Trick or Treat: Don’t let the home loan process scare you
has you spooked? Qualifying for a mortgage doesn’t have to be a monster. With a little homework, the right partners and a plan of action, you can do it.
The first step is to sit down with a loan officer to get pre-qualified for a home loan. They will review your overall savings, income and debts, and provide you with a written estimate of the loan for which they think you can qualify.
This initial conversation is important to have before you jump in the car and start heading to open houses. It will help you determine what you can afford to pay monthly for a mortgage, how much you have for a down payment, and thus what your realistic price range as a buyer will be.
With this knowledge, you and your real estate agent can be focused in your house hunting, saving you time and effort. You also won’t get your heart broken looking at homes beyond your affordable price range.
Prequalification is also an opportunity to understand different types of loans and programs. For example, if you are a veteran you may be entitled to certain loan programs and advantages. FHA loans have lower down payment requirements, but many sellers prefer conventional loans.
If you have had credit or other debt problems in the past, be honest with your loan officer during the prequalification process. They can provide advice and information on how to address credit issues to improve your credit rating, so that when you move forward with loan preapproval, you are in the best position possible.
The second step in the home loan process, preapproval, is critical to establishing you as a competitive buyer once you’re ready to start making offers on homes. In today’s rising real estate market in which homes are selling quickly, as a buyer you need to be prepared to make an offer immediately when you find the right home.
Today’s sellers are often receiving multiple offers. So, a key consideration for them is the reliability that the buyer they choose will be able to secure their loan – and do so without a hassle or delays.
“Loan preapproval demonstrates that you, as a buyer, have gone through the bank’s evaluation, met the bank’s criteria, and been given official approval for a specific loan amount,” explains Manuel August, Area Manager at Wells Fargo Home Mortgage.
During the preapproval process, lenders review your credit rating and evaluate your debt against your income and other financial assets to determine a debt-to-income ratio (DTI). They want to ensure that borrowers do not take on more debt than they are likely to be able to pay.
“Debt ratios can vary depending on the program and borrower based on their profile and situation,” says August. “The new Financial Reform Act, which is expected to be rolled out by January 2014, is looking at a maximum DTI of 43 percent for qualified mortgages, however, depending on the borrower’s profile, lenders may allow a higher debt ratio with compensating factors such as significant reserves or a lower loan to value.”
Because loan qualification is a process, August recommends that prospective buyers sit down with three different loan officers to find a good fit.
“Make sure you have confidence that they will take good care of you and work in your best interest,” he says. “The loan officer is your advocate. The more information you can provide to them to build your story, to explain how you will pay for your mortgage and qualify for this loan, the better.”
Your real estate agent at Prudential Locations can be a good source of recommendations for loan officers.
“Just calling around to get the best rates isn’t always the best solution,” August says. “If the lender or loan officer doesn’t have a good reputation in the marketplace to close your loan, you can end up paying for what you get. Sellers and their agents are more likely to go with loan officers and companies that have solid reputations.”