(This post is part of our Free First Time HomeBuyers’ course. For more information and/or to sign up, click on this link, or select ‘Education’ under the ‘Buy’ drop-down menu above.)
“I don’t even know where to begin.”
Nobody does. The mortgage process can be a bit (okay a lot) daunting. But that’s why you’re here. You’ve probably done a bit of research on the internet, maybe talked to your realtor, and discussed it with your mom and dad, older sister, friends, who knows. The best way to begin is (after you finish reading this, obviously) to ask homeowners you know and trust in the area you’re looking to buy in. Find out who they used for their mortgage, and whether they’d recommend them or not. Get a few options and compare them to find out who will be the best to work with, who is the most knowledgeable, and who can get you the most competitive rates. Ask each professional lots of questions- and make sure you can understand their answers. You don’t want to be working with someone who makes the process over-complicated and overwhelming. So here, we’re going to make it so simple, that we’re going to give you a recap. This is where you begin:
- Finish reading this fantastic guide
- Talk to homeowners in the target area
- Get their referrals
- Compare your options
- Ask questions
There’s a really important distinction we need to make first. Getting pre-qualified is not the same thing as getting pre-approved.
Getting pre-qualified is basically like having a lender say “sure, kid, this is a good estimate of what you can afford, now come back when you’re ready and I’ll do the real work”.
Getting pre-approved is like having a lender say “I’ve already done all the work. This is exactly what you can afford; this is exactly what the whole thing would look like, let’s go DO THIS THING!” Except maybe with a little less enthusiasm (unless they’re really good).
So the whole goal of the pre-approval process is do a few things. First, it allows you to talk to lenders to de-mystify the whole mortgage process. Second, it allows you to make educate purchase decisions and ensure your financial stability. Third, it makes you a better buyer. Buyers who are pre-approved aren’t just thinking about buying- they’re serious about it. This lets the seller(s)’ agent know that you are ready and gives yours an edge up over other offers. Fourth and lastly, it makes your home’s closing way faster once you’re in escrow. All of the hard work has already been done, and you just dot your I’s and cross your T’s.
But ultimately, all we want is to answer this one, crucial question:
How much can I get?
Most lenders (not all, so it will depend on who you choose to work with) will allow up to 45% of your monthly gross income to go toward paying all of your debts. So- let’s use an example to show you how they calculate what you qualify for.
So, you have $3,100 each month that can go toward your mortgage. But, it also has to cover your property taxes and homeowners’ insurance. And, this is the max amount that most lenders will allow you to use. So some might not let you this high, and some people might not want that high of a debt percentage (the 45%) being taken out of their gross income each month- just some food for thought (pause for life contemplation moment). But now that you have an idea of how much you qualify for, you can go to a mortgage professional with your lovely math equations written on a napkin and depending on the rates, the professional, etc., they can give you a price point estimate.
In order to give you the most accurate information, they’ll probably need all (or most) of these items:
- Last two pay stubs
- W2s from the last two years
- Tax returns from the last two years
- Bank and asset statements for the last two months
- Credit report (not a huge factor, but weak credit will hurt you)
Or, we can work backwards- which is the way most people do it. Now I’m not saying it’s wrong, but I’m just saying it might give you a disappointing answer that you weren’t hoping for. However, if you do this step after you did the first step, you’re going to have a really good idea of where you stand.
Is that monthly payment below that “debt allowance”? Yes? (I don’t want to play Dora here but $3,075 is less than $3,100). Wow! We did it! (Insert obnoxious Dora success song here).
So I mentioned down payments before (see part one), but how much is a good down payment? A lot of first time homebuyers think they have to have 20% ready for a down payment. Want to know the truth? Most first time homebuyers have 5-10% of the purchase price as a down payment. No more Dora here, you can do the math on your own, depending on the house. If that number seems a bit overwhelming, you can purchase a home with as little as 3.5% down on an FHA loan (we’ll talk about that in a bit) or 3% down on some Fannie Mae programs (no, it’s not your long-lost aunt, but we’ll go over that later too).
Once you and your loan professional figure this equation out, your loan professional will produce a loan application for you to review and sign. Then all those documents are submitted to an underwriter for full underwriting and approval, just as if you were in escrow on a home (just minus the home).
There are approximately 12,000 kinds of mortgages.
That might be slightly exaggerated. But there are a lot. So let’s start with a Fannie Mae. Only because I know you’ve been dying to hear about Fannie Mae. Well sorry to shatter your dreams but she’s not real (I know I’m a monster). She’s also not that important. But you know what I think is? Knowing why in the world it’s called a Fannie Mae. Four words: Federal National Mortgage Association. It’s a government agency, so like a lot of government names, it got shortened, to F.N.M.A. (G.A.S.P.). How that somehow became “Fannie Mae” remains urban legend. Probably because nobody has ever cared enough to look into it. Sad.
Anyway, that’s a type of mortgage that usually involves 3-5% down. There’s also
- FHA mortgages that involve 3.5% down,
- VA mortgages (only if you’re a US Veteran) that require no money down,
- 7/1 Adjustable Rate Mortgages (ARMs- charming I know), etc.
- Most first time homebuyers take a 30-year Fixed Rate Mortgage (like 90% of them), but it’s different for every person and you should definitely consult your mortgage professional to find out what’s best for you.
There’s one last term you might hear of during the whole process: PMI (as if there weren’t already enough acronyms to remember). It stands for Private Mortgage Insurance. It’s basically when your lender asks you to pay a little extra to make sure that no matter what, they don’t lose their money. A lot of times, buyers misconstrue this as a bad thing- as if it’s some red flag of “I don’t have enough money”. While some people think of themselves as peasantry, it’s not what they think it is.
PMI is actually super common– a lot of times if a purchaser doesn’t have (or doesn’t want to put) 20% down, lenders ask them to buy this insurance to make sure they (the lenders) don’t lose their money. Sure, it could be because you don’t want to be broke, but it also could be that a lower down payment makes more fiscal sense in your case. Technically, it’s because you’re a higher financial risk than someone who has more money to put down (just on paper- the circumstances in real life vary greatly). So this insurance protects the lender, and it comes in many forms.
If you’re planning to buy a home with less than a 20% down payment, call NextHome Element Realty at (818) 237-9426 to talk with an agent. They’ll be able to give you specific details.