First Time Homebuyer
You’ll find lots of general (but still good) advice as you search the web to prepare for buying your first home (and the mortgage that you will need to purchase it).
Common suggestions include researching neighborhoods, starting to save money for a down payment and closing costs, choosing a real estate agent to work with, being cautious about taking on new debts, exploring various types of mortgages such as $0 down if you’re a veteran, $0 down if you are looking in an area that qualifies for USDA Rural Housing (assuming your total household income falls within allowable guidelines), various low down payment programs from Fannie Mae and Freddie Mac (some of which also have income limits), or FHA may be the best option for you if you’re credit is a little bruised.
You’ll also read about all the warnings about the difference between pre-qualification and pre-approval, which generally speaking is that in a pre-qualification you are asked questions but your documents are not reviewed, while in pre-approval the mortgage company reviews your documents.
Pre-approvals though come in two different flavors. In one type the loan officer reviews your documents and issues the pre-approval, in the other an actual underwriter reviews your documents and issues the pre-approval. The latter is obviously the better option as no matter what the loan officer says or thinks, your file will ultimately be reviewed by an underwriter who has the final say.
I don’t mean to disparage loan officers as many are real professionals who understand mortgage guidelines as well as the best underwriters. At the end of the day the underwriter is just reviewing the loan officer’s work and even a pre-approval from an underwriter is still subject to final scrutiny when you are actually asking for the money.
Your real estate agent can be a good source of lender referrals as if you don’t end up obtaining your financing, the real estate agent doesn’t get their commission. So they are very careful to refer people they have a lot of confidence in, but even their referral doesn’t guarantee success. Many times loan officers will court real estate agents hoping to get referrals from them and will settle for being in “2nd position”. They wait there and get promoted to “#1” when the #1 blows a deal and the initially “pre-approved” mortgage doesn’t close.
When speaking with a loan officer you need to use your intuition and decide if you are working with a professional who closes 100% of the loans they set in motion or if they are a loan officer who is a little careless/less experienced and therefore has a certain percentage of loans that “fall out” due to their mistakes or oversights.
Even if you think you have your financial house in great order (high credit score, low debts, plenty of money in the bank, good steady jobs, etc.) there are mortgage guidelines that can trip you up.
Here is a sample of questions a careful loan officer will ask you when taking your application:
1) Other than normal sick and vacation days, have you been away from your job for any reason over the past two years (injury, caring for a relative, extended illness, etc.)?
2) Do you have any pending job absence or relocation planned (sabbatical, plant closing, etc.)?
3) If you are buying a condominium, is there a formal Homeownership Association (some smaller projects don’t have one)?
4) Have you made any deposits into your bank account over the past 90 days that you can’t verify the source (a friend paid you back money you informally lent them, you have a small side cash business, you won some money at a casino)?
5) Are there any items on your credit report that aren’t yours or aren’t accurately reported (especially if you have a parent with the same name or you have a “common” name it’s very possible for someone else’s credit items to get placed on your report)?
6) Are you letting the seller lease the property back from you after closing or for any other reason are you not moving into the property within 60 days after closing (there are requirements for how soon you need to move into a home you are buying as your primary residence)?
7) Is the seller making any repairs to the property prior to closing (you may receive an “appraisal waiver” which means you do not have to pay for an appraisal, however if there are repairs being made to the property the underwriter can invalidate the waiver and require an appraisal, which can either delay your closing or cause the deal to blow up if the value does not come in at the price you are paying).
8) Other than a garage or moveable storage shed, are there any outbuildings or mobile homes on the property (it doesn’t happen often but it happens and it can result in your loan being denied)?
9) In the jurisdiction where you are buying your home, does the sale of the property create an automatic change in the real estate taxes (if so you will have to qualify with the higher property tax amount).
10) If you are buying a multi-family home and need the rent from the other unit(s) to qualify, do you have any prior experience with rental property management (if you don’t some programs either won’t allow you to use the income to qualify or will limit the amount of that income you can use to qualify)?
The bottom line is that you should feel that you are being thoroughly questioned about your overall financial circumstances. It’s okay if the loan officer asks you to fill out the application online, but after that there should be a very detailed discussion about your situation.
It’s also okay if someone other than the loan officer conducts this interview, but you should hold that person to the same standards. Once a loan officer gets beyond closing around 5 loans a month, they need to bring on assistants to manage their volume. There’s nothing wrong with that, but it’s certainly possible for someone they hire to need more time getting ramped up or to not be as knowledgeable as they initially appeared. Make sure that in the loan officer’s attempt to increase the size of their business that you aren’t a “learning experience” for them as they build their team.
Thank you to my new friend from Rhode Island who created this article and has been involved in the mortgage industry for many year.