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Setting Expectations About the “New” Mortgage Process

June 20, 2013
From Loan Officer Kelly Ifland

From Loan Officer Kelly Ifland

You probably have clients who have never bought a home and don’t know what to expect. And then others whose only experience was buying when underwriting was extremely relaxed and loans were easy to obtain. Things have changed – dramatically. Actually, they’ve returned to many of the standards from the 1990s and earlier – before housing exploded and then imploded.

Here’s what buyers can expect today:

Down payment:  Years ago, buyers saved for a down payment before buying a house. However, during the housing boom it was common – and easy – to buy a home with zero down. The pendulum has swung back, and down payments of 5-20% are once again required for conventional loans. Qualified buyers can still find low to no down payment options with specialized government loans like FHA or VA.

Tip: The majority of your buyers will have to come to the table with some type of down payment. Cash can be gifted to them, but the source must be clearly documented and proven to be a gift, not a loan.

Debt to income ratio:

This ratio compares how much of a buyer’s gross income has to go towards paying bills each month. If this ratio is too high, it may mean the buyer is spread too thin and wouldn’t be a good candidate for a home loan. Today, most mortgages require a debt-to-income level of 43% or less.

Tip: The obvious advice for a buyer is to pay down unnecessary debt such as credit cards or car payments. And avoid adding new debt even if the loan is approved. Advise your clients to calculate the complete cost of the monthly payment vs. simply the principal and interest on the loan – that’s what lenders use for this calculation. That includes homeowner’s insurance, property taxes, and possibly private mortgage insurance if the down payment is less than 20%.

 

Credit score:

Credit scores have a big impact on a loan approval, but also if a borrower receives the lowest possible rate. Credit score requirements are much higher than they were during the housing boom.  An average credit score is now 765.

Tip: Clients should learn their credit score before they begin the mortgage process and if necessary, take care of anything that can improve their score. One way to do that is through the preapproval process. They learn their credit score while also discovering how much home they can afford.

Documentation

Gone are the no-doc loans of yesterday. Today, buyers must have a paper trail that clearly verifies important items like identity, employment, assets, taxes, and debt.

Tip: Instruct your clients to collect their paperwork ahead of time and request anything that’s missing. Buyers must be meticulous about having their information in perfect order because one missing page can hold up a loan closing.

You can assist your buyers by directing them to a lender that is willing to educate and work with buyers to help them prepare for the mortgage process. I would be happy to partner with you to make the mortgage process go as smoothly as possible.

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