times self employed borrowers are ideal candidates for a stated income program.
Credit History The pre-approval process will mean your credit history is thoroughly reviewed, using all three credit repositories. The lender will look to see if you have been late on any debts, if you are currently past due on a debt, if you have any unpaid or unsatisfied collections or judgements, or any other derogatory items. If so, credit repair should begin in order to be preapproved. At this point the lender reviews the credit report with the borrower, and if problems exist, advise the borrower how to repair them and what steps to take to improve the credit situation.
Credit requirements vary with loan programs. See your lender for details.
Debts A complete list of monthly debts must be provided to the lender. These include any car payments, bank loans, credit union loans, credit card payments, credit union debts, child support, student loans, etc. Be honest with your lender about monthly debts. It is easy to forget loan payments that are payroll deducted, or those deducted from your bank account automatically.
Monthly expenses such as power bill, phone bill, etc., are not included in the qualifying ratios, but may be used as alternative credit if you have no established credit history. Of course, in order for the lender to use these as credit references, they must be good. In other words, the alternative credit sources must state you have always paid on time, as agreed.
Child support, alimony, etc., may require the lender to have your divorce decree(s), child custody agreement, legal separation papers, etc. These are
public record and may be obtained from the courthouse in the county your case was filed.
Your monthly debts are added to your proposed house payment and then divided by your gross monthly income to determine your debt to income ratio. The acceptable ratio depends upon the loan program. See your lender for details.
Rental History A two year history is typically needed. The lender will want to know where you lived for the past two years, and if you’ve paid rent, who/where you have made payments to. Typically, the lender wants to know the month/year moved in to the month/year moved out, the amount paid, and if paid as agreed. If rent is paid to an individual, the lender may ask for canceled rent checks.
Assets The lender will want the most current two months bank statements, or if quarterly, the most recent quarterly statements. Any type cash asset account such as 401K, Certificates of Deposit, and IRAs look good. Every page of the statement is needed. A lender likes to see if a borrower has saved money. Even if you are not putting any of your own money down, lenders prefer a borrower to have an amount equal to at least one or two house payments saved in reserve.
Any unusual deposits—deposits inconsistent with what is shown on the statements provided, may be questioned. With this, the lender is concerned whether or not a borrower may have obtained any new loans that were not disclosed. A borrower should avoid depositing cash on hand into his
account. It is better to deposit payroll checks and use any cash at home for normal living expenses such as gasoline, groceries, etc.
Always avoid bounced checks!
Down Payment Some programs require no down payment at all, others require as little as 3%. If a down payment is required, there may be restrictions on the source of the money, and if it is a gift, certain types of documentation is required. Gift funds should never be given in cash.
Some Types of Mortgage Loans There are conventional loans which are underwritten based on Fannie Mae & Freddie Mac guidelines. Government loans are FHA (Federal Housing Authority) or VA (Veteran’s Administration). Non-conforming aka subprime loans usually offer higher interest rates than either conventional or government loans, but this is because the underwriting guidelines are more flexible and there is no Private Mortgage Insurance. PMI, as it is called, protects the lender in the event a borrower defaults on his loan. FHA has MIP, or Mortgage Insurance Premium, and VA has the Funding Fee.
Your lender will help and guide you to the program you are best suited for.
Good Faith Estimate
At this point the lender should be able to provide you with a Good Faith Estimate. It is not necessary for you to have a contract on a home. The GFE can be a scenario of a proposed property. This written document
states selling price, down payment (if any) closing costs, prepaids, discount points (if any) monthly payment, interest rate, type of program, cash needed at closing, seller contribution (if any) and cash reserves required (if any). This form is an extremely important document, and the lender is required by federal law to provide it within three days of application. The GFE details the components of the loan. For example, it breaks down each item which make up the closing costs, such as origination fee, attorney’s fees, title insurance, etc. The GFE breaks down the cost of the loan. Even if you do not have a contract on a home at this point, and you hopefully do not, since you are getting pre-approved, the lender must still provide a GFE based on a scenario for which you are qualified.
Processing the Loan
Once your application is complete and you’ve provided all necessary documentation, the loan process begins. All your data is entered (typically) into the lender’s computer software. This artificial intelligence underwrites your loan. It reviews credit scores, credit history, debt, income, assets, etc. The software either approves your loan application or not. If it does not approve you, it doesn’t mean you cannot buy a home, it just means there is more work to be done. Note: some lenders cannot finance a borrower who is not approved by the software. Ask your lender for details. During the loan process all your documentation is verified. The lender reviews your paystubs, tax returns, bank statements, etc. Rental history is verified, employment history is verified. Debt to income ratios are calculated. These ratios differ based on the loan program. Some programs are stricter than others. The loan process, in a nutshell, is when the lender prepares your file for approval. If the software approves your file, your data still must be reviewed and checked for accuracy. Often credit explanations must be
provided in writing to the underwriter, particularly if the software does not approve your loan.
Once all the documentation is complete and checked, processing is complete and the loan may be submitted for approval to the underwriter. This is the person(s) who makes the decision on the lender’s behalf whether or not your loan is going to be approved. The underwriter makes a business decision for the company.
If your loan is approved, the lender may then issue a pre-approval in writing, called a commitment letter, which is subject to a contract and appraisal. This approval is good for approximately three months.
Now you may go shopping for a home!! The fun begins.
Once you’ve found your home, you will need to have a written contract to purchase. A contract should be given to the lender so a new GFE may be prepared for you.
Appraisal
Once you’ve got a contract on a home, the lender will have an appraisal of the property done. The appraisal determines market value. The lender wants to be sure the home is worth the purchase price.
When the appraisal is complete your file is updated (if necessary) and submitted for final approval to the underwriter. Sometimes the underwriter will approve the loan subject to conditions. These conditions are necessary
in order to clear the loan to close. Conditions mean the underwriter may want clarification on a question. She may ask for updated paystubs, or she may want the appraiser to clarify an issue on the appraisal. Once the conditions are cleared, your file is prepared for closing. The lender sends closing instructions to the attorney, and your file is sent via email.
Closing
Often closing is called settlement. It occurs at an attorney’s office, typically. The buyer, seller, realtor, and attorney are usually present. You will sign documents such as your note, and your settlement statement, or HUD-1 form. If funds are needed at closing, they should be in the form of a cashier’s check payable to the buyer (yourself). Also, a one year’s homeowner’s insurance policy, aka hazard insurance is required. Once closing has completed, you are a new homeowner.
CONGRATULATIONS!!
_____________________________________
Rena Rogers: Helping People Get Further…Faster 770-387-4504