Question: Now that housing prices have dropped and mortgage rates are low, we have decided that we are finally ready to buy a home. What do we do first, where do we start?
Answer: The first thing you should do is find a good loan officer who can analyze your financial situation and let you know how much you can afford to spend for a home.
Some people make the mistake of shopping for a home first and then contacting a mortgage company later to see if they can qualify for a loan to buy it. Years ago, that was the traditional method of home shopping.
The real estate agent would ask a few questions about the price range you were interested in, then you would drive you around and look at homes in that range. When you found a home you liked, you would write up an offer and then go to the bank and apply for a loan. The problem was, buyers would sometimes find out that they could not qualify for a large enough loan to buy the home they wanted. The deal would fall apart and the buyers, the real estate agent and the home sellers had to start all over again. It was a very inefficient system.
These days most homebuyers go to a mortgage lender first to get “pre-approved” for a loan before they make an offer on a house. This is not a requirement, but it removes a major hurdle from the transaction because all the parties involved know that the buyers are financially qualified to close the deal as soon as the purchase offer is made.
All that remains to be negotiated is the purchase price, closing date and any repairs that the seller may have to make to the property. An added advantage of being pre-approved for a mortgage is that you can close quicker. It typically takes about 30 days to process and close a purchase loan. When you get pre-approved for a mortgage, you complete about half that process before the purchase offer is even made, so that you can sometimes close the deal in as little as one or two weeks. That can be a powerful bargaining chip when negotiating with anxious sellers.
So, how do you go about getting pre-approved for a mortgage? As I said at the beginning, find a good loan officer. Notice that I didn’t say shop for the lowest interest rate. There are several reasons for this. For one thing, the financial markets are very volatile these days. Mortgage rates can change one, two or even three times in a single day. Any rate quote you get today is worthless tomorrow. Now, obviously, you want to make sure you are getting a fair interest rate, so call around to a few banks and mortgage companies and find out what the prevailing rate is that day. You will probably find that most legitimate banks and mortgage companies are fairly close in the rates they quote you, so then it becomes more a matter of selecting the person you with whom you feel most comfortable.
You want someone who is knowledgeable and willing to spend some time helping you through the loan process, not someone who just wants to get your signature on the loan papers and then rush you out the door.
The first thing the loan officer will do is pull a credit report to analyze your debt load and see if you have any derogatory credit items within the past two years such as late payments, collections, judgments or bankruptcies. The most important factor on the credit report is your credit score, commonly called a “FICO” score. Credit is rated on a scale of 450 to 850. A credit score above 740 is considered excellent credit.
Lenders now use “risk based pricing” which means that the lower your FICO score, the higher the interest rate you will have to pay to get a mortgage. For example, on a conventional mortgage, if you have a FICO score of 680 you might get an interest rate anywhere from 0.5 percent to 0.75 percent higher than a borrower with a FICO score of 740 or higher.
Government loans (FHA and VA) are more forgiving. You can get a government mortgage with a FICO score as low as 620 and there is no interest rate adjustment based on your credit score. So if your credit is “less than perfect,” you are better off with an FHA loan, or a VA loan if you are a veteran or active duty military.
After checking your credit, the loan officer will verify your income. The days of stated income loans where you could simply write in a number for your income and nobody checked are long gone. They were called liar loans for a good reason. Today, your income must be verified with paycheck stubs and W-2 forms if you are a salaried employee, or tax returns if you are self-employed or have variable income such as commissioned sales.
Once your credit and income are documented, your loan application will be processed using a computerized underwriting system and you will be pre-approved for a mortgage. You will know exactly what home price you can afford, what your monthly payment would be and how much cash you will need to close the deal. Then you’re ready to hit the streets with a real estate agent and find the home of your dreams.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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