Buyers often would prefer to be out looking at houses than talking about their finances with a stranger.
Yet getting pre-qualified and learning about your financing options is an essential step in the process of buying a home, and doing it upfront will help guide your home search, give you the best chance of getting the home you want, and ultimately reduce your stress.
As a mortgage broker, I work with buyers to make sure that they fully understand their loan options and choose a program that best fits with their financial and lifestyle goals.
Everyone’s needs are different, and there are many types of mortgages available to borrowers.
Each mortgage option may vary based on the amount down, credit scores, and allowable debt-to-income ratios.
When I meet with home buyers (or talk with them on the phone if most convenient), I walk them through the options and how the financing process works from pre-qualification to closing
The first step is to get pre-qualified, something we can do after a short meeting where we can get some information about you and your finances.
I always say, getting a mortgage is about the three C’s:
Credit, Capacity, and the Collateral.
But within that simple phrase is a lot of information.
Let’s break it down a little….
It’ not unusual for a borrower to not know or be that familiar with their credit score.
It’s possible that there could be some errors or issues that the borrower may not even be aware of.
Running a credit report will allow us to manage any upfront issues and even possibly increase your scores.
The higher the credit, the better the interest rate may be with most mortgage programs.
Still, there are options for people with a wide range of scores.
The credit report will also tell us your monthly obligations with current debt. This will help with reviewing your budget and gets factored in to your Debt to Income Ratios (also known as your “capacity to borrow”).
During our meeting, I will run your credit report so we can assess options and identify any errors.
All programs will have a set level or max debt to income ratio allowed. The debt to income ratio percentage is calculated as follows:
Total monthly payments from credit report
Proposed monthly housing payment
Total qualified monthly income
It is my job to calculate this information. What I need from you is proof of income, either from a tax return or recent paystub.
When getting pre-qualified we will work through monthly payments together.
I will show you what your payment will look like once we factor in your mortgage payment, property taxes, and insurance.
You may qualify to buy a home for a lot higher than where you feel comfortable so seeing the projected monthly payments and assessing your budget is very important.
At the pre-qualification stage we will also review closing costs and pre-paid items.
There are many state and third party fees that add up quickly when buying a home. Knowing what to anticipate will make you better prepared for when you find the right home.
Now that you know the costs of buying a home and once your debt to income ratios and credit have been analyzed you will then be pre-qualified and issued a pre-qualification letter so you can keep house hunting.
We issue your pre-qualification letter based on your credit and capacity.
However, when it comes time to actually apply for a mortgage, the bank will also take collateral into account.
“Collateral” refers to the house you are planning to buy.
The bank will want to make sure they are investing in a saleable home that meets the guidelines for banking.
For the majority of the mortgage programs available, the bank will need to make sure the home is safe and habitable. Certain programs require stricter standards in regards to the home.
You likely haven’t yet identified a home when you speak to a lender or mortgage broker for the first time, but reviewing your options upfront and discussing the possible limitations for each program is important.
The more information you can learn up front about the home buying process, the less stressful and comfortable you will feel.
It’s never too early to start learning about your mortgage options whether you are ready to start home shopping or just want to understand your options so you can start the search in a few months or a year.
At my firm, we take a lot of pride in being able to offer so many different loan options and working with buyers to help them find the right fit.
There isn’t any cost or commitment to learning about your mortgage options, and it is our goal to make the process less stressful and understandable to everyone.
Ready to get pre-qualified?
Before meeting with a lender or mortgage broker, having some of the following documents on hand can be helpful.
- Most recent paystub
- Most recent W-2
- Two years of tax returns (if self-employed)
- Two months of most recent bank statement(s)
- One form of ID
Happy house hunting!
ABOUT THE AUTHOR
Nick Parent is a mortgage broker and owner of Vermont Mortgage Company, based in Burlington.