Have you ever looked for information about buying a home on a real estate site? Now for fun, look up the same information or guide on a financial site or mortgage site. Sometimes each industry might emphasize their selection of a local real estate or mortgage professional as a beginning step depending on which site you are on. For most of us, mortgages will be major factor in our home ownership, so let’s start there.
This is like the “chicken and the egg” idiom. For most of us, financing is a necessity and perhaps why you are here reading this. If that is the case and you are unable to obtain financing or mortgage, it does not matter the home you desire. Mortgage professionals need real estate and real estate pros need great mortgage service. This is a battle for your attention because of the potential or possible influences either industry might have if you commit to them first. Call the real estate agent first and they will tell you that you will need to get pre-approved prior to looking at the first home. Why? Because unless you have the money to close the real estate transaction, this will end up in heartache and frustration for you as well as wasted time for your agent. Real estate professionals know that it is very taboo to present offers without any preparation for financing. Many agents have either an affinity arrangement with an inhouse lender OR have very good, independent mortgage professionals to serve you as well.
Let’s try the other way now. Research and commit to the loan and lender first, then seek the real estate agent and home. Why? Numbers and costs are NOT emotional at all. There are not hardwood floors and A+ schools in mortgage numbers. This is the best place to start to set your realistic goals for housing expense and closing prior to becoming emotionally attached to a specific home.
A great example or comparison is how you buy a car from a car dealer, currently. You go in and discuss needs and are shown vehicles that match your emotional needs. It is only after you have selected the car itself, (like a puppy), that the financing is discussed and agreed upon. Why is this effective? Because you are emotionally attached to that car. That emotional choice weighs heavily against a battle of logic. Now, go into the same dealer with financing or a check for a specific budget and the dealer will gladly sell you a car that fits that need. The main difference will be that you will not be shown cars that do not qualify for your request because it is not a match. This simple decision can help avoid a lot of buyer anxiety. I used to ask my clients one simple question: “At what monthly payment will you reach for an air sick bag?” They told me a monthly payment not to exceed and I converted it into the mortgage dollar amount for them. Then I advised them if they qualified for more and many of them would chuckle about how much more money they could borrow; however, now they were ready to make a fully educated decision about an emotional purchase. Knowledge is power.
Homebuying is an emotional decision. As much as we all want to treat it like a business transaction, it really is not. This is where we raise our families and make friends. Not falling in love with a home you will not purchase or be able to purchase will save you a lot of time, money, and grief.
30 years is a LONG time and life has many hurdles and challenges. Strapping yourself to a maximum mortgage payment for the next 30 years may be the correct decision for you; however, many of my CONVENTIONAL clients qualify for a much higher payment than they can stomach. This is a great thing as they usually start with a maximum payment in mind and back into the home price they wish to purchase. Think of how smart this really is. “I only want to see homes for $300,000 in this neighborhood. Who would not fall in love with a $450,000 home and its “bling” versus a $300,000 home. Then, the reality and sacrifice of paying for it sets in….
Numbers never lie. Math itself is very easy to help give a general payment expense for your mortgage payment (exclusive of Association dues for condominiums or homes located in a PUD, Planned Unit Development where dues are required.
Here’s a quick shortcut (like we use on our keyboards or phones everyday): Use the following numbers listed below and multiply them by the mortgage size you are thinking of (except remove the thousands)
For our example: $350,000 Price with and $300,000 mortgage. The mortgage payment will be very close to this figure:
30-year loan: 7.5 X $300 = $2,250 Here’s the math behind the shortcut: 30-year loan: $300,000 @5% = $1,610.88, hazard $175, taxes $400 and mortgage insurance $75 = $2,260.88…. pretty close… 😊
20-year loan 8.5 X $300 = $2,550 20-year loan: $300,000 @4.75% = $1,938.67, hazard $175, taxes $400 and mortgage insurance $47.50 = $2561.17…. pretty close… 😊
15-year loan 9.7 X $300 = $2,910 15-year loan: $300,000 @4.75% = $2,294.98, hazard $175, taxes $400 and mortgage insurance $47.50 = $2,917.48…. pretty close… 😊
Summing it up, you can start looking around and no matter the area of interest, you will have a quick figure in your head that helps your math conscience help guide you. If you love that $450,000 home and have a $50,000 down payment, prepare for a $3,000 +/- a few dollars on a 30-year mortgage and so on. Knowledge is power, and preparation leads to separation.
Mortgage qualification is worked almost backwards. Remember, most people already have debts, obligations, and income. The missing part is the mortgage. Depending on your current monthly obligations at the time of application or more importantly, the closing, will determine your maximum housing payment. With that said, let’s simplify mortgage jargon to real life.
The normal maximum debt ratio for all credit debts (housing cars, credit cards, etc.) is 45%. Yes, this ratio can stretch to 50% in some cases; however, can you?? Remember, debt ratio is determined from your gross income. The last time I checked, there were a lot of items taken from my gross pay before I got my check. Keep that in mind for your own protection. Remember, at best we bring home about 80% of the gross pay and we all pay bills with our net dollars or take-home pay and not the gross. Also, much of our normal expenses are not part of a debt ratio. Utilities, cable, and cell phone bills are not part of debt ratio; however, they are bills we pay each month along with feeding and clothing our families. Staying with the math. Let’s use an annual income of $100,000.
$100,000 is the annual income. Monthly income is $8333.33. A maximum debt ratio of 45% would be $3,750/month and $8,333.33 * 45% = $3,750. So, a quick shortcut of your annual income is to use 3.75 X the annual salary (do not use the thousands). 3.75 X 100 = $3,750 😊
Now subtract the car and minimum credit card payments. We will use $500 for the car and $250 for the card payments. $3,750 - $500 (car) and $250 (credit cards) = $3,000 maximum house payment. Remember, we had our quick shortcuts for housing as well and on a 30-year mortgage, it would be about a $400,000 mortgage, $353,000 20-year mortgage and a $309,000 mortgage for a 15-year loan for the same $3,000 payment. So, you can see that housing payments is really “backed into” and the days of having two ratios (housing and overall debt ratios) are really outdated.
Let’s face it, credit scores availability are like ABS brakes. What used to be a mystery and luxury to some is now readily available to all of us, for FREE. Most major credit card companies and banks offer this service to its clients weekly or monthly for free. I know of three monitors I have on me with my bank and Costco CITI Visa for example.
There are some great services, free and subscription-based that can provide you the data, peace of mind, and/or game-plan you need. Credit scores are like thermometers or snapshots at the time of the inquiry; however, there is no mystery as to how a person’s credit-worthiness is calculated. Without any services or commercials during the Super Bowl, most of us know whether we pay or paid our credit obligations in a timely manner. You don’t need to have lenders pull credit to find out your score. KNOW IT BEFORE YOU EVEN APPLY FOR IT. 😊 You can even get all three reports annually for free (without scores) at www.annualcreditreport.com
Credit costs or “buckets” as they are loosely called in the credit world are priced in 20-point sections. This is what is called an LLPA, (LOAN LEVEL PRICING ADJUSTMENTS) for CONVENTIONAL, FIXED RATE LOANS. This is the “cost” differential in points for each score and each loan-to-value for loans greater than a 15-year term.
Example: A $200,000 loan with a 10% down payment for a borrower with a 625 score will cost 3% higher in costs or points to maintain the same rate versus a person with a 740 score. This would equate to a one-time $6,000 expense for a lower-scored applicant.
Most people do not have or will not pay the pricing penalty and convert the rate to absorb the points. For the same example above, it would equate to rate differential of about .75% which either raises your monthly payment about $90.
You can see that anything above 700 and especially 720 is very similarly priced. The 760 and above score bucket plays a role in the price of private mortgage insurance or PMI and some lenders will have modest pricing specials for credit scores from 740-760 and above. These specials may remove .250 in pricing, but it’s nice to be rewarded with lower pricing or costs simply because you live and lived up to your obligations.
The FICO Score buckets apply to loans longer than 15 years. So, if your score is low and wish to avoid a penalty for the score itself, there are two tricks or solutions:
You may or may not have to compromise on house and mortgage size (shortcuts shown above); however, there are many reasons a 15-year loan is a great option for borrowers and credit score pricing is just one of them.
The big difference in getting pre-approved versus pre-qualified is simple; A pre-approval is when your credit, income and assets have all been verified by and underwriter, not a loan officer. The main reason I stress this is that making a commitment to a lender upfront will remove or complete your portion of the mortgage commitment and then the only thing left will be the collateral (your home).
For Conventional borrowers, (and for most borrowers in general), a computer approval or AUS (Automated Underwriting System) is utilized for a 100% of the approvals. The most popular AUS is DU® (Desktop Underwriter from Fannie Mae) will decide from the information you provide. A residential loan application, 1003, is comprised of a 2-year history of residency, a 2-year history of income or jobs and a 2-month history of the assets or bank accounts used for the mortgage. A simple way to remember this or document this for your lender is 2/2/2/2
Once the information is input into DU, literally your approval will come back within seconds. If the information is correct and can be verified or validated as it is called in the mortgage industry, the DU decision is the approval. We can’t stress enough the accuracy of the information being paramount. GIGO, Garbage in Garbage Out, really is correct. A best practice is: provide your actual employment dates if you can and even if there is or was a gap between a job within the last two years, just let your loan officer know. In many or most conventional loans, it is not a deal-breaker; however, if this is an issue at all, you are better served dealing with it on day 1 versus the day of closing.
The good news is that some of the more advanced conventional lenders will verify your income, employment and assets without any documentation needed from you. This is great news and can make the pre-approval and mortgage commitment very quick and safer from identity theft. Knowing where your documentation is located is great preparation for you; however, before you provide, upload, or email your personal and “non-public” information, ask your lender if they have opted into FNMA’s DAY ONE CERTAINTY®. DAY ONE CERTAINTY is the utilization of third party verification for income, employment, and assets. The lender must opt in for this service and you would need to opt in to the service as well.
For income and employment, a service like THEWORKNUMBER® would obtain and provide verification of employment and income for example. Another verification service called Accountchek®, would basically ride your coattails into your banking institution and export the previous 60 days of activity and balances. This is safer than emailing your documentation or handing it to your loan officer or processor.
For one thing, there is no documentation that could be lost or printed, etc. These 3rd party verification services simply extract data and put it in a report-type format for DU®. Better yet, DU® reads the information and if DU® accepts the information provided, you would not be asked to explain any deposits or payments. Many underwriters over-condition loans, especially the assets, because they are human and review each deposit and payment by hand. So, a check each week for $100 on the same day may be considered a red flag requiring explanation to insure it is not an undisclosed debt. It may have simply been tithing to your church. These types of conditions can be very frustrating to borrowers.
Luckily, Accountchek® and DU® have some tolerances built in the report and programming and account omission or deletion is allowable. This is usually not the case with human underwriting and sometimes would require a new lender and application to edit the assets or accounts disclosed. The best way to describe this is going the TSA or security check at the airport. Accountchek® is like the scanner that the luggage goes through on the conveyor belt. Sometimes there is a need to stop a suitcase and check its contents in more detail; however, most of the baggage is kept intact.
Conversely, bank statements and documentation in general, has been humanly viewed and scrutinized. Try traveling efficiently where every piece of luggage is opened, and everything is reviewed by hand and re-packed. Now, couple that delay with individual pat-downs on every passenger. Bottom line: technology is a great, safe, and efficient screening method. It does not replace humans and underwriters in general. It does empower them to potentially serve more clients efficiently and make a better borrowing and buying experience for you.
In a perfect mortgage transaction, there would not be a single piece of paper you would sign, and you would not have to provide any documentation. All your information would be verified. This is like flying after enrolling with CLEAR®, which is the biometric secure identity platform that allows passengers to bypass the lengthy TSA lines. We know it is possible for more daily; however, with new thoughts come older habits. Those older habits in the mortgage business are your documents. If prompted to supply your paystubs, W2 forms, bank statements and/or tax returns, we urge you to control those documents on your end by setting up a Google Drive or Dropbox account and allowing your loan officer or processor access to the requested documentation and then simply removing the access if desired. Some systems where you apply for the mortgage may have a secured portal to upload the documents as well. Emailing is convenient; however, most personal email systems are not secured, and this is about protecting your identity, so that should be the last resort.
Another identity tip: create an account for yourself with the IRS, Internal Revenue Service. The IRS is quite amazing as to how they can insure it is you. The setup process is simple, fast yet thorough. Once established, you have complete access to all your tax records and transcripts. Furthermore, when you log in, you see who last requested your information and when. It is fascinating and by having access to your own tax records, there is no reason for your transcript requests being delayed would ever affect your closing. Knowledge is power.
This is an old saying; however, it really does have some merit. Location is important because this is where we are going to live. This is our public-school systems and even proximity to private schooling, churches, and grocery stores, etc. Luckily there is so much data out there as well as friends and family that can give you advice. Real estate sites can give you current price per square foot along with public school grades along with pricing trends and direction over previous years. Why is this important? It’s important for several reasons; however, most of us will eventually sell our home and considering the investment value of a home is part of the home selection process.
A drawback for many of us is simply learning to compromise on our wants versus our needs. If you have a large family and space or square footage is the priority, you might compromise on the desired location to accommodate for the space needs. This is where research and selecting a professional real estate agent that is familiar and “farms” the area. Real estate and personal real estate knowledge is local. How can an agent living 30 miles from your desired area really have any “personal” knowledge of it? Usually they don’t. Conversely, utilizing an agent that farms your neighborhoods of interest will want to have a personal tour guide. They know the local hangouts, schools, shopping, and churches. Remember, you are buying a home, not a house. There is a big difference.
So, you now have a general proximity of area or neighborhood you want to call home. Now you are ready for an agent. Sure, you can use any licensed agent to complete a real estate contract. We all have friends and family in the business. Real estate professionals that specialize and farm your neighborhood are the experts of that neighborhood. They know more than just what is listed on Zillow and Realtor.com. They know the people. They know the sellers and the other agents involved. Relationships matter and they have great value. Strongly consider researching and selecting a real estate professional specializing in your housing needs. It just may be the best decision you make.
With so much information online, researching any home is quite easy. Remember, you picked a certain area or neighborhood and is listed in the county property appraiser records. You will be able to see the ownership chain, year built, construction type, current tax bill, and even permits pulled. This information is very important to help you make an educated decision and offer. A great example is homes built in the 1980’s – 1990’s may have polybutylene plumbing pipes. If so, it would be comforting to know that the plumbing is not polybutylene or that there was a permit for the replacement of the pipes. This is more about the insurance and re-pipe costs if the current plumbing is polybutylene. It’s a minor inconvenience to re-pipe a home; however, it’s better to make an informed decision prior to making an offer. Your real estate professional will have opinions and stories to tell about polybutylene piping and contractual negotiations.
Is the property in a HOA, Home Owners Association? If so, what are the dues? Are they mandatory? Are there restrictions in the neighborhood? Are those restrictions deal-breakers? If so, it is much better to eliminate prior to falling in love with a particular home.
Wow! You are ready to make an offer. You are hopefully happily pre-approved for your mortgage and simply need your dream home address to complete the circle. You have decided upon the neighborhood and hired a great and knowledgeable agent and after getting a great game-plan together, you submit your offer. Sellers always convert offers and the terms to their net proceeds. Consider your offer and your needs. Do you need your settlement or closing costs to be paid by the Seller?
Most sellers appreciate and many times, require, a pre-approval letter from your lender. As you can see from the chronology we listed, financing or money to purchase your home is the most important step. It is not the most emotional step which is why there is always battle for your attention.
Perhaps cash to close is a non-negotiable for you. As you formulate your offer and game plan with your agent, they will advise you as to how the climate is for that home or seller; however, in the end, it will be your decision. A good example of this is a $300,000 list price and you offer $295,000 and request the seller to contribute $5,000 towards your closing costs. To a seller this is $295,000 - $5,000 or $290,000. If the seller has a figure of $295,000 in their mind, adjustments would need to be made; however, if you need the closing costs paid as a non-negotiable, the final accepted offer might be $300,000 with a $5,000 seller contribution. This nets the seller their desired $295,000 ($300,000 - $5,000) and you get your needed contribution. In your offer and contract, it will reflect the proposed mortgage amount you applied for as well as other clauses about inspection(s).
Most real estate contracts have inspection periods. Obtaining a 4 or 5-point inspection prior to the appraisal will be helpful on two main fronts: This will solidify and answer any questions associated with your homeowner insurance quote and can either comfort you or alert you to something serious that needs attention or re-negotiation prior to appraising the home for value. Why spend $500 appraising a home you are not going to buy? The cost of the inspection is several hundred dollars; however, it usually pays for itself in your insurance premiums within the first year. An inspector will usually catch the presence of polybutylene piping in his/her report. That usually will stop or pause the transaction because of the ripple effect it has on either the insurance premiums and/or coverage changes. If a seller becomes aware of this issue usually there is a remedy worked out, so do not fret. Most major issues pointed out in an inspection are handled.
Appraisals were once a critical part of the Conventional loan and scrutinized by underwriters. It is still important; however, online data is so prevalent today, that FNMA can offer appraisal waivers on qualifying homes and transactions. What does this mean to you? Once the address is run through DU®, the collateral or property finding, or decision/condition will be clearly defined. If the appraisal requirement is waived, you can save approximately $500 and time OR at your request and payment, you can still decide to have the home appraised. It is your decision; however, FNMA will not issue waivers on over-priced or unsupported homes. Technology is really changing the CONVENTIONAL mortgage market to better serve you effectively and efficiently.
Binding homeowner’s insurance is required to obtain your final mortgage approval and allow the lender to release closing documents. You already possess the inspection report and shared it with your current or proposed agent and now it is simply completing the insurance carrier’s application to complete the conversion of the quote to a binding policy. You do not pay for your policy at that time. You just need to get it bound and obtain the invoice so that the final closing numbers will be accurate. For a 30-day real estate transaction, binding insurance by the 10th – 14th day will give your lender plenty of time to handle the final preparations of your mortgage.
The days of not being informed in a timely manner are long gone. That is one of the better byproducts from the mortgage meltdown over a decade ago. You will receive a CD (Closing Disclosure) at least three days prior to closing. The figures will be extremely accurate and many of the costs reflected on the CD have zero tolerance (meaning they are not allowed to change them without a valid change of circumstances and re-disclosure). The lender will also finalize figures with the title or closing agent. The final exact dollar amount and wire instructions for settlement will come directly from the closing agent
Although your awesome real estate professional will have an itemized list of local utilities, it is best that within a week of closing, you notify the major utilities, (power, water, gas, cable, satellite, internet) of your closing date and complete any necessary application(s) and/or deposits with them to insure that the day of closing, your new home has lights and water at least. With good communication from the agents, you will be told the date the seller will terminate the utilities in their name. Regardless of that knowledge, we all want our creature comforts. Electricity powers those comforts. Don’t forget the lights!
The title, settlement agent or attorney will finalize figures and confirm specific wire instructions for your funds required to close. For security and protection reasons, wiring directly is the safest and most efficient way to transfer funds and make them available on the settlement date. Cashier’s Checks and Certified Funds are not usually acceptable anymore for two reasons:
1) some counterfeiting of cashier’s checks has happened due to such great copier quality and 2) Checks, certified or cashier’s, are not always recognized as available immediately.
You will be advised of this early in the process by your mortgage professional as an expectation and reiterated again by your real estate professional. For our clients, we introduce the parties and the expectations of each and allow them to do their jobs respectfully. Title agents do not even want a mortgage lender or a real estate professional to send wire instructions on their behalf. They want a direct connection with each party so that the funds are transferred and received safely. Title agents give lenders wire instructions as well for the mortgage proceeds. That is what they do. They “settle” the transactions, real estate, and mortgage. It is best to get the information and instruction from them and only them.
The settlement agent will contact you usually at least a day before closing to confirm the wire instructions and final figure for the wire itself. Wiring funds, the afternoon prior to closing and confirming receipt avoids last minute scrambling on the day of closing and the uncomfortable waiting for funds to clear the wire. Wiring money takes a couple of hours from transmission to receipt. The day of closing belongs to you, the buyer, so it is a relief to be fully educated and fully prepared on the day of closing.
The day of closing should not have any unpleasant surprises. You have already seen the final figures and posed any questions pertaining to the mortgage. Now, it is time to finalize the sale and transfer ownership. Many sellers do not attend the closing. They execute or sign their few documents and give the title company their wire instructions for their proceeds, if any. One of the main things you might need from the day of closing is the fully executed CD with Buyers and Sellers. Your Deed will take some time to get officially recorded; however, the CD will serve the same purpose for some utilities such as county water as well as proof of residency for public school enrollment.