What role does a lender play?
So as a lender the main role that I play in a real estate transaction is to enable the buyer to purchase the home that they want and have it be a stress free of a process as possible, I get involved very early on in the process to prequalify and pre- approve the buyer so that they know what price range they can be looking in, I collect the documentation so that I can provide a pre-approval letter to the seller so that the seller knows that the buyer has done their due diligence and has spoken with the lender to find out what they can qualify for and then during the process, once they are under contract, I provide weekly updates, if not more often, letting everyone involved know where we are in the process and what steps lay ahead of us to get the closing in table on time or early.
Should I get pre-qualified or pre-approved?
So the main difference between getting pre-qualified and pre-approved is that when you are pre-qualified, I've looked at your application and I've analyzed it along with your credit reports, that’s it with pre-qualification, taking it a step further and getting pre-approved is when I collect your documentation such as tax returns, W2, pay stub, and bank statements, I review those and let you know what you are pre-approved for, the time it takes, typically I can get you pre-qualified the same day that you submit your application and the same day that you submit your documents to me, now if it is a complex deal where you're a business owner or you’ve got a lot of properties on your tax return, it may take a little bit longer, but we definitely want to analyze it thoroughly to make sure we are providing accurate information to you and when it comes to looking for a home, I definitely recommend you get pre-approved, that’s what the sellers are going to want to see, a pre-approval letter that shows that you have done your due diligence and spoken with a lender that can state confidently what you are able to purchase.
How much house can I afford?
So the way I can calculate how much to pre approve a client for is through a debt to income ratio calculation and that will let me know how much their maximum loan amount can be, so the debt to income ratio that is allowed on different loan products vary by those loan products, for instance on a conventional loan its typically a maximum 45 percent maximum debt to income ratio and with a strong borrower it can go to a little bit higher to say 47 percent or 48 percent and FHA loan allows the debt to income ratio to go up to 50 percent sometimes as high as 55 percent based on the strength of the borrower, now the way I calculate that debt to income ratio is that I take the minimum monthly payments that show up on the borrowers credit report and I take the cost for the subject property, the total monthly mortgage payment including the principle, the interest, the taxes, the insurance, and if there are HOA dues, and for the income, I calculate that based on their gross income so before any taxes or deductions are taken out.
How much will I need for a down payment?
The amount for the minimum down payment required is based off of the actual loan product that the buyer decides to go with, on a conventional loan, if the buyer has not had ownership in a property in the last three years, they can go with a down payment as little as 3 percent and if they have had ownership in a property in the last three years, then the down payment needs to be at least 5 percent on a conventional loan, on a FHA loan the down payment is 3 and a half percent and on a VA or a USDA loan the down payment is 0 percent. Now one thing to keep in mind is that there are also closing cost and pre-paid items the borrower will have to come to the table with and prepaid items include taxes, insurance, and prepaid interest, there’s three ways that the buyer can reduce what they bring to closing either through lender credit, which can be provided if they go with a higher than market interest rate, it’s the opposite of buying points, they can also get a seller credit from the seller, which is when the seller increases he sales price of the property and for the same amount that they inncrease it, they turn around and give the buyer credit on the closure disclosure, reducing what they bring to closing and the last way to reduce the amount of money they bring to closing is through a gift from a family member.
Which loan should I apply for?
So the four main types of loans that we work with are conventional FHA, USDA, and VA, conventional loans are the only ones that can finance an investment property. The majority of the loans we do are conventional, they require at least a 5 percent down payment although if the borrower is a first time home buyer and hasn’t had any ownership in property in the last 3 years they can go as low as 3 percent down and FHA loan product is 3 and a half percent down and that’s for primary residents only. USDA loans are for rural areas, it has to qualify based on the property address so it can’t be anything in a city center for the most part. VA loans are for veterans or the surviving spouse of a veteran if she hasn’t remarried.
Difference between fixed rate/adjustable rate loans?
So the difference between a fixed rate loan and an adjustable rate loan is that the fixed rate loan is just that, the interest rate is fixed for the life of the loan. With the adjustable rate loan the interest rate is fixed for a set period of time and then it adjusts typically once a year so you’ll see adjustable rate loans be 5/1 ARMs 7/1 ARM’s or 10/1 ARMs. That first number is the length in time of years that the interest rate is fixed. On a 5/1 ARM, the rate is fixed for 5 years and then it changes every year after that. Now a lot of people shy away from these adjustable rate mortgages because of the way it got some people in trouble back before the mortgage crisis occurred. Its still a good loan product if somebody knows they are going to be moving within a few years, say if they are on contract with an employer and they are only going to be there for three or four years then it’s a good loan product, or if they plan on moving in three years when their kids are out of high school, it's still a good loan product because they have that low fixed rate for that period of time.
Will my loan application impact my credit score?
I do get that question quite a bit, having your credit report pulled could as we say ding your credit score, the amount that it does is very difficult to predict because of the complexity of how credit bureaus calculate someone’s credit score. I will say that if you are getting your credit report pulled by a bunch of different companies, say for credit cards, store credit, like Home Depot, Macys, if you are applying for car loans, things like that, me pulling your credit score after that could lower your score, considerably more than if you haven't had your credit pulled in months. What it does, when you do that, it shows a risk to the credit bureaus that you are racking up a lot of debt at once and you can be what they consider a flight risk, taking on a lot of debt, and then just not paying back. So while it's difficult to say the exact amount. If you haven't had your credit report pulled in a couple of months, it's not going to impact your score by very much, if at all.
How can I improve my credit score?
While I’m not a credit repair specialist, I can give some helpful hints on ways to increase your credit score or to establish credit in the beginning. So aside from the obvious that, make your payments on time, don’t be 30 days late on your payments. It is good to have less than 30 percent of your credit limit as your balance, so if you have a 1000 dollar limit in your credit card, don’t go above 300 dollars because the credit bureaus hit you for having a large balance on your credit cards. Student debt doesn’t impact you very much, medical debt doesn’t impact you very much, but what they lower your score on mostly is based off your credit card debt. So it’s good to have less than 30 percent if you have a card and charge it, and then pay it off monthly that shows that you are making your payments on time, keep your balance low, that will end up improving your score. A credit report that I pull from my borrowers has a credit score improvement figure for each bureau on the first page so if they have a 718 credit score and interest rates improve at the 720 and above level, I can go in analyze their credit report and find out what needs to be done to get to that 720 and above mark, typically it’s just paying down some of that revolving credit card debt.
How will rising interest rates affect me?
So the way that the rising interest rates will impact a buyer and their ability to purchase a home is best explained through an example showing what impact it will have on the payment, so for every 100,000 in loan amount, a quarter of a percentage point increase in the interest rate, will increase the monthly principle and interest payment by 15 dollars. So a typical loan size is about two hundred thousand dollars, if your interest rate went from 4.25 percent to 4.5 percent you’re going to see an increase in your monthly payment of 30 dollars, now how interest rates will move going forward is tough to say, the analysis that I’ve read shows that by the end of this year, 2017, interest rates for conventional loans will be around the 4.5 to 5 percent range, so they will increase some per the analysts, but it’s not going to be a large increase.
How much will the loan amount affect my monthly payment?
A good rule of thumb when it comes to how much the loan amount impacts the monthly payment is that for every $10,000 increase in loan amounts, the monthly principal interest payment will go up approximately 50 dollars.
What is the difference between a mortgage broker and a bank?
The main differences between a mortgage broker and a bank involve the cost that the borower pays and the level of service that they receive. So a mortgage broker gets paid to collect all of the borrowers information and send it to a lender and that lender will then process and underwrite the loan. I've seen that fee go as high as 3 percent of the loan amount. As a bank we do not get paid a percentage of the loan amount to do the loan. We get paid a flat rate to originate, to process, and underwrite the loan. The broker is paid a percentage of the loan amount, 1%, 2%, 3%, just to be a middle man and find the best lender for that borrower. Now when it comes to the level of service, the broker can’t make a lot of the decisions that the bank can because the broker is acting as a middle man, they don’t have the power to make a lot of the designs, the final lender gets to make those decisions, where as we, as a bank, are in control, and can make the decisions a lot faster which helps to make the process go a lot more seamlessly.