Buying a home comes with several moving parts that must fit together like a snug puzzle piece in order to successfully wind up a homeowner. In any multi step process, there is always a crucial first step to ensure a smooth sailing adventure. Before embarking on a home buying journey, the most important step is to fully understand what you are capable of affording each month in terms of a mortgage payment. This is achieved by speaking with a well respected and seasoned local mortgage professional and having an in depth financial conversation. As you maneuver through this process, the next step will be to get your feet wet making offers on the oh so perfect home. By tackling this first step, it ensures the seller and listing agent will take your well crafted offer seriously. Our trusted, local and seasoned mortgage professional, Denise Hosek with Annie Mac Mortgage, was kind enough to take the time to sit down with Jennifer Archambeault, Broker/Owner of Urban Provision, REALTORS® to answer a discuss the ins and outs of the mortgage application and lending process and answer a few questions.
J: Thanks Denise for joining me today and helping our future buyers understand the mortgage process. We know when they have a glimpse into the financial portion of buying a home, they will feel more at ease when routine and normal processes occur in the buying cycle.
D: Thanks for including me in this process, I have always made it a practice to ensure every buyer is educated from start to finish so I am happy to share.
J: I know most people will only buy one home in their lifetime so the home buying and mortgage journey will be quite foreign. And even if someone has bought a few homes in their lifetime, it seems when time has passed between those buys or better yet industry regulations or processes have evolved – it is great to have a reminder of what to expect. So I hope you don’t mind answering a series of questions.
D: No not at all, I would be happy to answer them.
J: Before we dive into the mortgage process let’s talk about credit, income and assets. Is there such a thing as a minimum credit score these days? How do income and assets play a role in your buying power?
D: Lenders examine three general areas: credit, income & assets. If an applicant is weak in one area, looking strong in the other two areas can help the qualification.
Let’s talk about credit first… For a Conventional loan, 620 will be the lowest score to qualify. That being said, it’s important to understand that the only way to determine your credit score for a mortgage, is to have your credit pulled by a mortgage loan originator. Most people don’t know this, but your credit scores can vary greatly depending upon which industry pulls it. Each industry uses different algorithms to come up with those scores. Mortgage scores are typically the lowest. A higher credit score will result in a lower interest rate and a lower PMI (private mortgage insurance) rate, if PMI is required.
Income, of course plays a very big in role in buying power. The credit report provides a lender with the applicant’s monthly recurring liabilities. Those liabilities when divided by monthly income, give us the debt to income (DTI) ratio. A lower DTI ratio allows for a higher mortgage payment.
Lastly, let’s discuss assets. Having more cash can certainly increase your buying power in three ways. For one, a larger down payment reduces your monthly payment. Secondly, having additional cash reserves is necessary in cases where a buyer is offering over the asking price…. If an appraisal comes in low, those funds can bridge the difference. Lastly, additional cash reserves can be a compensating factor when credit is a little low or DTI is a little high.
J: It sounds like it is paramount to have a knowledgeable and reputable loan officer navigating the credit, income and asset process in order to ensure no missteps.
J: There are two types of mortgage approvals: pre-qualification and pre-approval (or what we refer to as conditionally approved) and both are very different creatures. Can you elaborate how a qualification and an approval is different in the terms of mortgage lending? And is one better than the other? And further elaborate on what conditionally approved means.
D: A pre-qualification is when a lender views the application and credit report with very minimal documentation. The lender gives a buyer an idea of what they qualify for, as long as everything checks out after further documentation is provided. The pre-qualification can’t give the buyer much assurance that their loan will not be denied later.
With a pre-approval, the loan officer thoroughly reviews income and asset documentation, calculates allowable income according to guidelines and then runs the loan through an “automated” approval process. A conditional approval takes this a step further… The loan, along with all documentation is submitted to an Underwriter who has the final authority to approve a loan pending certain conditions. An example of a condition is “Copy of flood certificate for subject property.”
J: When is it important to get pre-qualified vs pre-approved (or conditionally approved)?
D: In a seller’s market like we’re in now, it is CRUCIAL for buyers to have the strongest proof of financing available. If a buyer is using a mortgage, a pre-approval or conditional approval is a MUST for a seller to even consider an offer.
J: What are the biggest challenges you see surface later in the mortgage process with buyers who only get pre-qualified?
D: Sometimes the loans get denied because the loan officer was unable to see important details. I’ll give one example… the most recent paycheck shows a large bonus that is added to the income. Then later, when a verification of employment is received, it reveals no history of bonus and therefore it cannot be counted. The income is recalculated by the underwriter who then denies the loan for lack of sufficient allowable income. In those cases, buyer can lose the house and their earnest money deposit.
D: Yes, it definitely dampens the home buying mood especially when the buyer is giddy about home buying.
J: Are there tips you give buyers during their home buying journey that helps them from skirting missteps which could result in being denied or better yet unable to close on their home in a timely manner?
D: Once a buyer is pre-approved, we say “no changes!” Don’t change your job. Don’t apply for a new credit card, loan or bank account. Don’t move balances from one account to the next. Don’t run up credit card balances. And most importantly, don’t miss a payment due date.
Once under contract, it’s also important to respond to your lender quickly. Promptly sign your loan disclosures and provide any additional requested documentation. Staying ahead of schedule will remove stress and provide a buffer in case something happens outside of anyone’s control.
J: Now that we have tackled the types of approvals and uncovered a few challenges and how to circumvent them. Let’s reverse a bit and discuss the application process. What type of information should a buyer be prepared to furnish along with their application?
D: A buyer should have on hand, the dates and addresses of places lived and worked for the past two years. A buyer will also need proof of income and assets. For most people, that will be the most recent 30 days of pay statements, last W2, most recent 60 days of bank statements and a valid government photo ID, such as a driver’s license or Permanent Resident card.
J: Once the application and documentation you mentioned is received, talk me through what happens behind the scenes in terms of understanding if a borrower can move forward with their purchase? What does a loan officer actually do?
D: There are specific calculations to determine allowable income from salary, hourly, bonus, commission, rental property, self-employment, social security, pension…. The list goes on. The assets are reviewed – large deposits must be paper-trailed. The credit report is thoroughly reviewed. We look for balances without payments, any evidence of derogatory mortgages, credit disputes. Mortgage guidelines dictate how each of these scenarios must be treated.
J: So, what you are saying with mortgage guidelines driving the conditions for approvals, one loan officer generally cannot circumvent the system if one cannot.
D: You are correct.
J: Now I want to pivot and dive into what the happens in the mortgage cycle once the buyer is officially under contract? What are the next steps?
D: Your loan officer will call to congratulate you and discuss locking your interest rate. You will be sent initial loan disclosures to e-sign. They will include a Loan Estimate based upon what is outlined in the contract. The loan officer or loan processor will ask for updated documents and request that you start shopping for your homeowner’s insurance. The loan officer’s team will order documentation from third parties: title insurance, HOA documents, a condo questionnaire (if applicable), property tax certificate, flood certificate, mortgage insurance (if applicable), social security verification and employment verification. The loan will then be submitted to the underwriter. If the underwriter did not already conditionally approve the loan, it will be done at that time. The loan processor will come back to the buyer with a list of remaining items needed for final loan approval. When the appraisal report comes back, the processor will submit it along with those final items back to the underwriter to request final loan approval.
J: This seems like a ton of moving parts and any one of these not fitting like a snug puzzle piece could potentially derail the transaction.
D: There is a great deal of moving parts, as you said, that must come together in order for a buyer to become officially approved. As you can see there is several key factors that well beyond the buyers control.
J: Can you briefly outline any upfront out of pocket costs associated with the mortgage? And when are those costs paid by the buyer?
D: Some of the closing costs are what we call “pre-paids” which are regular costs associated with owning the home, like your first year’s home owner’s insurance. The escrow account cannot start at zero, so we also collect 2 months homeowner’s insurance and property taxes as an escrow “cushion.” Pre-paid interest is for the days that you own the home that aren’t charged in your first mortgage payment. Other fees paid by the buyer are title insurance, government recording fee, appraisal fee, lender fee, document prep fee. The seller will pre-pay the annual property taxes up to the day the buyer takes ownership. The seller may also offer to pay the owner’s title policy.
J: You mentioned appraisal as part of the process and an out of pocket cost, is there a time best time or a specific time in the processing and underwriting when the appraisal is ordered? And better yet, how long does it take to get the appraisal back?
D: I’m glad you brought up timing of the appraisal while we’re talking costs… The appraisal fee is actually the only closing cost associated with a mortgage that’s paid prior to closing. That is why usually wait until after the buyer’s home inspection to order it. The appraiser will go out to inspect the property and then turn in a very lengthy report that is done in a format to match the guidelines of the loan program being used. It takes a few days to a few weeks depending upon the availability of appraisers at that time. Typically, we expect it within 1 ½ to 2 weeks from the time we order it.
J: When can be a buyer be assured they are approved for the loan to purchase the home? When are they officially approved?
D: I would say when we have “clear to close.” However, we can give our buyer’s very good assurances if they have conditional loan approval and the list of conditions are short and very routine such as “proof of earnest money check clearing” and “credit refresh.” If the buyer has followed all the do’s and don’ts, there should be no surprises after that.
J: Let’s talk about the closing process. When can the buyer officially close on their home? What does that process look like including any required disclosures?
D: The closing date is set in the contract and it’s important for the buyer and lender to work diligently to manage to that date. Around the time we get clear to close from the underwriter, but not less than 3 days before closing, the Closing Disclosure will be sent to the buyer. It looks a lot like the Loan Estimate that I mentioned before, but instead it contains all the final numbers. The buyer will sign the final Closing Disclosure at the title company on closing day.
J: Lastly, let’s talk about the big elephant in the room the future of rising interest rates. How will this effect buyers who are on the fence?
D: Mortgage rates rise and fall cyclically. Home prices will continue to rise, however it’s better to buy a house today at a higher rate and refinance next year when rates drop, than to wait until next year and buy the same home with a higher price tag. Waiting is never the answer in real estate. When people say, “I should have bought last year,” I always say, “now is the second best time.” I had several people pre-approved last year who decided to wait and now the same houses they were looking at cost $55,000 more.
J: I have seen evidence of this too and it generally the buyers who have been waiting for the market to slow down or prices to drop. I do not see that happening anytime soon and why I hate to see buyers wait on the sidelines.
J: Denise thanks for taking your time to go through what I consider to be so many crucial aspects of the mortgage process. We hope this information guides and educates future homeowners so when they wind up as mortgage clients they are a few steps ahead of the game in terms of understanding of the mortgage process.
D: It was my pleasure!
If you are pondering buying a home in Texas, whether it be a year or so down the line, or are ready to embark on your home buying journey, consider reaching out to a well respected, educated and thorough loan officer to help you navigate the mortgage lending process. Denise Hosek with Annie Mac Mortgage is our recommendation and she can be reached by phone or email or if you are ready to move forward with your mortgage application you may do so online.