Interested in buying a home but don’t know where to start? This is not uncommon. There is one simple answer – and it might surprise most. The search for a new home does not begin with a REALTOR®. Rather it begins with a mortgage lender. Let’s discuss some of the things a homebuyer needs to discuss with a mortgage lender.
Know the Score – One of the first things a mortgage lenders needs to know is the credit score of the borrower. The higher the score the easier it is to borrow money. A credit score is really the report card on how a specific person paid bills in the past. Missing a credit card payment, being late to pay a cell phone bill, giving the landlord the rent a few days late or neglecting to make a car payment all detract from a credit score. Establish a pattern to pay bills on a certain day of the month and stick with it. That one strategy alone can give anyone a favorable credit score.
Get The Records – In addition to a credit score, a lender wants to see the 2010 and 2011 federal and state income tax returns. These document income over the past few years. Gather the last three months of bank statements that show both deposits and withdrawals from checking and savings. Provide the most recent statements on all types of loans that show the unpaid balance and the amount of remaining credit. Having these handy is a great start to shortening the pre-approval process.
Ball Park Estimating – Most lenders use a 29/41 ratio for mortgage pre-approval. They want to keep the current recurring debt to within 29 percent of the monthly income. As an example, if monthly income is $1000, then anyone with $290 or fewer dollars in recurring debt can probably expect pre-approval. Lenders also use another ratio. They want the total recurring debt plus the house payment to not exceed 41 percent of the household income. In this example, if recurring debt is $290, then the house payment cannot exceed $120. A house payment of $120 plus recurring debt of $290 is $410 of monthly bills in a $1000 a month income household. That is the reason for the emphasis on reducing current debt. Assume that in this house the recurring debt was just $100. That means the mortgage payment could be as high as $310.
Maximum versus Affordability Scale – A lender tells a borrower the financial limit on a home purchase. If the lender will write a mortgage for a $250,000 home, that does not mean the borrower has to find a $250,000 home. It just means he cannot exceed that amount. He can limit the purchase to $100,000. Many buyers do just that. That makes great financial sense.
Comparison Shop – While multiple lenders may quote an identical 30-year fixed-rate mortgage interest rate, the wise borrower takes it a step further. They find subtle difference in the fees that lenders charge for the transaction. Sometimes these difference can add (or save) thousands of dollars. To help borrowers make an “apples to apples” comparison, the federal government now mandates that home lenders provide a “Good Faith Estimate” that is normally within just a few pennies of the actual payment.
Don’t Change A Thing – Mortgage pre-approval is not mortgage approval. The main difference is that the pre-approval considers the financial past and present without regard to a specific address. Lenders reserve the approval process until they are ready to approve the loan. Approval normally comes hours before the closing. The closing ends the transaction with the legal transfer of ownership. Once the buyer legally owns the property, he pledges the property as collateral to secure the loan. To make sure nothing ruins the transaction, continue to pay bills on time. Don’t change jobs. Don’t take on any new debt.
On The Clock – Mortgage pre-approval has a time limit. It varies among lenders. Don’t delay in finding an acceptable house. Ask about the validity period. Then take action. Contact your REALTOR® to find the best properties in the best locations that bring the best value within that time frame.
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Andy Kalinowski is a REALTOR® and an Accredited Buyer’s Representative® with CENTURY 21 Doris Hardy and Associates, LLC in Columbus, Mississippi. He is also a member of the National Association of Realtors®. Contact him by cell (or text) phone – 662.549.3421 or by e-mail – andyk@dorishardy.com. He is also available for web video chat.
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