If you’re getting ready to buy a house in the Charlottesville area in 2016, most buyers will need to get a mortgage. I asked Matt Hodges with Presidential Mortgage to put together a primer for buyers – first timers and experienced buyers. Matt has outlined the mortgage process quite well:
There are dozens of my clients who started the mortgage process in 2015, but for a variety of reasons, they aren’t ready to buy yet and have targeted 2016. Their reasons are myriad – the simplest of them is their current lease expiration. It’s a financial hardship for many to have overlapping mortgage and rent payments due. Others need to save for a down payment or pay down some debt or allow time to elapse since late payments on their credit report, in order to have improved scores. I give each of these clients individualized advice, which speaks to their specific situation. Here I’ll try to give anyone looking to buy in 2016 advice so that they too can be ready.
Local Lenders Matter
The first and hopefully most obvious piece of advice is to talk to a local mortgage loan officer. Whether it’s me or one of my local colleagues or friends, buyers will get the best information and options. We are invested in this community and understand the needs of commitment and close dates. A local loan officer will collect enough data to complete a loan application.
Depending on the client’s responses to the loan application questions, the loan officer will pull a credit report, which is generally good for 90-120 days (credit report pull through closing date), depending on the program and the lender. One client might need a baseline report pulled, if he or she is unsure what their report contains, while another might be quite sure of their credit scores and reporting, since they monitor their credit history. It is allowable to charge the client for a credit report before loan application, though individual companies have internal policies about this – our company does not charge until the closing.
The next step is pre-qualification. A pre-qualification is the written opinion of a loan officer after the loan application data has been inputted, a credit report has been accessed and automated underwriting has been run. That last step is run though GUS – Guaranteed Underwriting System through USDA, DU – Desktop Underwriter through Fannie Mae or LP – Loan Prospector through Freddie Mac. Those systems assess risk, based on credit and the accuracy of the loan application responses.
A pre-qualification is GIGO – Garbage In, Garbage Out. So, let’s make sure that the pre-qualification we present to a Realtor is accurate. We ensure accuracy by collecting income and asset documents. If you are self-employed, you will be scrutinized. Fair or not, lenders, due to investor requirements, use net profit from a self-employed, yet we allow gross income from a W-2 employee. So, we request 1040s, 1065 partnership returns and 1120S corporation returns.
The Consumer Financial Protection Bureau does not allow loan officers to require collection of those documents for pre-qualification – only after six data points are collected, constituting a loan application. Nonetheless, loan officers can request them and it is often in your best interest to provide. I have a client who did not provide me her 1040s until after ratification of her purchase contract. She also misunderstood her self-employment income and had not filed until the late October 15th deadline this year. Both her lower income, as well as the delay in filing, have caused underwriting challenges. (Jim’s note: having a local lender who understands these challenges and adapts as necessary – without freaking out – is critical)
During the pre-qualification step, the loan officer will verbally provide an upper limit for the buyer’s price range and/or monthly payment. Since Fannie Mae, Freddie Mac and Ginnie Mae may provide an automated approval for a dollar figure much higher than you feel comfortable with, a good loan officer will talk to the buyer about his/her current mortgage or rent payment and compare to his/her proposed new one. This will be based on loan program, down payment, fixed or adjustable and your credit profile.
Every loan officer I know wants you to be comfortable with their buyer’s decisions. (Jim’s note: some lenders do not give this type of counseling; they tend to give the cap for which the buyer can qualify, but don’t factor in other data points such as food, gas, vacations, etc.)
Closing Costs and Pre-Paids
Next, every loan product has closing costs and pre-paid items.
Closing costs are one-time occurrences, like the appraisal, tax stamps when recording your documents and settlement agent fee. Pre-paids are items that recur every month, like escrows for insurance and taxes. Buyers might need a down payment, which they have saved for or received a gift, but often don’t have an accurate way of calculating total cash to close or have the ability to pay that in addition to the down payment. A good loan officer will assist the buyer with understanding the closing costs as well as seeking options on how to get them paid – through lender premium pricing (higher interest rate trading off for lender paying them), or seller paid closing costs. Every loan program has different rules on how much the seller can pay, typically expressed as a percentage of the sales price.
Avoid Easy Mistakes
Finally, the buyer has come so far, but can be derailed after pre-qualification, so listen to your loan officer’s (and your Realtor’s) advice.
- Don’t make major purchases (ie: car, washing machine, refrigerator) on credit or with cash, if that depletes reserves until after closing or after discussing with your officer.
- Don’t make changes to your employment, unless you discuss with your loan officer.
- Don’t apply for new credit cards
- There are a variety of more “don’ts” and they are fairly obvious. The key here is talk to your loan officer about any significant changes you would like to make first.
- If you get married during the transaction, please let everyone know!
Now, I need to reach out to my 2016 clients to review their specific situations. Call or email me if you would like this same service.