Pre-approval pt 1. The loan consultation, a clear Mortgage Ready Plan.
When you embark on the path to home ownership, it's hard to know how, or where to get started. As part of the mortgage education process, we always recommend starting with a Lender. A realtor won't show you houses until you have your pre-approval letter in hand and you've got see a lender anyway in order to get pre-approved.
In our subsequent post, "How much can you afford?" we discuss how a loan officer arrives at the amount of monthly mortgage you can afford and the determining factors used for them to arrive at that conclusion. In this post we'll walk you through the loan consultation and what that entails.
When you start your home purchase journey, it's important to develop what we term a Mortgage Ready Plan. That's to help you define your situation and your financial readiness in order to put you into the best position to buy a home. Once you submit your documents and information for a loan officer to see if your pre-approved, they should schedule the loan consultation.
A good loan consultation will cover 4 distinct areas.
Cash to Close
Any any questions you may have at that time
QUALIFYING FOR A MORTGAGE
We'll take a look at 3 basic criteria to start. Your, Credit Score, Income and Debt
CREDIT SCORE (FICO)
In short your FICO credit score informs the loan officer of your interest rate. The higher score, the lower the rate. Keep in mind that's it not the rate so much as it is the mortgage payment that is important. The mortgage payment will tell you how much house you can afford. In other words, date the rate, marry the mortgage.
Your income influences the loan amount. It doesn't matter how much income you make if your debts are high, which brings us to...
Your debt in relation to your income is what we term your Debt-to-Income Ratio (DTI). The DTI directly affects the amount of monthly mortgage you can be approved for.
Once your Loan Officer arrives at their determination, they'll discuss that with you and give you a price range of homes to shop in that match your budget. This will cover your monthly payment and sales price.
More importantly so you gain a thorough understanding, they should also cover, the Cash to Close.
Cash to Close
One of the common refrains we hear from first time homebuyers in forums and groups is where a borrower is two weeks from closing and they are struggling to come up with $12,000, $18,000 or whatever the case may be to come up with the cash to close to purchase their home.
Many times they decry, "Can't they take that out of my down payment?". No, the truth is they can't. The cash is close is comprised of the 3 components and all of them must be met in order to close your loan.
In short the Closing Costs + the Prepaids + the Deposit = CASH TO CLOSE
The question becomes, "What's the difference between Closing Costs & Prepaids?" Let's take a look.
Homeowners insurance (premium)
Homeowners insurance (escrow)
Title Fees & Title Insurance (lenders)
Property Taxes (escrow)
Prepaid Mortgage Interest
Underwriting Fee/Loan Origination Fee
HOA Dues (escrow) - If applicable
Government taxes/Recording Fee
Prepaids are the upfront cash payments you make at closing for certain mortgage expenses before they’re actually due. These expenses are among the monthly costs of homeownership. Your lender will deposit these funds in an escrow account, and they will used to pay those bills by the loan servicer when they’re due.
Closing costs are different from prepaids, in that these expenses are what you have to pay upfront to other parties such as your lender and other third parties for administering and processing the loan.
So at the end of the day, it takes the prepaids + the closing costs to equal the estimated total closing costs. The Total Closing Costs + your Deposit are what makes the Total Cash to Close.
Your loan officer can also discuss, your options in regards to ensuring that your closing costs are covered. As a borrower there a several strategies available to you all designed to help you buy a home. Whether it's down payment assistance or other avenues for covering closing costs, those should also be talked about during your loan consultation.
MORTGAGE READY PLAN
After your consultation, you should have a good idea of where you stand in order to buy a house. Maybe you're ready to go now, receive your pre-approval letter and find a realtor to start viewing houses. Maybe you need to improve your credit rating, save more money for a bigger deposit or closing costs, pay off some debt. Whatever the case may be, be sure to put a Mortgage Ready Plan together with your loan officer. Be it a 30-6-90 day plan or long term 60-120-180 day plan. At the end of the day you should have a clear understanding of the path forward and how much home you can afford.
A good loan officer will develop one with you and schedule check-ins with you at regular intervals doing all they can to ensure your path to home ownership.