By Rob Bland, Guest Writer, US Bank Home Mortgage
Securing a mortgage can be daunting and a tedious process. In fact, many feel like the job of a lender is to find a reason why the financial organization should not lend you the money. Contrary to that belief, as a lender our goal is to make the mortgage happen. See below for education on how the home loan process works and tips to navigate this process successfully.
What are my choices when selecting a loan?
Most likely you have heard of a conventional loan, but what does that really mean? A conventional loan is not guaranteed or insured by a government agency. These types of loans usually offer the best interest rates and loan terms, which can result in a lower monthly payment. Since these loans are not backed by the government, they are risker for the institution loaning the money and therefore there may be additional requirements the borrower must meet. When comparing a conventional loan to a government backed loan, the differences may include:
- A larger down payment
- A higher credit score
- Proof of stable income/employment for a longer period
These 3 requirements may seem straightforward, but for many physicians just completing residency and/or establishing themselves as an independent contractor, meeting these requirements can be tricky. That’s where portfolio loans come into play. Portfolio loans are similar to conventional loans, but can offer expanded underwriting guidelines to accommodate variances in a borrower’s financial profile. Banks keep these loans on their books (rather than selling them in the secondary market) and therefore can create their own guidelines of what it takes to qualify for the loan. Typically, these loans have competitive interest rates and may offer features not available with a government backed loan. If you are a physician with limited cash and/or limited 1099 income history, research banks that offer portfolio loans for your situation.
Fixed Rates or Adjustable Rates?
How long do you plan on living in your home? If you plan on living in your home for a shorter period of time (maybe it is a starter home where you will live for 2 or 3 years), an adjustable rate might make sense because typically the interest rates are half a percent lower than fixed rates. Adjustable rate mortgages are 30 year loans and can fix the rate for 5, 7 or 10 years. However, if you plan on living in your home long term (more than 10 years), fixed rates provide more stability, which makes budgeting easier. When deciding between the two options, compare the payments over the period when the adjustable rate is fixed and see if it the savings and holding period for the home meets your financial plan.
When should I apply for a loan?
If you are thinking about purchasing a new house, contact a lender to establish what you are looking for and what you might qualify for. The current marketplace has been tough for buyers due to low inventory. This is resulting in quick sales with multiple offers. If you are seriously shopping for a home, you should start the mortgage process as soon as possible and do a credit approval. This will ensure you have the documentation needed to make a quick offer. The pre-approval paperwork is typically valid for 120 days.
Oh, the documentation! Remind me what I am going to have to dig up?
You may feel like the questions about your finances are endless when securing a mortgage. The underwriter looks at your income, assets and credit score. When there is a lot activity in any of those areas, it raises questions. The underwriter isn’t trying to be nosey, but he/she needs to connect the dots to ensure the established guidelines are being followed to successfully secure the loan.
Typically, underwriters look at your earnings for the last 2 years. This includes W-2/1099s and tax returns, and this documentation needs to be in a pdf format (not a picture taken from your phone). The underwriter will also need documentation of your assets and may ask questions about large deposits or withdrawals. Mortgage credit reports are a little different than the credit score that is used to buy a car or get a new credit card. There are about 40 variables that go into a mortgage credit score. Don’t be surprised if the score your lender records does not match what you have seen on other reports outside this process.
KEY NOTE: In anticipation of securing a home loan, do not pay off a credit card or student loan and close the account. This can reduce your credit history and therefore negatively affect your score. If you are in the home buying process, talk with a mortgage professional before you close an account.
If you are trying to qualify for a portfolio loan, the lender might ask for additional items like a copy of your medical license, certificate of residency completion, an employment contract, gift letter, etc.
What might keep me from getting a loan?
Debt-to-income ratios could keep you from getting a loan. This ratio represents the amount of monthly debt as a percentage of your monthly income and generally cannot exceed 43%. The underwriter wants to see that after you make your monthly payments that you have enough funds to cover your other bills.
For W-2 income, gross wages are used for the calculation (the amount of income before all the deductions come out of your pay check like federal income tax, 401(k) contributions, etc). As an independent contractor, underwriters use your net income (the amount of income after expenses are deducted) to calculate your debt-to-income ratio. If you are working for a few different facilities, the underwriter wants to see the income generated in the last 2 years and likelihood to continue for the next 3 years (for those just completing residency, the contract income is used). The underwriter may have additional questions to determine this.
What if your home loan application is rejected? Start by finding out why. Common issues include a low credit score and/or not enough income. Work with your lender to understand the steps you can take to avoid this in the future. If you feel your credit and income should support the loan request, try a different lender. Bunching your applications into a 30-45 day window will help minimize a reduction in your credit score from too many hard inquiries. In some scenarios you may be rejected because the house didn’t appraise. Work with your agent to renegotiate the selling price.
You thought you would never get here… closing day. There are two sets of paperwork you will be completing for this grand finale: 1) the agreement between you and the seller to transfer the property, and 2) the agreement between you and your lender regarding the conditions of the mortgage.
The day before closing, connect with your lender to ensure they have all the paperwork they need from you to successfully complete the loan. Upon signing the paperwork, be sure you understand what you are signing and take the time to ensure all the documents are accurate.
Lastly, closing fees are not due until the day you close. These are usually paid with a wire transfer. On a refinance, there are some fees that can be added to the loan balance, or the borrower can work with the lender to cover these fees (typically in exchange for a higher interest rate). Once the papers are signed, the down payment and fees are wired to the escrow officer, the keys to your new home will be handed to you and at last you can celebrate the beginning of a new chapter.
Have questions about the loan process? Connect with us to further discuss your specific situation. Our job is to make loans, not deny them. Happy house hunting!