The Mortgage Process

 

Ok, we’ve made the assumption that you have cleared up your debt and have started saving for your new home. Now on to the lending process. Unless you have cash, this is the biggest, if not the biggest piece of the puzzle. Ironically, we all shy away from digging in and truly understanding the process, the options and the offerings in the market.  The more you know about mortgages, the better prepared you'll be, so here are 12 things you should know that can get you ready for the application process and possibly save you thousands of dollars. Each step blow can be discussed in length, so contact me to learn more about the process. 408-384-1351, Susan Ward Email

 

In addition, contacting both large and small lenders to develop a relationship is a smart move. Talk to your bank’s mortgage lender as well as private more boutique type lenders to see what they can do for you. Remember you are in the driver’s seat and you are the customer. They want your business.

 

Your credit score can make a big difference in how much home you can afford and how much interest you'll end up paying. MyFICO.com has an excellent calculator that can tell you the cost of your credit score. Before you start the home buying process, it can be a good idea to check your credit report and FICO score and to do damage control if necessary.

 

Lenders generally use two different debt ratios to determine how much you can borrow. The short version is that your monthly housing payment (including taxes and insurance) should be no more than 28% of your pre-tax income, and your total debt (including your mortgage payment) should be no more than 36%. The ratio that produces the lower payment is what the lender will use. Many lenders have more generous qualification ratios, but these are traditionally the most common.

 

If you have a credit card with a $20,000 limit, that doesn't necessarily mean that you should spend $20,000 on purchases with the card. The same logic is true when it comes to mortgages -- just because you can qualify for a certain mortgage amount doesn't mean that you have to max out your budget. Be sure that your new mortgage payment not only fits your bank's standards but your budget as well.

 

When you apply for a mortgage, you'll need to document your income, employment situation, identity, and more, so it can be a good idea to start gathering the necessary documentation before you walk into a lender's office. Here's a more comprehensive list that can help you determine what you'll need.

 

To be clear, you don't need a pre-approval to start looking at houses. One caveat: A pre-approval and pre-qualification are two different things. A pre-qualification is based solely on information you provide and is not a commitment to lend money, therefore it doesn't carry nearly as much weight.

 

The mortgage industry standard is a 20% down payment. However, you may be able to get a conventional mortgage with significantly less money up front -- as low as 3% of the purchase price in many cases. Specialized loan types, such as VA and USDA mortgages require no down payments at all for those who qualify.

 

Generally speaking, you can expect closing costs to be in the neighborhood of 2%-3% of your mortgage principal amount. So, on a $200,000 mortgage, you can expect a bill of up to $6,000 that must be paid when you get the keys.

 

Typically, you'll need a minimum of a 620 FICO score to qualify for a conventional mortgage, and it can be difficult to qualify with a score that's near the minimum if your other qualifications aren't stellar. Another option is the FHA mortgage, which is designed for borrowers with qualifications that don't meet the standards of conventional lenders. The downside is that FHA loans can be significantly more expensive, but they can be great resources for people who otherwise wouldn't be able to qualify for a mortgage.

 

If you put less than 20% down on your mortgage, you'll probably have to pay private mortgage insurance, or PMI, so be sure to budget for this when shopping.

 

One common mistake among first-timers and repeat buyers alike is accepting the first mortgage that's offered. A seemingly small difference in rates can save you thousands of dollars over the course of a 30-year mortgage, and as long as all of your mortgage applications take place within a short time period, the additional inquiries won't have an adverse effect on your credit score.

 

For the majority of homebuyers, a fixed-rate loan is the best choice, especially in a low-interest environment like we're in now. However, if you don't plan on being in the home you buy for more than a few years, an adjustable-rate mortgage could save you thousands of dollars in interest. For example, if you're buying a home to live in during four years of graduate school, an adjustable-rate mortgage with a five-year initial rate period could be a smart idea.

 

Continuing on my last point, it's a good practice not to use your credit for anything out of the ordinary between the time you're approved for your mortgage and when you actually close on the home.