Throughout the home buying process, you’ll work with several different professionals who are tasked with helping you get the best deal. However, if you are unfamiliar with this industry, you might be asking yourself, “What’s involved in a mortgage loan officer’s job?”
For months, maybe even years, you’ve dreamed of owning your own home. As you move forward towards that direction your first step should be to determine how much of a home you can comfortably afford. Even if you’ve taken steps to ensure you have a respectable credit score and saved for your initial investment, it’s completely normal to feel anxious about your mortgage application being approved. Use the following as a guide to ensure a smooth loan approval.
Calculate Your Mortgage Budget
Before you start shopping and fall in love with a house you can’t afford, you need to do some math. You know your financial situation and your spending habits better than anyone. What monthly mortgage can you reasonably afford given your current income and debt obligations? After you’ve done your homework, consult with a reputable loan officer and get their opinion on what a lender is likely to loan you. It will generally take about 15-20 minutes over the phone to find out. Having a good understanding of your finances will ensure your success as you shop for your home and apply for your mortgage. As a general rule, your total monthly house payment (PITI and HOA dues if any) should be between 30% – 33% of your gross monthly income. Your house payment plus all of your other debts should not exceed 36% – 42% of your gross monthly income.
Ascertain Your Available Funds for Down Payment and Closing Costs
As you consider homes to purchase, determine if the potential house payment will be within your budget and check to make sure you have cash on-hand that is necessary for the down payment and closing costs. The larger your down payment, the lower your monthly house payment will be. Most loan programs will require a minimum down payment of 5 percent of the sales price of the home. In addition, you’ll have to plan to pay closing costs and “pre-paid expenses” which usually run between 3% – 4% of the sales price. (There are loan programs available that have a minimum down payment of 3% if you can qualify.)
Avoid These Actions
Lenders examine every aspect of your financial history. From your credit to your income, no stone is left unturned. As you prepare to submit your mortgage application, talk to your loan officer before you do any of the following:
- Buy or lease a new car
- Change Jobs
- Get Married
- Transfer large quantities of money between bank accounts
- Close credit accounts
- Open new credit cards (Don’t let anyone pull your credit – it can make the difference between qualifying and not.)
- Make any unusual deposits in your bank accounts
Basically, any unusual financial activity could hinder your chances for mortgage approval.
Get Your Documentation Together
There are some documents your lender will need to collect from you to submit your mortgage application.
- Complete copies of bank statements for the most recent 2 months from checking, savings, investment, and retirement accounts.
- Complete Personal Tax Returns including all schedules and W-2s for the most recent 2 year period.
- Paystubs for each borrower for each employer the most recent 30 day pay period.
- Driver’s licenses for each borrower.
- Complete tax returns, W-2s, and 1099s for most recent 2 years
Depending on your particular circumstances the necessary documentation you must provide will vary. Your loan officer will give you a customized list of everything required.
Get Expert Advice
After you’ve done your homework, consult with a reputable loan officer and let her help you put all the pieces together. It will generally take about 20-30 minutes over the phone to give you a good idea of what you can expect to be approved for. (Face-to-face meetings are always a good idea when possible.) She will probably want to check your credit to make sure there aren’t any unforeseen surprises. She’ll review different loan programs which might be a good fit for you and explain the pros and cons of each. She will give you estimates for different loan scenarios so you can see what your monthly payment will be and how much of an initial investment each scenario will require. When you feel comfortable with the loan officer it helps to provide her with the supporting documentation listed above and ask to be formally “pre-qualified”. She will review everything for any potential issues and advise you how to correct them. She will be able to give you a rock solid Pre-Qualification letter so that a seller will consider your offer when you find a home. (If you’re in need of a good Realtor, she’ll be able to refer you to a tried and true professional.)
For over three decades, Dorothy Erminger has been helping Texans buy homes. When you’re ready to get in the game give her a call. She will give you professional, reliable guidance so you can set yourself up for a smooth loan approval. Contact Dorothy today.
Congratulations on beginning the home buying process. You’ve started in the right place by researching how to best prepare yourself for submitting a mortgage application. A major part of that application is the home buyer’s credit score which examines many years of your financial history.
About Credit Scores
Known as FICO scores, credit scores were developed in the late 1990s to serve as an objective method for assessing an individual’s credit management habits. As a portion of the mortgage application process, your credit score allows lenders to determine which type of loan you are eligible for and the pricing tier you qualify for when searching for a new home. Credit scores range from 300 to a high of 850, with most lenders looking for a median score of at least 640.
There are 40 factor codes divided into five main categories that are used to calculate a credit score:
- Past Payment Performance (35%) – This indicator shows how often you pay your bills on time. If you let bills and debts slide, thus incurring late fees, this will negatively affect your credit score.
- Credit Utilization (30%) – This factor examines how you use credit. In regards to applying for a mortgage, lenders like to see 3-5 credit cards in use for a period of no less than two years to know that you understand credit and utilize it properly.
- Credit History (15%) – A look at of the financial accounts in your name and the length of time they have been open.
- Type of Credit in Use (10%) – Accounts such as mortgages, auto loans, revolving or installment accounts show the type of credit you’ve used.
- Inquiries (10%) – This refers to any formal inquiries made about your credit. Any time a company makes an inquiry about credit score, it impacts said score. Too many inquiries can be the difference between getting a mortgage and not. If you’re planning to buy a home you need to be very judicious about who you give your Social Security Number to.
Improve Credit Score Before Applying for a Mortgage
It might seem like your credit score is chiseled in stone but that’s not true. A credit report (and a credit score) is a snapshot in time. If you are planning on buying a home soon and are concerned with your credit scores, there are steps you can take to ensure they will be better before submitting a mortgage application.
- Speak with a financial professional. Before, you close any accounts or make any changes to your credit profile, speak with a knowledgeable loan officer about the best course of action to take so you can be strategic about your overall mortgage plan. A professional, experienced loan officer will be your guide throughout the home buying process and is there to help you successfully submit your mortgage application.
- Pay all of your bills on time. Always. Past Payment Performance accounts for 35 percent of your credit score, so it’s imperative that all bills are paid in a timely manner. A great method for making sure your bills are paid on time is to set up reminders on your cell phone’s calendar. Also, many companies allow users to set up recurring payments to automatically pay bills to eliminate the monthly hassle.
- Under-use existing credit cards. While it is important to have credit cards in use, you want to under use them. Try to keep a balance that is no more than 35 percent of your credit limit. Maxed out credit cards reflect poorly on your score.
- Don’t pay off your credit cards unless you normally pay them off at the end of every month. A zero balance has a negative impact on your credit score – leave a small balance.
- Review your credit report for any errors. You should not be penalized for errors made by creditors and you are entitled to have these mistakes removed from your credit report. Unfortunately, any mistakes might negatively impact your overall score and thus change the outcome of your mortgage application. Your loan officer will tell you exactly what you need to do to clean up any incorrect information from your report. It’s not a good idea to formally dispute any charges until you’ve spoken with your loan officer.
- Do not apply for unnecessary credit. You want to limit any applications you might make for additional credit, whether you are considering buying a new car or you want to acquire another credit card. Your top priority is your mortgage application. Extra credit lines can absolutely be considered once everything has been settled with your mortgage.
- Increase credit limits. Speak with the banks and companies that hold your credit cards, and see if they will extend your credit limits. The increased credit limits reflect well on you but the unnecessary spending of that credit works against you. A word to the wise: be careful not to increase your spending habits if you get additional credit.
- Begin the process sooner rather than later. If you think you’ll be buying a home within the next year or so, the time is now to take steps to improve your credit score. Work with a loan officer, organize your bills, and follow the other tips mentioned here so when the time comes to apply for a mortgage, there are no unwanted surprises awaiting you. Believe it or not, you’re probably in much better shape than you realize.
- You may get a free credit report once a year from www.AnnualCreditReport.com. This will not be reflected as an inquiry on your report. You will be asked if you would like to pay for an upgrade but that’s not necessary. You will need to follow the prompts to request your report from each credit reporting repository – Equifax, TransUnion, and Experian. You should request your free report from all three bureaus – they don’t always report the same information.
Buying a home is an exciting yet nuanced process, with many moving parts. To make sure you move into the home of your dreams, you want to work with a trusted and tested expert who will walk you through the process and answer each and every one of your questions. With 24 years of experience as a loan officer and 10 years of experience as a realtor, Dorothy Erminger has the expertise every homebuyer needs to successfully submit a mortgage application. Contact Dorothy today to start taking steps to improve your credit score.
Throughout his campaign and following his win in the November election, President-elect Donald Trump has had a massive impact on our nation and around the world. Once he is sworn is as Commander-in-chief, President-elect Trump will continue to influence many aspects of everyday life, including buying and selling real estate. As we look ahead to what the next four years of a Trump presidency holds, our nation is pondering what to expect from his administration.
A few weeks after the November election, the Los Angeles Times reported that, “Long-term U.S. mortgage rates continued to surge this week in the aftermath of the election of Donald Trump as president.” Rates increased by approximately .25% after the election.
Put in proper perspective, it’s important to understand that the Fed has kept rates artificially low for many years in an effort to keep our fragile economy from imploding. As we finally move forward into a more healthy economy it’s only fair to expect these controls to give way to a normal market and a more sound fiscal policy. (You can’t kick the can down the road forever!) Even though mortgage rates have increased, they are still very close to historical lows and they are not expected to increase much more in the near future.
Admittedly, the prospect of higher interest rates isn’t what one wants to hear if they are considering buying a new home. Higher interest rates have a negative impact on the amount a home a person can qualify for but at the same time, an increase in interest rates could potentially drive down the overall price of homes. Higher interest rates can make refinancing less feasible for homeowners who are looking to refinance their homes because the savings won’t be as great and as home values decline, so does their equity.
The silver lining is that the prospects of a Trump presidency is having a significant >positive effect on our economy. More jobs and higher paying jobs that are expected from a Trump presidency will almost certainly bode well for would-be homebuyers and home sellers.
Positive and Negative Outlooks are Both Impacting Interest Rates
In anticipation of Trump’s ascension to the most powerful job in the world, investors have been putting as much capital as possible into the US stock market in hopes that Trump’s presidency will yield the economic boom that analysts are predicting. In order to put their put their funds into stocks, a lot of investors have withdrawn money from the US bond market.
As the strength of Treasury bonds decreases, the interest rates that accompany mortgages rise in comparison. As the stock market rises, the mortgage bond market dips which causes mortgage rates to rise. This is normal. There have always been and will always be ups and downs in both markets.
Either way, the result is the same. Whether investors are excited or downtrodden about a Trump victory, it’s a given that the housing market – as well as other segments of our economy – will feel some repercussions while we adjust to the policies of the new Administration.
What Does This Mean For You?
The ability for an average person to buy a home is slightly more difficult than it was a few months ago. However, a new home is not out of reach for most prospective home buyers. It might take a little more time and patience but in most cases your efforts will be rewarded. Home buyers might need to expand the scope of their search parameters. Keep in mind that your first home is not likely to be your forever home. It may not be exactly where you want it to be and it may not the home of your dreams – it’s a stepping stone.
The key is to get into the home as soon as you can. Chances are that you’ll be able to earn some equity and sell for a profit in a few years. The money you earn from appreciation on your first home is what you will use to buy your second home and you will get closer to meeting your ultimate housing goals then.
In today’s environment, it’s more important than ever to work with a knowledgeable, dedicated loan officer to help you navigate through the home buying process. If you live anywhere in Texas, Dorothy Erminger is a great resource for potential homebuyers. Dorothy will guide you through the loan process and you can rest assured that your home buying experience will be straightforward, pleasant and easy-to-follow.
Dorothy and her colleagues work tirelessly to ensure their clients lock down the best loan program for their unique needs at very competitive interest rates while minimizing unnecessary costs. She is known by her clients as well as industry professionals as a stickler for detail – which translates to smooth closings – on time, every time! Owning a home is part of the American Dream, and it’s Dorothy’s goal to help you turn your dream into a reality.
This is probably the best article I’ve ever read about the loan process. Enjoy!
As a loan officer, one of the things I am often asked is “Should we buy or rent?” My answer is that it depends. Assuming you live in a desirable area with a stable economy and you are planning to stay there for at least 3 years and as long as you expect your source of income to remain stable, it almost always makes financial sense to buy – here’s why:
- You’re heard it a thousand times – and it’s just as true today as it was 50 years ago – location, location, location. Real estate is only a good investment when you invest in a home that’s in a good area of a city where people want to live. The outlook in your town may be different than in other parts of the state or other parts of the country. Do your homework and make sure that the market in your area is stable or likely to appreciate.
- Home prices are always tied to employment opportunities. If the city you want to invest in has a diversified economy with a healthy job market, the housing market is more likely to be stable as well. This translates to a safe investment.
- Do the math. If you are renting for $1,500.00/mo. and your landlord increases your rent payment by 5% per year, you would be paying $100,000 over a 5 year period and you would have nothing to show for it. Any improvements you may make to the home would be going into your landlord’s pocket not yours.
- Even though interest rates are not as good as they were in 2013, they are still at historically low levels. Assume you buy a home in Austin, Texas for $375,000.00 and you invest 20% for your down payment. You would have a mortgage of $300,000 for 30 years. Based on an interest rate of 4.75% (APR = 4.798%), your monthly payment would be about $ 2,500.00 including property taxes and insurance. Assuming you’re in a 25% tax bracket, this would be equivalent to a rent payment of approximately $2,000.00/mo. The best part is that if the home appreciates at a modest rate of just 5% per year, at the end of 3 years the home would be worth $434,000.00. Although appreciation rates are never guaranteed, if you do your homework you should be able to predict with a fair degree of certainty what the rate of appreciate should be.
- The benefits of home ownership are numerous. If you can find a good neighborhood in a good part of town you will notice that you will build a sense of community, you will take pride in ownership and appreciate not having to get the landlord’s permission to do what you want to do and you will be building equity to boot.
- When you buy a home, you can adjust the amount of your withholding tax to the IRS. This allows you to have less money withheld from your paycheck each month so that you can handle the new mortgage payment more comfortably.
If you are thinking seriously about becoming a homeowner it’s important to talk to a professional who understands your personal financial situation as well as the local market in which you intend to buy.
Dorothy Erminger, Residential Loan Originator NMLS # 216624
Dorothy Erminger has been helping people to buy homes in Texas since 1992. She has a degree in Education from Stephen F. Austin University in Nacogdoches, Texas.