Isn't it an interesting time in our life to see the greatest debacle in the financial world to hit since the Great Depression? Why do I say interesting? Because, the mortgage and financial hand book is being re-written almost on a daily basis. We are seeing banks fail, industries collapse, credit defaults and people losing their homes...none like we have ever seen before. However, there are many millions of people still buying homes and if you are trying to figure out what the pre approval process is all about, how it works, what you need and how it's done...keep reading.
This is about as basic and simple as it gets folks.
DERIVATIVES
The word itself conjures up thoughts of the banking demons and deacons of Wall Street and the fraud that ensued. Gone are the days of stated income loans, no doc loans, NINA loans, which means "No Income and No Assets" required. Can you imagine that? You walk into a bank, you sit down with a loan officer without any paperwork whatsoever, except for the basics,. The lender would sit you down, size you up, run your credit and voila! You have a home loan. That is a very good example of using a derivative loan. At one point in time, there were tons of loans similar to that. And you ask why we got into trouble?
THIS IS ABOUT YOU
Whatever type of loan you are looking for such as an FHA loan, a Conventional loan, a VA loan or in the state I reside in, a Texas Vet loan, the pre-approval process is the first stage of getting you qualified. If you have not done so on your own, your realtor could recommend a few lenders for you to talk to. Remember this please. This process is about YOU! Nobody and nothing else should matter. You and your family deserve the best that a lender can give you and it needs to be a fun and an exciting time for you as you travel down the path of future home ownership.
CREDIT WORTHINESS
Remember the derivatives I told you about a little while ago? Well, it used to be that a "sub-prime loan (usually below a 620 FICO score) was okay. At some point, if you could fog a mirror, or sit up and take nourishment by yourself, you could get qualified for a home loan even if you had bad credit. They'd shove a derivative down your throat or the way the cat gets the thermometer. Either way, they were going to sell you a loan. And guess what? You didn't care because you wanted the house. Pretty sad isn't it? Nobody at the helm steering the boat and it cost Americans their homes. That's another article I'll get into at some point down the road. Anyway, where were we? Ah, yes. Perfect credit is considered to be an 850 FICO score (I don't think Bill Gates has an 850 and I could be wrong about that, but of course he could buy one now, couldn't he?) The point is, 850 scores are pretty rare. One of the highest I've ever seen is about an 820.
Like I said, anything below a 620 score is called sub-prime and those types of loans are very hard to come by and are pretty much gone. The industry standards today, require that you have good credit history. It doesn't have to be perfect, but it does have to be good. Passable credit today is considered a 620 FICO score. This means you are about C to C minus paper. Your scores are a snapshot of what your stability, or instability is, when it come to seeing how you handle financial responsibility with your creditors.
PAPERWORK, PAPERWORK, PAPERWORK
Oy vey... mucho paperwork! Did you like my Yiddish and Spanish mix? Anyway....yes, there is a ton of paperwork to fill out. Your loan application alone is like killing part of the rain forest. And wait until you get to the title company to sign your final paperwork. Godzilla forms to sign. Of course, in the long run it's worth it. It's your house.
In almost all cases, you will need to bring the following to your lender. Just remember the 2, 2, 2 rule. You will need to bring 2 months of your most recent pay stubs, 2 months of your most recent bank statements (all pages for all accounts that you have) and 2 years of W-2's. If you are self-employed the lender is more than likely going to require you to have 2 years of your tax returns with ALL schedules. Again, this is a snapshot of your work and life history. It gets even more personal folks. There is a ton of trust you will need to have with your lender. Remember the credit part we just talked about? Well, in order to run your credit you need to give your lender your social security number and date of birth for all borrowers. Are you getting the picture? It's fine. Just relax and enjoy the show. You have to do this if you want to qualify for a house. It's just that simple. When your credit is run and you are over a 620 fico score, you are about half way there. Right now you're probably saying to yourself, "You're kidding right?" Oh no Hiawatha...not by a long shot.
DTI
This is what lenders call your Debt-To-Income. It is a ratio based on the obvious. What the ratio is from your income to your debt. For example; if you have $5,000.00 "gross" per month coming in from your paycheck and $2,500.00 of it goes to paying your monthly bills, your DTI is 50%. HOWEVER... keep in mind... you are trying to qualify to purchase a house. That 50% DTI ratio must include your mortgage payment as well. Makes sense, right?
HOW MUCH HOUSE?
This is the part I love the most. You must, above all, get in front of somebody who is not going to put you in harm's way with a financial noose around your neck. That's part of the reason we got into this mess, isn't it? I don't care how much you love the house. If you can't afford it, don't buy it! A really good lender is going to fight for you and along with realtor the two of them should be on the same page to determine how much house you can really afford. Your DTI comes into play here and depending on the loan (another article once again) it will give us a snapshot of the parameters you need to stay within. If I see a DTI that is around 60%, you're buying way too much house here ladies and gents. Don't do it! I like to see about a 43% DTI. Depending on the circumstances and a good analysis of your credit, you can go a wee bit higher than that.
I am going to say this again. Your realtor and your lender need to work in harmony together and that lender must, without a shadow of a doubt, convey to your realtor how much house you can afford. When you finish the pre-approval process, then you should have a very clear understanding of how much money you will be spending on your mortgage payment. Keep in mind, a pre-approval is the grand daddy of approvals. A pre-qualification for example, will just give your lender the basics to run your credit. A pre-approval on the other hand, gets into the meat of your life as it pertains to your income and your assets.
When you actually find a house you like and want to submit an offer, your realtor will be asking for a pre-approval letter from your lender to submit with that offer. The listing agent (this is the real estate agent that represents that seller) will more than likely want to have a pre-approval letter accompanying the real estate contract. This will tell the seller that you are bona fide buyer and that you have the wherewithal to purchase that particular piece of property.
Call your lender before writing up that contract and make sure you know what you're your payment will be. You need to know what the taxes are and what your hazard insurance is going to be every month. By the way, you cannot get funded on your home loan without having proof that your hazard insurance in place. During the loan process, make sure you call your agent and get your binder in place.
One, Two, Three...pretty simple, right? Last bit of advice here folks. When you choose your lender, make sure you get your paperwork together in advance of your meeting. I like to tease my clients and tell them that we don't tolerate client misconduct. Of course, I say it lovingly! I hope this article, in some small way, helped point you in the right direction. Happy house hunting!
Aristides Priakos is the Sr. Loan Officer and Financial Analyst of United Lending, LLC, a mortgage banking firm in San Antonio, TX. We are the leading experts in Texas to provide home loans to our military, active or discharged, for Texas Vet & VA loans as well as the leaders in first time home buyers. Every question as it pertains to the forms you will need is located in the "forms" section of my website at: http://texasloanprograms.com/forms.html If you are in need of credit restoration, please visit my other website at: http://www.spankmycredit.com/ You are always welcome to call us at 210-408-6060. Thanks for reading.
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