In the past 3 months I have taken over 40 new applications. Not bad for the season we are coming into.
Something that has alarmed me, however, is what I have heard from almost half of them. “I don’t know if I can get qualified because I hear banks are not lending money anymore” or “I hear it is very difficult to get a loan.”
Qualifying for a Home Loan
Simply stated, these rumors are not true. I don’t know where this rumor started but I suspect media has a lot to do with it. To be sure, it is more difficult to get business loans currently but that doesn’t necessarily translate into residential lending. If the rumors being spread are by people trying to compare today’s lending to the “Sub Prime” era, then yes it is harder to get a home loan today than back then. During the Sub Prime hay day we used to say anyone who could breathe could get a mortgage. While that saying was in jest, there was some validity to that statement.
Let’s be honest, should we really have been allowing anyone with a 500 FICO score (450 is the lowest and 850 the highest), 1 day out of bankruptcy, and a collection rap sheet that rivals a career criminal, state that they make $150,000 a year without documentation? On top of that, no down payment required! Here’s a good question: Would you lend a total stranger with a proven history of not paying on time or not paying at all $200,000 of your own money? If so, good luck with that!
Because so many of these types of loans went bad, banks were forced to tighten up the requirements. In reality, they are pretty much doing what they had been doing before the Sub Prime fiasco and should have been doing all along.
Managing Your Credit
If you mismanage your credit, you will be required to show at least a 12 month history of getting back on track. That said, there are still programs available with low down payments (and in some cases no down payment) for borrowers with lower credit scores or dinged credit.
If you have a 620 credit score, you still have a good chance at an FHA, VA, or USDA Rural loan (and in some cases even lower scores allowed if you meet certain criteria).
Loan Documentation Required
While conventional loans and PMI companies that insure their loans are requiring higher credit scores, the main change in lending today is documentation. Your income and assets must be verified through W-2’s, tax returns, pay stubs and up to date bank statements with deposits that can be verified.
The truth is, banks are still lending money for homes to thousands of people every day. They are just doing due diligence to make sure you can handle the line of credit they are giving you.
Unless you choose a loan officer with little experience, it can and should be a smooth and exciting process!
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1. How do I get prequalified?
Your mortgage specialist will need for you to fill out an application and check your three credit scores. Once you have qualified by your scores, your income will need to be determined to verify how much of a loan you can qualify for. Credit score requirements constantly change but for the most part you will need a 640 middle score to qualify.
2. How much can I afford?
All underwriters have debt to income ratio guidelines they must go by. Debt includes mortgage note and all other payments that appear on your credit report. As a general rule you are allowed 45 to 50% of your gross income to qualify with. While you may go up to that percentage this doesn’t mean you will want that note that comes with it.
Set a comfortable monthly note and stick with it. Don’t become house poor.
3. How much down payment must I have?
There are certain loan types that will not require a down payment or you may qualify for down payment assistance
through grants. These are usually reserved for lower income families. FHA requires as little as 3.5% and conventional
loans can require as little as 5% if you credit score qualify.
4. How do I calculate my monthly payment?
There are several online mortgage calculators available. They are easy to use and will help you get the principal and interest payment (P & I). Don’t forget that there is more to the payment than P & I. You must calculate property
taxes and home owner’s insurance and in some cases you may also have Mortgage Insurance (MI or PMI).
5. What is mortgage insurance?
If you borrow more than 80% of loan to value (contract price on purchases and appraised value on refinances), most lenders will require this insurance. Mortgage insurance is a policy that insures the lender against any losses on the property due to foreclosure. If you are below 80%, the lender views this as a lower risk so that if they foreclose, there is enough room to resale without taking a loss.
6. Are there penalties if I sell or refinance my home?
Consult your mortgage professional about the type of loan you are getting. Almost all fixed rate and Adjustable Rate Mortgages (ARM’s) no longer have a prepayment penalty. That is not always the case so be sure to see it in writing.
7. Should I get a fixed rate or an adjustable rate?
In spite of all that has been said about adjustable rate mortgages, they are not necessarily bad as long as you
understand how they work. ARM’s usually have a lower interest rate and are actually fixed for a period of time. After
the fixed period is over, they then adjust based on the type of ARM, but usually once a year. They also have “caps”
on them so that they cannot go over a certain interest rate during the life of the loan. Consult your mortgage
professional about the terms but if you are not comfortable, get a fixed rate. Fixed rates will not adjust any during
the life of the loan.
8. How long will it take to close my loan?
By law you cannot close until 7 days after making application in person and 10 days after making application by phone or internet. You should still allow 3 to 4 weeks at a minimum.
9. Should I shop around?
Absolutely. Just remember, someone quoting you a lower rate doesn’t necessarily mean better service. If you find a mortgage professional you are comfortable with, stay with them. Current rates are available online so you can always check to see if they are at market rate.
10. Where do I start?
Ask around and then check online. Friends that have purchased or refinanced before can give you great insight.
There are also lots of resources online that show feedback. If you are working with a Real Estate professional, seek
their counsel also.
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Buying a home can be a very exciting time, but it can also bring a lot of stress. If you have never bought a home before, you have to figure out all the lingo and paperwork that comes with banks and realtors.
The Ashton Real Estate Group of RE/MAX Elite has a preferred mortgage company called Ameris Bank and in Nashville we have the resources of Armando SanMiguel, Snr VP, who has a wealth of knowledge which allows our agents to become educated in the terms and ways of the mortgage business and also allow Armando to become a conduit for information for our clients.
Preapproved and prequalified are two words that can be very confusing for home buyers. A majority of home buyers consider preapproval and prequalified to be the same. Even worse, some agents use these terms simultaneously, which can confuse home buyers further.
When a home buyer is prequalified, this means that they are approved by the creditor to obtain a loan. For this to occur, typically, the creditor will talk to the home buyer, and decide that they are eligible for a loan.
At this step, the creditor has yet to confirm the home buyers credit report. It is only going off what the home buyer has told them. This is not the case with all creditors, but most only ask a series of questions to deem a home buyer prequalified. At this stage, the creditor may have not even met or reviewed a loan application with the home buyer.
When a home buyer has been presented a preapproval letter by a creditor, it is confirmed that the creditor has checked their credit report and submitted a loan application. The creditor could go as far as sending the buyers information through a computer-generated approval process. This is known as desktop underwriting or a DU.
Only an underwriter is authorized to grant a loan. Until this is done, preapproval is not truly complete. The underwriter completes this step during the last part of a loan. When the buyer receives their preapproval letter, it will typically state that this decision is pending until appraisal, title reports, subject property conditions and final underwriting are complete.
Understanding the difference between prequalification and preapproval is one of the most important steps towards owning your home. Make sure you know whether you are prequalified or preapproved before you start home shopping.
These are links to explanations of the different mortgage products available to homebuyers.
Are you looking to buy a home here in Nashville with little or no money down? There are 2 loans that allow people to borrow 100% of the purchase price, VA and USDA Rural. Unfortunately, these loans are only available to a select few as you must be a veteran of the armed services or your property must be in an outlying area deemed rural by USDA. In Tennessee however, the is another option available for cash strapped individuals.
THDA Grant Money
The Tennessee Housing and Development Agency (THDA) offers grant money assistance to first time homebuyers and buyers who have not owned a home (or lived in a home owned) for the last 3 years. There are actually counties that are exempt from the 3 year requirement. THDA has 3 different loans scenarios to choose from. The Great Rate (which is currently at 4.6% but offers no grant assistance), the Great Advantage (currently 4.9% offering 2% grant money assistance) and the Great Start (currently 5.2% offering 4% grant money assistance).
The THDA loan is actually an FHA loan requiring 3.5% in down payment, however, THDA serves as the non-profit organization approved by FHA to assist with down payment and closing costs. For more information, go to www.thda.org.
Thanks to Armando SanMiguel at Brand Bank for this update.
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