Consumers want the best price and best value, whether it is with a gallon of gasoline or a mortgage. Most lenders’ business comes to them from referrals, which is a very good thing, and many mortgage loan originators have had years of experience watching borrowers shop for loans. Some shop different lenders as if they could make a selection based on price. Most mortgage borrowers, however, don’t try to shop; they select or are selected by a single lender, which tends to work very well.
Unlike a gallon of milk, or a Big Mac, there are at least two prices: the interest rate and total lender fees. On adjustable rate mortgages (ARMs) there are also rate caps, the rate index used, and the margin over the index. Borrowers should know that an interest rate all by itself means very little. Multiple prices complicate shopping by borrowers when a number of factors enter into the decision: the products can change based on the borrower’s qualifications, the loan-to-value may change based on the appraised value, and the actual rate and price can change from day-to-day, or even during the day, based on bond market fluctuations.
In recent years borrowers have been at a disadvantage during the process since some lenders have exploited clients. They believe that since the borrower is not shopping, the lender can take advantage of them. This is the illegal, and should not be tolerated. Honest lenders believe in total transparency, and will not quote a price to a borrower below the price they are actually willing to accept. Low-balling is endemic on internet-based referral sites which display price quotes by dozens or hundreds of lenders, for example. Potential borrowers should be very careful when searching for a mortgage – it is an important process.
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Often is the question asked, “What’s up with paying for a property in cash?”, albeit in slightly more technical language. For buyers, the market is tough right now, as there’s not a lot in the way of inventory, and sellers often receive multiple offers, especially in some parts of the nation. Many real estate agents suggest that buyers make a cash offer in order to make themselves seem more competitive and improve their chances of having their offer selected.
Buyers have a few options when it comes to making an offer. They can pony up cash by writing a check and backing it up with statements that disclose the balance of their accounts. They can get pre-approved, which involves having their down payment verified with asset statements; employment verified with W-2 forms, pay stubs, and tax returns; credit reviewed; and loan reviewed for underwriting. They can also be “pre-qualified,” meaning that all of that same documentation has been reviewed but not underwritten.
Trained loan officers tell borrowers that the last option, despite its somewhat reassuring moniker, poses certain risks to a borrower’s deposit. If the buyer puts down 20%, for instance, and the appraisal comes back lower than the price upon which both parties agreed, the buyer is faced with a situation where they have to come up with more money, pay private mortgage insurance, or convince the seller the lower the price.
Such a scenario can become even more complicated if the seller refuses to deviate from that agreed upon price and the buyer doesn’t have that extra money and can’t qualify if they have to pay private mortgage insurance. In this particular case, the buyer could potentially lose the deposit.
Cash payments do indeed make for an attractive buyer, but the wise would-be homeowner understands the difference between a cash offer, being pre-approved, and being pre-qualified along with the risks carried by their various options. Be sure to ask your loan officer their thoughts!
Rates are still low, we’ve definitely seen an increase in borrows purchasing homes. There continue to be motivated sellers, and good buys to be had, in spite of us being in a traditional “slow down season” for purchases. And with home buyers comes the need for borrowers to be “pre-approved” by lenders in order, in some cases, to compete with other potential buyers.
For clients having a hard time finding a new home, the first adjustment they make is to get pre-approved – which some lenders and real estate agents believe is of critical importance. There are three main factors that determine a home buyer’s purchase price, loan amount, and type of loan: income, credit, and cash. Typically one of the three areas is the limiting factor for loan qualifying, and therefore purchase price, so borrowers being pre-qualified, and more importantly pre-approved, before writing that offer will avoid a lot of headaches, heartaches and disappointments.
To be pre-approved, a borrower first needs to contact a solid lender. Second, be prepared to provide all the information and documentation needed to properly evaluate the current financial status and be able to accurately provide mortgage amounts and options for a maximum purchase price based on capability. Here are the items usually needed: most recent paystubs, prior years federal tax returns and W2s, most recent statements for all asset accounts (checking, savings, investments, retirement accounts), residence address(es) for prior two years, employment information prior two years for all jobs (name, address, dates of employment, position, salary/commission/bonus), and birth dates.
With this information a credit report is run that includes all three credit agencies (Experian, Trans Union, Equifax) to obtain not only current credit scores but also to have what debt is currently listed. The information is put through the Automated Underwriting System for either Freddie Mac or Fannie Mae (the preferred AUS for government and most jumbo loan programs as well). The AUS will let us know if we have official credit approval or not.
At that point borrowers and lenders will discuss purchase prices, loan program, loan amount & down payment combinations, future plans & possible changes during the next 3-5 years. The lender stands by to write a letter of pre-approval to the real estate agent and the one representing the seller. But as noted, start with a discussion with your lender.
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