Qualifying for a Real Estate Loan
Getting a home loan is an involved process, to say the least. But, the first step is finding a good mortgage broker or loan officer to walk you through the process. Even in today’s economy, there are still many loan officers to choose from and it may be difficult to sort through them on your own. If you’re having trouble finding one you like, contact me and I’d be happy to refer you to some loan officers who have been quite helpful for my clients.
U.S. Government Home Loan Info
Pre-qualification / Pre-approval
Unless you happen to be one of the lucky few who will buy with cash, the first step on the house-buying journey begins here. Pre-qualification and pre-approval are terms that are often used interchangeably, however they are different.
To be pre-qualified means you have talked with a lender, given them some information, but they have not verified your information. If you just want to go look at houses, pre-qualification is fine.
To be pre-approved means the lending officer has checked out the information you’ve given them. Pre-approval is stronger than pre-qualification, and to write a successful offer on a property, you’ll need a pre-approval letter from your lender.
This often happens after you’ve found the property you want to buy and need the money to do so. Your loan officer will walk you through the application. This can be done on the phone and through e-mail. The application is then sent to underwriting where it will undergo further review. In addition, an appraisal is ordered for the property you wish to buy and a loan amount will be determined. From the time the formal application is completed to the time you clear underwriting, you should expect about a month or so to have elapsed.
There are many different types of loans from which to choose, however the following types are the most common.
Conforming: The vast majority of loans are conforming, meaning they adhere to the standards set forth by Fannie Mae and Freddie Mac (the largest loan guarantors for lenders). For loans originating in 2010 in Lane County, the maximum amount for a conforming loan for a first mortgage, single-family residence is $417,000.
Jumbo: For loans greater than $417,000 (non-conforming), you will be looking at a jumbo loan. These differ from conforming loans in that they are not backed by Fannie Mae or Freddie Mac. Instead, they are guaranteed by Wall Street. So, even though applicants for jumbo loans often have superb credit worthiness, their interest rates are higher because of the increased investment risk involved with Wall Street. In terms of loan limits, these amounts vary annually, but you can check with your loan officer for the most current information.
FHA: Federal Housing Authority backed loans are becoming increasingly popular. You can have as little as 3.5% down (5% if your FICO score is below 580) and still obtain the loan. The maximum property value currently allowed for this type of loan in Lane County is $343,750. The Federal Housing Authority does not issue loans, but rather insures those made by private lenders. The borrower pays for this insurance.
With today’s ever-tightening money environment, one viable option is for the seller to serve as the bank. Most sellers can’t or won’t do this for a number of reasons, but on occasion it is a possibility. For instance, if the seller has a loan on the property there is usually a due-on-sale clause, which means the lender can call the loan once the property is sold. However, if the seller owns the property free and clear, this will work. And, the seller can be much more flexible than a traditional lender who has to comply with multiple regulations. Typically, seller financing is usually more expensive than a traditional loan.
RatesIt is difficult to predict the trend of interest rates during the best of times, and even more so now. However, it is my opinion that when the economies of the U.S. and the world pick up, interest rates may trend higher.
When we hear that the Fed has lowered (or raised) rates, it is usually because it’s headline news. Many people think that the interest rate for the typical home loan will vary by the same amount as the Fed change. This isn’t true. Fixed-rate mortgages closely follow the rates of the 10-Year Treasury Bill. The headline news of the Federal Reserve Board interest changes are actually to the Federal Discount Rate, which is the rate the government charges banks for very short-term loans.
Fixed or Variable Mortgage?
Fixed Rate Mortgages have payment amounts that are identical through the entire life of the loan. They are less risky to the home owner and can be secured for 15 or 30 years. If you’re flush with cash, you can always make additional payments to principal, however if you’re low on money, you can’t pay less on a monthly mortgage. Payments are less on a 30 year mortgage and can therefore give you a little more breathing room. A drawback is that over the life of the loan, you will pay more in interest than if you had a 15 year mortgage. Use this mortgage calculator to [see the difference].
Variable rate mortgages have an interest rate that can change, and often goes up. This means your payments go up. If your budget can’t take the added monthly increase, you could be in trouble. At the same time, if your rate goes down, you enjoy the ability to put some extra money away in savings for that rainy day.
Will I Qualify?
The two biggest factors in determining your ability to get a mortgage loan are your credit score and your Debt to Income Ratio, or DTI.
Debt to Income is a measure of your total obligations compared to your gross income. Banks look at this as a measure of your ability to repay a loan. Sometimes front-end and back-end DTI ratios are mentioned. The front-end ratio is how much of your income is consumed by your PITI (principal, interest, taxes and insurance). While there is no hard and fast rule, a front-end DTI of less than 33% is good. The back-end ratio is how much of your income is consumed by your total obligations, including your mortgage. Again, this isn’t set in stone but a back-end ratio of less than 50% is good.
Read more about credit scores.