Pre-Approved For Mortgage
Many homebuyers make the mistake of not fully assessing their resources and not understanding financing options, financing terms or the advantage of getting pre-approved for a mortgage.
Review your resources - The four “C’s’’ of Homebuying:
- CREDIT
- CASH (for down payment & closing costs)
- CASH FLOW (your available income less debt payments)
- COLLATERAL (the value of the home as security for the mortgage)
Determine the mortgage program that is right for you:
Government Backed Mortgage Programs
- FHA - Federal Housing Administration - Easier to qualify for - lower down payment generally - 6% seller concession allowed.
- VA - Veteran’s Administration - No down payment required. For qualified veterans only.
- SONYMA - State of NY Mortgage Authority - Harder to qualify for - low down payment - $5,000 grant for closing costs.
- RHCDS - Rural Housing & Community Development Service. Rural properties only - for people who can’t qualify for other mortgages.
Other Mortgage Programs
- Conventional
- Non-Conforming
- Sub-Prime
- CRA - Community Reinvestment Act Programs
Determine the approximate amount of the maximum monthly mortgage payment that you can qualify for. Note - We aren’t suggesting that you should actually plan on paying the amount you come up with. Most homebuyers are comfortable with a monthly payment much lower than this. However, it is a good exercise to start with the maximum and then scale back.
Debt to Income Ratios - mathematical process to help identify the maximum monthly payment that a homebuyer should pay and still have money left for other household expenses.
Front End Ratio - maximum percentage of your gross monthly income to cover your mortgage payment (PITI)
Back End Ratio - maximum percentage of your gross monthly income to cover your mortgage payment PLUS other debt payments.
Sources of Mortgages
Mortgage Broker - Best - Works with dozens of banks - can shop the loan - has knowledge of special mortgage programs and which banks handle which loans best.
Bank - Best for in-house special mortgage programs not available to mortgage brokers (CRA programs in particular) - Generally don’t shop the loan - Limited mortgage programs.
Credit Union - Excellent rates - Don’t shop the loan - Very limited mortgage programs.
Effect of Secondary Market - The secondary market consists of investor pools which purchase blocks of mortgages freeing up cash for banks. Banks can get instant liquidity by selling their mortgages or exchanging them for securities that are traded on stock exchanges. The secondary market sets the rules for mortgages that they purchase. Best known, quasi-government entities, FREDDIE MAC (Federal Home Loan Mortgage Corporation) and FANNIE MAE (Federal National Mortgage Association).
Portfolio Loans - Some banks don’t sell their loans through the secondary market, but rather “portfolio” or keep their loans. This results in some lenders having mortgage programs that are unique and that don’t have to meet the requirements of the secondary market. CRA (Community Reinvestment Act) type loans generally fall into this category.
Other Important Considerations
Pre-Qualification - This is a personal opinion by someone as to whether or not they think you will be able to get a mortgage. It generally involves one or two credit repository reports - Income is checked by looking a pay stubs. Rarely is anything else checked. Worth is based on the reputation of the person or entity giving the pre-qualification. Sometimes not worth the paper it is written on.
Pre-Approval - An actual mortgage commitment issued by a bank or mortgage “banker” (a mortgage banker actually lends money, funds the loan and then sells it) not a mortgage broker (who only packages the loan on behalf of a bank but doesn’t fund it). Generally it is subject only to getting a home under contract and the home appraising for at least the purchase price. FULL VERIFICATION of employment, assets, income, credit from all three credit repositories, income tax returns, etc.
Put on a seller’s hat. Which one of the above would you be most comfortable and impressed with? Why?
GFE - Good Faith Estimate - of mortgage closing costs. Used to compare costs of different loans. Doesn’t include all costs. You may also incur closing costs such as home inspections, personal attorney, title insurance, etc. in addition to the costs noted on a GFE. If a lender won’t give you one then find another lender. It is required that you be given one upon application for a loan. But you should get one before so that you can compare different loans from different sources and not be surprised at closing. Actual costs at closing should be very close to the estimates. A variance of $100 to $200 is OK, but $500 to $1000+ is not.