Or, As They Say in the Boy Scouts, “Be Prepared!”
When shopping for a home, most of the time you’ll be asked for a preapproval or a mortgage commitment. Real estate Brokers typically request and some demand that buyers have them in hand before making an offer to the seller. There is no legal requirement to have a preapproval or commitment in hand before making an offer to the seller, but most parties involved don’t want to waste their time with unqualified buyers.
Typically, when people get a preapproval, many mortgage reps just take your information over the phone, pull a credit report, and then issue what is known as a preapproval or commitment with at least five to 10 conditions/stipulations that have to be met in order to close. The real question is: can you meet those conditions? The key, in my opinion, is that the financial documents required, or “conditioned for/stipped for,” be reviewed before issuing a preapproval. Why? Most buyers typically do not know or understand underwriting guidelines and those guidelines are not always logical. It’s not just about having $1 million in the bank or a great credit score or a good job. It’s about having all three, and if there is a variation in anyone of those three, you may be able to still get a mortgage, but the pricing may change.
The best thing to do is to have your credit and your financial documentation reviewed ahead of time, so you can make offers with confidence knowing that the only thing you’ll need to do is have an appraisal and an inspection. Also in addition to an appraisal, when it comes to buying a condo and co-op, that the building also must be approved as well. Aside from saving you time and money, it will also minimize your stress level during the transaction. In addition, you will have an opportunity to firm up any weaknesses and strengthen your chance of getting a loan. There are a lot of little nuances to underwriting a deal, so my biggest piece of advice is to work with an experienced mortgage professional and leave logic out of it.
We once had a borrower referred to us. They started the conversation by saying “I already have a preapproval from another lender, but my friend told me to call you because he said you are great to work with, so I’m calling. I just want to know what your rates are,”
I said “I am more than happy to give you a quote, but I need to know a little more about you and your deal.”
They said “Well, we are in contract and already have a preapproval for 10% down and we won’t have a problem.
I said “I understand that, but you’re calling me for a rate quote, and I want to advise you in the best way possible, so if you have all the documents ready, why don’t you just send them over?” They said “OK” and they did.
After we reviewed their information, we told them that they wouldn’t get a loan even if they put 40% down. They couldn’t believe it and said “how could that be? The other company said we could put 10% down.”
I said (very respectfully) “I think you should ask them.” Those borrowers went back and did ask the other mortgage company. End of the story: The original mortgage company admittedly neglected to factor in a major debt obligation which, in fact, would not allow the borrowers/buyers to qualify for a 10% down deal unless they had a strong co-borrower. Our advice saved the deal.
I just want to give you a couple of important tidbits to keep in back of your mind: All gift funds and any deposits within two months of closing need to be paper trailed and the source of money should actually be discussed before two months of closing.
Work with the credit score you have, as long as you can get a competitively priced mortgage loan. If you try and repair your credit and it backfires, you could wind up costing yourself more in the long run. A bird in the hand is worth two in the bush.
If you plan on using funds from a credit card or from under a mattress, make the deposit to your account at least three months before applying for a mortgage.
Make sure the tax returns you supply are actually the ones filed with the IRS. Lenders verify the tax return, and if you supply a draft that wasn’t filed you may delay your closing.
A borrower typically needs two years of self-employment. So if you switch from W-2 to going self-employed, even if you’re in the same industry, make sure you get your mortgage while you are an employee before switching to self-employed, unless you plan on being in business for at least two years before obtaining financing. There may be one year self-employment exceptions.
Bonuses and commissions need a two year earnings history.
If you are on extension and self-employed, and do not qualify based on your existing income, re-evaluate your numbers and expenses before filing. You may have an opportunity to report an income that will allow you to obtain the financing you need (although you may pay more taxes, but you can’t always have your cake and eat it too!)
Lenders look at the lowest score of any two borrowers. Have your loan structured with that in mind and you may save thousands of dollars let alone actually get approved.
Get your ducks in a row and your ammunition ready and …. Home shop like a warrior!
Carl Guzman, NMLS# 65291, CPA, is the founder and President of Greenback Capital Mortgage Corp. He is a residential financing expert and a deal maker with over 25 years’ experience. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com [email protected]
By Carl Guzman