Waiting until you can make a 20% down payment
I'm sure you've heard that having at least 20% to put down is the golden number when applying for a conventional home loan. And, since it enables you to avoid paying private mortgage insurance (PMI), an extra monthly fee of 0.3% to 1.15% of your total loan amount, it makes sense. But with mortgage rates as low as they are today, waiting for that magic 20% could be a huge mistake, since the more time passes, the greater the chance that mortgage rates may rise along with home prices. Talk to your mortgage lender. It may make more sense to jump into home ownership now and pay down as quickly as possible to that 20% margin. You can then request to have the PMI removed from your loan and still lock in that great low rate. Which brings us to the next thing you should consider when preparing to purchase a home.
Meeting with only one mortgage lender
If you just stick with your best friend's cousin or the next door neighbor's lender, you could be missing out in a big way. Every lender offers different deals and even the interest rates may vary slightly from lender to lender. Do the math. Even nabbing a slightly lower interest rate can save you big bucks over the long haul. Getting an interest rate of 4.0% instead of 4.5% on a $200,000, 30-year fixed mortgage translates into savings of approximately $60 per month, which may not seem like much in the scheme of things but over the first five years of the loan, you will save $3,500.
We usually advise the Buyers we meet with to interview at least three mortgage lenders. If you don't know that many lenders, we can give you a list of some good ones we have worked with over the years. When you meet with each lender, get what's called a good-faith estimate, which breaks down the terms of the mortgage, including the interest rate and fees, so that you can make an apples-to-apples comparison between offers. Finally, once you have made your choice, be sure to ask them for a Pre-approval letter rather than a pre-qualification.
Getting pre-qualified rather than pre-approved
They may sound like the same thing, but they’re completely different. Pre-qualification entails a basic overview of a borrower’s ability to get a loan. You provide a mortgage lender with information—about your income, assets, debts, and credit—but you don't need to produce any paperwork to back it up. In return, you’ll get a rough estimate of what size loan you can afford, but it's by no means a guarantee that you'll actually get approved for the loan when you go to buy a home.
A mortgage pre-approval, on the other hand, is an in-depth process that involves a lender running a credit check and verifying your income and assets. Then an underwriter does a preliminary review of your financial portfolio and, if all goes well, issues a letter of pre-approval—a written commitment for financing up to a certain loan amount. This document will give your offer a lot more stock when presenting your purchase offer on the home of your dreams.
Moving money around
To get pre-approved, you have to show you have enough cash in reserves to afford the down payment. (Presenting your mortgage lender with bank statements is the easiest way to do this.) Nonetheless, your loan still needs to go through underwriting while you're under contract for your loan to be approved. Because the underwriter will check to see that your finances have remained the same, the last thing you want to do is move money around while you’re in the process of buying a house. Shifting large amounts of money out or even into your accounts is a huge red flag, and may even cost you the deal. So if you're in contract for a home, your money should stay put until after closing.
Applying for new lines of credit
Just like moving your money around can cause you to lose your ability to qualify, applying for a new credit card or request a credit limit increase a few months before closing can have the same effect. Credit inquiries ding your credit score by up to five points and for some folks,that's all it takes to knock them out of the running for the loan. Applying for multiple lines of credit while you’re buying a house can also make your mortgage lender think that you’re desperate for money. If they see credit inquiries happening, they may change the terms of your loan or deny you all together. Remember, nothing is for sure until the closing documents are signed and you have the keys in your hand.
Mortgage lenders like to see at least two years of consistent income history when pre-approving a loan. Changing jobs while you’re under contract on a property can create a big issue in the eyes of an underwriter. If you have no choice, just be sure to contact your loan officer immediately to alert them to the situation. If you are staying in the same line of work, there will probably not be any issues. However, if you are changing careers completely, you may have to wait on buying a home.Your best bet is to try to wait until after you've closed on your house to change jobs.
Following this advise will insure that you have smooth sailing, at least on the buyer side of things, as you move to closing on your new home. If you have any further questions, or would like to have professional representation on the purchase of your home, please contact us. As always, there is no cost to you to use our services and we can certainly work towards making sure your best interests are protected in the process.
Until Next Time...
Dick Gibb and The Maximum Exposure Team