Mortgage Musts: Part 1
If you follow me on Instagram, then you may have seen my post regarding “Mortgage Musts”. I said that I would write a post about the homebuying process on Wednesday but, unfortunately, I was hit with a nasty head cold which allowed to do nothing but barely take care of my kids and answer the most time-sensitive emails. I did cook dinner every night, though! *Pats self of back*
As promised, I would love to talk about the homebuying process and specifically how the mortgage piece of it affects your home search. Many people decide that they are ready to buy a home and immediately hop on Redfin, Zillow, Realtor.com, or Trulia. They pick their dream neighborhood, set the filters to include their ideal bed and bathroom count, and a price range that they think they feel comfortable with. Some will even go out to open homes and fall head over heels in love with the home that they are certain is “the one”. It’s not until they speak to the agent holding the open home or their Realtor friend that they start to get a slight picture of what it takes to actually submit an offer on a property and have the property actually close. The worst thing is to have a deal killed because you didn’t understand your loan.
Have you been pre-approved?
This is the first question a smart real estate agent will ask you, but this question will be followed up with more questions. What was included in that pre-approval process, who is your lender, what documents did you provide, can I see you pre-approval letter? Many times, Buyers will meet with a lender or mortgage broker (I’ll refer to them as lender for the purpose of this post, but there is a difference) and basically tell them exactly what they want to qualify for. A good lender will give you a list of items that they need and go through an application process while explaining the importance of getting a pre-approval and not a pre-qualification.
A pre-qualification asks basic questions - what is your income, what are your expenses, what do you think your credit score is, how long have you been at your job, etc. The lender will run a quick calculation and based on the information provided (NOT verified), you will receive a pre-qualification letter. This letter is like giving you monopoly money and then telling you to go on a shopping spree. It means nothing. People tend to stretch their income, underestimate their debt (OH, I didn’t realize the child support was included in my debts), and confidently provide their credit score. Of course this isn’t done intentionally, but people are excited about buying a home. They want to look good and they don’t think about how income is actually calculated or what is actually included in their debt ratios.
Many times, it’s not the lender’s fault that a pre-approval wasn’t provided. The buyer generally doesn’t want to commit and doesn’t want to provide the level of detail that the lender is asking for. Unfortunately, this will never end well. Buyers get super excited about how much they can afford and what their monthly payments will be (again, all done on best case scenarios) and it isn’t until their home actually gets into contract that the deal falls apart. The good news is that most lenders and Realtors have gotten smarter about this process. Realtors won’t accept pre-qualification letters with the Buyer’s offer. They simply don’t want to waste their time. If you aren’t serious enough about getting pre-approved and have everything lined up, then they aren’t going to take your offer seriously. Negotiating contracts, reviewing offers, and going through all the offers with a Seller takes work. Please believe that I’m not going to put an offer in front of my Seller that I haven’t vetted. Who wants to get excited about a deal and then have it fall apart?
Tip: Make sure you get fully approved. There are now loan programs available which completely approve you so you can submit non-contingent offers (you will still want your appraisal and inspection contingency unless you have the ability to cover those variables). Benefits are that you know exactly what you can afford. You won’t waste your time looking at homes that you can’t afford or wishing that you could afford only to find out that you can!
Has your lender outlined all of your loan options including what your down payment is, how much you will have to bring to the table on the day of closing, what your monthly payments are, and what your interest rate is? Do you have a full understanding of your loan?
Another common issue that I see when working with Buyers both when representing them or when working with the Seller, is that the Buyer has NO CLUE about their loan. They just know what their payment is (sometimes), what they are required to put down (sometimes), and how much they can afford (hopefully). There have been times when I talk to a Buyer about their loan and they are completely lost. It’s at that time, that I either A) get on a conference call with the lender immediately; or B) give them the name of one of my preferred lenders. The worst thing is getting an offer accepted, going through the process of inspections and negotiations, and finally get to the close to find out that the loan is not at all what they expected. Common issues:
“I thought that I just had to bring in my down payment. Why does the closing documents say I need more money?”
“I didn’t realize that I had to pay x% for my loan. That wasn’t explained to me.”
“I thought my monthly payment was X, but this has additional costs - taxes, insurance, mortgage insurance, HOA dues.”
“I’m paying X% in interest? How did that happen?”
Unfortunately, I’ve seen people either sign documents and close the deal because they really want the house or have to walk away. Most times, the lenders, Realtors, and sometimes family members can help out with some of these issues, but it makes the process that much more stressful.
Tip: I can’t stress enough the importance of having your lender talk you through your loan options - every detail. For some, understanding the mortgage piece of it is a easy. Maybe they work in finance or have experience in mortgages, so the lingo is easy. For most, it’s complicated, confusing, and sometimes overwhelming. If you have a good lender, they can explain this to you in a way that is easy for you to understand. Don’t be afraid to ask questions and run through different scenarios.
Next week, we will discuss the Mortgage Musts after you get into contract and the common mistakes that people make that could negatively impact your loan approval.
I hope this was helpful! As always, if you have questions about buying, selling, investing, or anything real estate related contact me. I am happy to be a resource!
Have a wonderful weekend!