EVERYONE’S FEAR FACTOR: The greatest source of “worry” for most home buyers, whether they are “first-time” or “move-up”, is the uncertainty about financing: qualifying for and obtaining a home loan.
There is nothing secret about home financing, but there are a number of questions that need to be answered and a lot of information to be supplied as you pass through the process.
WHAT KIND OF LOANS ARE AVAILABLE?: Home loans have traditionally been available in a number of different variations. However, many of these have been discontinued because of the abuses that occurred in home lending in the middle of the last decade. Gone, or at least difficult to get, are the “introductory” rate loan, and, in most cases, the “variable”. You may have heard of these in the past, but you will probably need to look at the old-fashioned “fixed” rate loan.
Fundamental loan types are these:
- F.H.A. (Federal Housing Administration) – generally 3.5% down, 1.5% origination
- Conventional – generally 5% minimum down, 1.0% to 2.0% origination
F.H.A. loans contain in-built mortgage insurance, Conventional loans in which the value of the loan exceeds 80% of home value carry Private Mortgage Insurance for which you pay.
BIG PICTURE, WHAT SHOULD I EXPECT?: In the 2010-2015 era, there will be some changes in terms and loan limits for obtaining these fixed rate loans, but the qualifications for their general structure will remain very much the same: verifiable employment, reasonable (though not perfect) credit scores, no excessive debt (credit cards, time payments), and a provable source of some amount of down payment.
Ryan Hoffman explains why its critical to select a good lender:
WHERE DO I GO? HOW DO I START?: The qualification process differs in details from lender to lender, but generally you will be asked to provide, at minimum, the items shown on the following list. It will save you time and confusion if you have these with you on your first visit to a lender.:
- Your Driver’s License
- Your Social Security Card
- Bank statements for the two most recent months
- Paycheck vouchers (“pay stubs”) for the two most recent pay periods
- A copy of I.R.S. Form 1040 and attachments for the two most recent years
Most lenders will require more data as you proceed with the process.
To find a lender with whom you are comfortable you may want to start with a loan officer at your bank or credit union. Comparison shopping is as necessary today as in times past, but there are fewer “gimicks and gimmies” than there were then. If you want another loan source, there remain a few “loan brokers” with independent investors, but unless they can demonstrate that they are what is called a “direct lender”, there is a strong possibility that a seller, reviewing the letter confirming your being “pre-qualified”, may require you to apply with a lender of the seller’s choice as well.
HOW IS THE AMOUNT I QUALIFY FOR DETERMINED?: There are many formulas and not two lenders are exactly the same.
- The general rules for F.H.A. require that the total of your monthly expenses (including installment debt) plus the estimated future monthly cost of Principal, Interest, Taxes and Insurance (you’ll here it called P-I-T-I) cannot exceed 50%-53% of your gross (pre-tax) income.
- The general rules for Conventional loans is that the same costs not exceed 45%-49% of your gross income.
The total of housing-plus-other expenses is called the “back-end ratio”. With certain lenders there is a possibility of obtaining a higher bank-end-ratio loan than the percentages shown above; interest rates may be higher, however..
HOW DO I KNOW WHAT I’M GETTING AND WHAT I’M BEING CHARGED?: Both state and federal law require lenders to provide you with detailed, pre-commitment estimates of what the cost will be for all serviced connected with the loan together with the estimated amount of the monthly payment to be made. This estimate, or disclosure, must be in writing and signed by a representative of the lending institution. If you do not understand any aspect of the process of the documents, ask, ask, ask questions!
VIDEO ON WHAT TO EXPECT AT CLOSING
A good source of information, advice and, perhaps even of referring you to a known and trusted lender, it your licensed real estate professional.