This is where it “gets real.” This is what separates the House Hunters enthusiasts from the real players: money on the table. I can’t tell you how many times I’ve seen a client fall in love at an open house and announce they want to write an offer without ever having spoken to a lender. Two days later, said client decides to pull the breaks because they realized they’re not playing with Monopoly money anymore.
Just like everything else in this world, properties aren’t free, and even winning the bid requires a bit of work. Admittedly, it is a little overwhelming if you consider all the moving pieces. However, understanding the process ahead of time and choosing the right lender will make financing a breeze.
***Disclaimer: I am not a lender nor am I a financing expert. I have, however, engaged in the financing process hundreds of times with every type of buyer. This guide is intended to be the best model for the financing process, but I firmly believe your lender is the foremost resource for explaining which loan option will suit your situation best.
Step 1: Who Do I Even Talk To?
When I say “lender,” I mean any institution that will give you a mortgage loan. This is typically either a big bank (e.g., Bank of America, Wells Fargo, Chase, etc.), a local/community bank (e.g., Eagle Bank, National Capital Bank of Washington), credit unions, or mortgage lenders (direct, non-bank lenders).
My suggestion? Talk to a few, see which will offer you the lower interest rate. If you like one lender’s services over another, see if that lender can match the better interest rate (they probably can). While you’re at it, see what incentives they can offer. If a lender can reduce/cut its fees or offer credit, that could save you thousands of dollars from your closing costs, so it’s worth the time to ask!
*My worthwhile tip: please, for the love of money, ask me to suggest some lenders . A lot of buyers are wary of lender referrals from Realtors because they fear our referral is dishonest and attached to money/gifts/credit, etc. Under the Real Estate Settlement and Procedure At (RESPA), federal law prohibits kickbacks to real estate agents from mortgage companies, title companies, inspectors, and appraisers (basically, everyone involved). I recommend all of my providers because they’re outstanding and ensure the highest-quality experience. It’s taken years of vetting, and they all make me look good! Email me today to receive a list of my hand-selected lenders that deliver outstanding service, rates, and turnaround.
Frequently Asked Question : Will getting multiple pre-approvals ding my credit? Answer: Not really. Credit bureaus have come to expect rate-shopping, so they will consider multiple “hard credit pulls” from various mortgage lenders as just one, large credit pull if they’re all done within 45 days.
Step 2: What Do I Bring and/or Email?
You know when you go to the DMV and you’re supposed to bring 20 different things, but you forget just one, and they can’t do anything for you? Pretend like you’re going to the DMV, and bring or email all of the following:
-Government-issued identification (and, if applicable, proof of U.S. residency if you’re not a citizen; military ID, if applicable)
-W-2 forms from the last two years
-Tax returns from the last two years
-Pay stubs for the last two pay periods (four, if you’re paid weekly)
-Bank statements from all bank accounts for the last two months
Situation: My parents are helping! – That’s great! Make sure your lender knows whether:
-they are helping with the down payment (you may need your parents to provide a Gift Letter and proof of those funds in a bank statement)
-they are going to be co-borrowers on the mortgage loan with you (they will need to provide all of the items listed above, too)
Be sure to ask your lender to explain any tax consequences or loan limitations if your parents are assisting.
Step 3: What Questions Should I Be Asking?
Once your lender has explained to you all of your loan options (e.g., Conventional/FHA loan, fixed-rate/adjustable rate, 30/15-year term), be sure to ask these often-forgotten questions:
–What’s the lowest down payment I can make? Many lenders offer conventional loans with as little as 5% down (and FHA as low as 3.5%), which is a great option if you don’t want to sink all of your cash into your down payment. However, if you are putting less than 20% down, you will have to pay Private Mortgage Insurance (PMI) every month until your loan-to-value ratio (Mortgage amount owed / Appraised value) drops to 80%. Ask your lender how much you can expect to pay each month in PMI and when it expires.
–Will you be selling my loan? Many lenders make their money selling your loan to the secondary mortgage market, which means your loan could end up being serviced by some small, unknown bank you’ve never heard of. This is often “the catch” with lenders who offer low rates. While the terms of your loan will not change, the service experience over the course of your loan could change. If it’s most important to you to get the lowest rate possible, you may have to accept that your loan will be sold.
–What incentives can you offer me? As a first-time homebuyer, it’s expected that you have limited funds and need as much help as you can get. When it comes to lender incentives, sometimes you have to ask for the sale. You’ll get even better results if you can prove that “X-Bank is willing to waive (this) fee and (that) fee.” Make each lender earn your business!
–How quickly can I close? In a competing situation (i.e., there is another offer on a property you want), it’s extremely important to work with a lender that can close quickly. Why is this important? Because the seller wants the property sold ASAP – they don’t want to keep paying for a mortgage/taxes/insurance/HOA fees any longer than they have to. A quick close is often the deciding factor in a competing situation , so be sure to ask what the quickest turnaround is. If they respond with anything more than 30 days, just be aware that that number may negatively impact your offer.
*Tip: local/community banks and mortgage lenders can usually turnaround a loan in 25 days or less. Big banks usually take between 30-60 days. Ask your lender to explain their timeline so you know what’s going on.
–How does the appraisal process work? Your lender wants to give you the loan for your new place, but only if it’s actually valued at or above your offer price. To make sure the property meets up to that value, your lender will have it appraised by an independent appraiser (totally anonymous to the lender), who will determine its adjusted value after comparing it to recent “like” sales in the immediate area. If it appraises at or above your offer price, great! Your loan moves forward. However, if it appraises under your offer price, your lender may cut the chord right there. Ask your lender if the appraisers are local and familiar with the varying neighborhoods of the city. I’ve seen many deals fall through because appraisers come from out of state and are just licensed to practice here; they don’t know the area, they don’t know neighborhood boundaries, they don’t understand the value of new construction versus historic architecture, etc. While your lender can’t know the identity of the appraiser, he/she can hopefully convince you that the Appraisal Management Company they use is local.
–What if the condo I want is in a building that is “non-warrantable”? Some condos may be considered “too risky” to lend to. Whether it’s because of a high investor ratio, pending litigation, high delinquencies, or too much commercial space in the building, your lender may have certain protocols for financing these “non-warrantable” condos. Some lenders may not be able to finance at all, so it’s important to see if you need to drop this lender entirely and find a new one that will finance a non-warrantable condo.
–For how long is my pre-approval valid? Pre-approvals stay valid anywhere from 30 and 120 days, depending on the lender. Whenever you submit an offer, you should always have a valid, up-to-date pre-approval, so be sure to stay on top of its expiration.