Note: This is a chapter in my new ebook called The Ultimate Guide to Buying (and then Selling) Your First Home. I will post a chapter a week. If you like what you read, you can pick up a copy here for the price of a candy bar! Buy a candy bar or be a real estate guru! This chapter is about mortgages and first time home buyers.
Task number one for Steve and Sally was to get preapproved for a mortgage. How does one get approved for a mortgage? The easiest way is to call a mortgage professional or apply online. You want to check out at least three because you will work closely with mortgage professionals, so you want one that fits your personality and pace of life. If you need suggestions, ask around. Everyone will have a recommendation.
Once you find one you can work with, they will start by asking you for some basic information about your income and debt obligations. They will also check your credit score. If all looks good, they will give you a prequalification letter saying that you are likely to get a mortgage. If you want to take it a step further (which is recommended) provide some documentation on your income and debt. If all looks good, you will then get a preapproval, which carries a little more weight with sellers.
Steve and Sally did a preapproval with a lender who did much of the qualifying work on the front end versus waiting until a house is under contract. Mortgage professionals have a tough job with first time home buyers. Clients come to them with the highest of hopes on getting a mortgage to purchase their first home. Often, the mortgage professional is faced with educating them at the same time as working with other clients and attempting to get it all done for everyone. Most mortgage professionals will do an adequate job with first time home buyers, but there are always a few things that fall through the cracks. Here are three facts I wanted to make sure Steve and Sally to know about the mortgage process.
1. Your first step is not your last step – I have been told by many first home buyers that they are surprised that the initial review of their credit and employment is not the final step in the process. Steve and Sally were also surprised to hear this. “Why do they make you supply so much paperwork at the beginning if there are more steps to it.” Steve asked me. . I told the young couple that they need to realize that mortgage companies will be very intrusive into their lives, asking for things that might feel very private. It will happen during the whole process so just when you think you are done, you will get another email requesting one additional item. It is a necessary evil of the process. If you want to get a mortgage today, you should expect to be an open book for the mortgage professional as they will ask about employment history, where you have lived, about charges on your credit card statements, deposits made to your checking accounts, etc. Some will even ask you to write letter explaining why you are purchasing the home. It can be very overwhelming and stressful. Be patient with the process and it will be over before you know it.
2. If you home doesn’t appraise at the sales price…. First, Steve and Sally did not even realize that an appraisal is required by the lender. An appraisal is where a certified licensed individual will determine the value of a property. These certified individuals, called appraisers, will be the only ones who can give true value of a home. The lender will require it to be assured that the loan they are giving matches, or is less, than the property value. They do this to ensure that if things ever get dicey for the first-time home buyers and they must foreclose on the home, that they can regain the loan amount when selling it. It can be a hit and miss on whether the appraisal will come back at the contract sales price of the home. It is a very subjective process. I have had the same home appraised twice many times and they are never the exact same. If the market prices are accelerating at a fast pace, sometimes appraisals will be lower than the agreed upon sales price. When this happens, the seller will have to lower the price. If they seller does not want to do this, the buyer will have to come up with the difference between the sales price and appraised value. A third option is that you find a middle ground where the seller lowers the sales price somewhat and the buyer puts more of a down payment. As with everything else in real estate, it is a negotiation that drives the final decision.
3. We recheck everything the last week before you close – I told Steve and Sally to pay very close attention to this next tidbit of my unending wisdom. When all is said and done with the mortgage where the lender has given you a green light, you still need to be careful. I told them to picture the following. You have gotten through the constant questions, the appraisal came through, you have a time and date to close on your first home. You are a week away from getting the keys. Boom! The mortgage company asks for more information. They check your employment and credit one more time. There are more questions to answer. I have found the last week before closing on a home as the most stressful period of the home buying process. Because they do check things up to the day of closing on your house, I told the young couple here are some things to consider during the mortgage process.
1. Don’t get any more credit cards. Don’t even apply for them.
2. Do keep all credit cards active.
3. Don’t get crazy with purchases and max out your credit cards.
4. Do keep your same employer
5. Don’t try to consolidate your debt.
6. Do take care of any collections, judgments and/or tax liens
7. Do pay all your bills on time.
8. Don’t make any large deposits into your accounts!
After I finished my speech on my soap box about the mortgage, Steve let out a sigh and Sally looked worried. I told them that not to be concerned. Just set their expectations accordingly about the mortgage process and they can get through it. They had already been approved for a loan. I would guide them through the negotiation on the appraisal, if it was even needed. Focus on the result of getting that first home and being on a spending vacation for a month will seem easy! We decided the next step was to look at some homes online. This seemed to get their spirits up as looking for the right property is most of the fun when it comes to finding that first home. As always, I wanted them to know three things before jumping into our initial search.