Here are some alarming results from an April 2011 Zillow/Ipsos study: 55% of homebuyers don’t know that rates change throughout each day, 37% think getting pre-qualified means they’ve secured financing, and 44% said they’re not confident in their mortgage knowledge nor the mortgage process.
So let’s review mortgage basics for new buyers and especially experienced buyers who need a refresh given new lending complexities of the past two years. Here’s how lenders analyze you, how the buying process works, and how mortgage rate markets work.
A good mortgage advisor will do a 30-60 minute consultation with you and lead with data collection. They can’t help you set objectives or make recommendations without your profile. Of course you have to be comfortable with their style, then you’ll provide these items (verbally first, then documentation):
–Personal information including birth date, marital status, number of children and ages. Loan applications are Federal documents and require this data. Good loan agents use it to help with family and retirement planning.
–Residence history for at least two years. If renter, rent payment is needed. If owner, all mortgage, insurance and tax figures are needed.
–Employment and income for at least two years. If you receive commissions or bonuses, you need two years of figures—all lenders average variable income (including self-employed income) over two years. Full tax returns for two years are always required, including business taxes if you’re a business owner.
–Asset balances including all checking, savings, investment, and retirement accounts. If you move money among accounts, you must provide all accounts even if you’re only using one account for the down payment, because the lender will review every line item on two months of full account statements and ask to paper-trail large deposits and withdrawals. Here are specific rules if you’re using gift or retirement funds for down payment.
–Debt payments and balances for credit cards, mortgages, student loans, car loans, alimony, child support, or anything else.
–Social security number: A good loan agent can use the verbal debt information to estimate your credit score which is needed for loan qualifying and rate quotes, but eventually you’ll need to provide your social security number so lender can verify with a credit report.
Borrower pre-approval is a combination of credit score, down payment, and your total (housing and non-housing) debt relative to income. So collecting this information (verbally first, then documentation) enables your loan agent to:
(1) Provide written estimates purchase showing prices and down payments you qualify for, monthly budget (with rates), and tax benefits.
(2) Pre-qualify or pre-approve you for a loan. Both phrases mean the same thing.
Now comes property pre-approval. Loans are made based on borrower AND property profiles. So after you are pre-approved and start home shopping, you or your Realtor must tell your lender about each property you’re serious about so they can also pre-approve the home.
For a single family home, a loan agent should screen the property (before you write an offer) for any deferred maintenance, pest reports, un-permitted additions, or known structural defects. Some of these issues are ok to lend on, but you need to know before you get into contract.
For a condo, a loan agent should screen the property for owner-occupancy ratio of the building, budget, commercial space, and homeowners association litigation. Loan approval depends on these factors, so again: make your lender find out before you’re in contract.
Rate locks require a borrower’s social security number AND a property, so you must be in contract to buy a home before you can lock a rate.
Home mortgage rates are derived daily from yields on mortgage bonds. As mortgage bond prices trade up and down each day, bond yields (or rates) move inversely. So if economic news is bad, bonds get bought, prices rise, and yields (or rates) drop. And if economic news is good, bonds sell, prices fall, and rates rise.
All U.S. lenders update mortgage rates throughout each day based on whether mortgage bonds are trading up or down on the day’s economic data.
A good loan agent will brief you on each given week’s economic outlook and update written estimates as rates move during your shopping process. They’ll also advise on what market factors will impact rates when you get into contract, so you can decide when to lock a rate.
The official approval process begins when you’re in contract to buy a home.
That’s when your loan agent assembles the property documentation—appraisal, title report, inspections and condo docs as necessary—with what they already have for you, and presents the full loan package to their bank underwriter for formal approval.
If your loan agent follows a detailed pre-approval and documentation process as noted here, the formal underwriting approval process should be smooth.
If they don’t, the process is really just beginning when the bank underwriter gets the package.