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 seeking the loan later. If you don’t qualify for large enough loan to buy the home you want, the deal can fall apart and you have to start over.
That’s why most homebuyers go to a lender first to get approved for a loan before they make an offer. That way, all the parties involved know that the potential buyer is financially qualified to close a deal.
All that remains to be negotiated is the price, closing date and any repairs that the seller may have to make to the property.
When you get prior approval, you complete about half that process before the purchase offer is even made, so you can close faster than starting from the beginning. That can be a powerful bargaining chip when negotiating with anxious sellers.
So how do you go about getting mortgage approval?
As I said, 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, the financial markets are volatile and rates can change one, two or even three times in a single day. Any rate quote you get today is worthless tomorrow. Obviously, you want to make sure you are getting a fair interest rate, so call around to a few banks and mortgage companies for the prevailing rate.
You will probably find that most legitimate companies are fairly close in the rates they quote you, so then it becomes more a matter of selecting the person with whom you feel most comfortable. You want someone who is knowledgeable and willing to spend time helping you through the loan process.
The first thing the loan officer will do is pull a credit report to analyze your debt load and check for late payments, collections, judgments in the past two years.
The most important factor is your credit score, commonly called a FICO score. Credit is rated on a scale of 450 to 850. A score above 740 is considered excellent.
Lenders now use risk-based pricing which means, the lower your FICO score, the higher the interest rate you will have to pay.
For example, on a conventional mortgage a FICO score of 680 might qualify you for an interest rate anywhere from 0.5 percent to 0.75 percent higher than a borrower with a 740 or higher.
Federal Housing Administration or Veterans Administration loans are more forgiving. You can get a government mortgage with a FICO score as low as 640 and there is no rate adjustment.
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. 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 preapproved 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.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.
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