So, you want to buy a property and you are going to need some financing? Before you go out running to pick your new home, start by taking a few important steps to ensure that your dream purchase becomes a reality. You certainly do not want to go through the heart-braking experience of falling in love with a new place only to find out later that you cannot afford it! Not only should you understand how much you can spend on your new acquisition, but also include other housing costs such as Homeowner Association fees, taxes, closing costs, insurance and other costs added to the mortgage payment. This is why learning about loans and financing requirements should be your starting point. Education and the following guidelines will prepare you to deal with the obstacle course that is getting a mortgage and will point you in the right direction, saving you stress, money and time.
Step 1: CHECK YOUR CREDIT
Review your full Credit Report including score and history to check for errors. If you find any mistakes, dispute them. Starting early with this step is vital because credit bureaus take at least 60 days to respond to a dispute and most lenders will require an undisputed record of credit when reviewing an application. As you can imagine, lenders will examine your complete Credit Report to understand your financial situation, how you manage your obligations and to see if you have any delinquencies. If your credit score is lower than 680, see if there are any easy actions you can take to improve it. Also, a major factor considered by lenders is the DEBT-to-INCOME ratio, which is the percentage of total debts or obligations you have to pay out of your total income. By dividing all your liabilities by your gross monthly income, lenders will assess your ability to repay the loan. Currently, in order to qualify for a loan, the rule of thumb is that your DEBT-to-INCOME ratio should be lower than 43%, ideally below 36%. You could still qualify with a higher percentage but other factors such as assets would have to justify the risk to the lender.
Step 2: GATHER YOUR DOCUMENTS
You will need all of your documents including proof of employment/Self-employment, 3-month bank statements, 2-month pay-stubs, investment income reports, place of residence, credit report, gift letters, rental lease agreements with 12 months of cancelled checks to landlord, divorce decree if any, and 2-year tax returns. There are also 2 vital points that you will like to keep in check just before and during the application process: 1) Do not take any action that can hurt your credit score such as applying for new credit or making major purchases. 2) Make sure your Down Payment & Closing Cost money has been sitting in your bank account for at least two months.
Step 3: LOOK FOR A LENDER & GET PRE-APPROVED
With your documents in hand, you are ready to look for a Direct Lender or a Mortgage Broker. Brokers differ from Direct Lenders in that Brokers are intermediaries who have more options with many lenders to choose from. This means that Brokers can shop many lenders and have access to several different types of loans. When shopping for a lender, review costs including application fees, loan term, interest rates (APR), broker fees, points (every point equals 1% of the borrowed amount) and prepayment penalties. It is important to note that once you apply for a loan, your lender is required by law to provide you with a Good Faith Estimate (GFE) of the closing costs within 3 days of applying. The GFE is not an obligation to take the mortgage; it gives you the chance to compare offers and understand the real cost of taking the loan.
Once you select a lender, it will be very important to get Pre-approved and NOT Pre-qualified as there is a big difference between these two. Only a quick minor look at your credit and financial situation is required to Pre-qualify you (it doesnâ€™t really mean much); whereas getting Pre-approved means providing full documentation and going through a longer detailed verification processâ€¦the real deal! Taking the shortcut with a Pre-qualification may backfire later and become your worst nightmare when you realize that you do not qualify for the loan you want or need. Plus, in todayâ€™s market largely dominated by Cash deals here in Florida, many Sellers will require a Pre-approval Letter when you submit an offer to buy through financing.
Early loan approval is key to the process. By securing the loan before falling in love with a property, you will eliminate some anxiety from the transaction, save a great deal of time and effort, and prevent possible heartbreak. There will be a much better probability that you can buy what you intend to buy when you are Pre-approved. You will concentrate on homes that are in your price range and not waste your time looking at properties that are unattainable.
Step 4: BEGIN LOAN PROCESS
After completing a mortgage application with a Loan Officer, supplying all the required documentation, going over all the fees and receiving the Good Faith Estimate, the loan goes to Processing. Between days 5-20 of the loan, a Processor reviews the borrowerâ€™s information such as credit report, payment history and debts. The Processor will make sure that the property is examined for any issues and also that several third party items such as an appraisal, survey, home inspection, homeownerâ€™s insurance & title insurance are ordered and all taken care of. After all these items are O.K., the Processor will put together an entire package that will go to Underwriting.
Approximately, between days 21 and 30, the Underwriter will review the borrowerâ€™s package and determine if ABSOLUTELY EVERYTHING is acceptable for the loan. Understand that Underwriters will not let any small details pass before signing off the loan, so it is very common for them to ask the borrower for additional documentationâ€¦expect this! This is why STEP#2 in this article is to start gathering early all your documents and being thorough with this process will definitely save you a lot of time and future headaches. If you are lazy with any supporting documentation from the start, the Underwriter will get you later, guaranteed!
Note that Mortgage Insurance and its Underwriting will be required for borrowers that put less than a 20% down payment. In that case, the loan is sent to a private mortgage guaranty insurer, who gives extra insurance to the lender in case of default. As above, if more information is needed the loan will be delayed.
Once everything is looking good with the Underwriter, the borrower will receive the Official Loan Commitment Letter, which states the official approval of the loan and specifies the final terms. Hopefully, between days 30-45, all approval contingencies will be met and it will be time to order the Title Insurance and schedule Closing. At Closing, the lender funds the loan via a cashier’s check, draft or wire to the seller in exchange for the propertyâ€™s title.
This is the conclusion to getting a mortgage and buying a place. Usually this Conventional Loan process ends up taking from 45 to 60 days. If you want to have a much smoother experience, plan well, get your credit in check, start early with all the documentation and get Pre-approved before falling for your dream home!
Adrian Morales Dobrzynski