Just Have to Get Out of Here!
If you’re tired of living in your parent’s basement, or tired of listening to what you hope is your neighbor’s TV, sometimes, the itch to have your own place needs to be scratched.
On the other hand, maybe you’ve had your home for a while, and it’s time to give the extra child (human or furry) some more room to roam.
Perhaps, you have graduated all of your children to their own homes, and for you, it is now time to downsize.
Scratching that Itch
In a moment of desperation such as this, it’s tempting to search websites that show pictures of previously owned homes touched up as much as a supermodel illustrated on the cover of a sports magazine.
Obsessed with this idea of having the perfect place, you drive past the alluring, brand new model homes and pristine landscaping. It’s hard to resist a quick peek inside when you have the itch to shop for a home.
I’ve been there. I get it. Friends, can I offer you some advice?
Setting out before you have talked to your mortgage lender can be cruel.
It seems we always want a little more house than we can afford, or we find the perfect one, ready to place an offer, and we don’t have the written proof to back it up.
Offer rejected, and the home sells to someone else.
It’s an Experience — Root Canal or Spa is up to you.
I’ll never forget my first home shopping experience. We decided to be savvy shoppers, as we didn’t want to max out our budget. So, we set our budget thirty-thousand dollars below what we qualified for. In six months, we could not find a home that checked off all of the boxes.
Bravely, we pushed the envelope to a number within a thousand dollars of our max, and within a week we had one home to select and one to eliminate. We lived there for sixteen years.
How did we know we could risk that? It’s all in the pre-qualification.
What is a Pre-Qualification and Why Do I Care?
If you run the term “loan pre-qualification” through your search engine, you’ll find a variety of answers.
Often used interchangeably, pre-qualification and pre-approval are similar but not equal.
Pre-qual
In short, a pre-qualification is based on information you provide to the lender. If everything checks out, based on your stated information, the Lender will give you the numbers you should qualify for. It’s an if-then math equation, a ratio.
If your income equals “XX” and your debt is “YY,” then you should be able to obtain “ZZZ” house payment. (The lender has to do some math on a fancy calculator to arrive at that house payment, but it is reasonably simple.)
Pre-approval
A pre-approval is much more detailed, requires an official application and paperwork supporting the information you provided the lender for a pre-qual.
- Company officials verify your paperwork and compare it to the set of guidelines for your requested loan.
- If all of your t’s are crossed, and your i’s are dotted, then you will be issued a pre-approval letter, for the exact amount of your
Sounds official, and obvious; you may be thinking I should always get a pre-approval, right? Not necessarily, and let me explain why.
Lenders Differ
Different lending institutions have different processes. Some processes are built to benefit you, the customer. Simplify your life and upgrade your experience.
Others are structured to protect the company and its agents.
Clearing up the Mystery
Let me be frank. There are absolutely times a pre-approval is what is required.
However, most times, a pre-approval is not necessary, and it can cost you more time, more money and more strain.
If you have an unusually difficult situation you are working through financially or in your employment role, for instance, a pre-approval might be essential. Keyword might.
But it is not required for every client seeking to purchase a new home as much of the internet would suggest!
Pre-approvals are often pushed on you as a crutch to the loan officer, who may be inexperienced with the requirements and guidelines. A pre-approval in such cases helps them see if you even have a viable chance at the loan.
An experienced, highly trained mortgage professional should be able to navigate and pre-qualify the majority of those questions through a detailed appointment.
The bonus: a pre-qualification doesn’t take as long to deliver, hours versus days.
Experts and the Information Review
In Arizona we issue a PQF, (that’s inside lingo for pre-qualification form,) in other states it’s called a loan approval letter or a loan commitment letter.
When issuing a PQF, as an expert, I am confident in the numbers I provide to my clients. My Realtors depend on that (PQF) as well, to be solid, I don’t take it lightly. It’s their livelihood, if I mess up, neither of us get paid.
More importantly, my clients are counting on me. It’s their entire life in that home.
To be clear, without the official pre-approval process, it’s not a guarantee, things happen, but over the years, and many experiences, I have learned to ask my clients, both the Realtors and home buyers, subsequent questions, helping me know if a pre-approval is beneficial versus a pre-qualification.
How many questions is that? As many as it takes.
When I talk to the client, I think of it like they’re buying a certified pre-owned car. The professionals have gone over it with a fine-toothed comb.
I am that professional.
Over the years I’ve learned the value of processes development, and tool implementation helps me be professional. That fine tooth comb review for me is what I call it the hopes, fears, dreams, goals and boundaries conversation.
The Big Picture in Getting Pre-Qualified Right the First Time
As previously stated, the term prequalified means a highly trained mortgage professional has run your income up against the standard ratios for the type of loan you will be pursuing.
Now we know they should be asking more than just how much income you earn and your debt load, such as the following.
1. What do you HOPE to accomplish?
- The purchase of your first house, bigger house, or downsize
- Buying a forever home that requires some fixing up
- Moving your in-laws in to help with the kids.
2. What are your FEARS?
- Not qualifying for a house at all
- Has enough time elapsed since — (bankruptcy, foreclosure, new or self-employment)
- Interest rates going to high, or house payment going to high.
- Is this the right time to buy?
- Are we going to have another housing crash?
3. What are your DREAMS?
- This is a very personal question for people, but when I open that up to my clients it’s amazing how they will share with me it’s about their, kids, dog, relationship with families.
It’s a big topic, but so important to take the time to understand and include in the big picture.
4. What are you GOALS?
- How long do you intend to be in the home?
- Are you purchasing a primary residence, vacation or investment home?
- Do you want to purchase a home but have little or no house payment (Reverse Mortgages for Seniors)?
5. What are your BOUNDARIES?
- House payment within “XX” range
- City or school district
- Homeowner’s association, or no association
- What type of home are you looking for? A condo or a single-family home?
Gathering More than Basic Information
During the course of the hopes, fears, goals dreams and boundaries conversation, a highly trained mortgage professional will also ask a few other qualifying questions like:
- How long you intend to be in the home?
- How much of a down payment can you afford if any?
- Are you a first-time home-buyer, a veteran or looking for a home in a rural area?
- Do you fit the age and residency requirements to purchase your home under a reverse mortgage product?
We All Have Choices — Which is the Best Product?
It might seem like all of the questions were answered above. In reality, not every product fits every buyer.
If your loan officer is not having an in-depth conversation with you like this, you may be missing out on critical details and benefits.
Your mortgage professional also needs to discuss the advantages or disadvantages of different types of loan products as it relates to your hopes, fears, dreams, goals, and boundaries.
There are many loan products to choose from. Some of the most common are:
- Conventional and FHA
- USDA loans that are for rural communities, and
- VA loans, which are for Veterans.
- Reverse Mortgages, offered to Seniors, have better options than those provided ten to fifteen years ago. They are so specialized; loan officers can receive certifications in that product alone.
Each of these programs have different guidelines and requirements, including different ratios, down-payments, and mortgage insurance (or lack of.)
Considering the Ratio Equation
Every loan officer has to calculate the ratios. What they do with them, however, may differ.
- The front-end ratio considers the maximum house payment (MHP) you could afford if you had zero debt.
- The next consideration is how much monthly debt (MD) you have, added to the maximum house payment just calculated and is known as the back-end ratio, or DTI, which stands for debt to income ratio.
Here’s the formula: MHP + MD = DTI
Insurance & Guarantees Also Known As — PMI/MIP/Guarantee Fee
A special kind of insurance is required for guarantying (some) loans as certain risks are involved when lenders and investors lend you money.
To reduce the risk until you have at least 20% equity in the home, lenders and investors require this coverage to insure you in case of default.
- Conventional loans require Private Mortgage Insurance or PMI.
- FHA loans require a Mortgage Insurance Premium (MIP) which is paid up-front at closing, and an additional monthly fee.
- VA loans do not require a monthly amount nor are you paying for insurance. It is called a VA Guarantee, but essentially provides the same coverage of risk as the insurances do.
No Cheat Sheets Here — Because I Respect You More Than That
Moment of truth.
I would be remiss in giving you a table of what is standard on ratios, or FICOs, etc. Why? It’s a moving target, and there are compensating factors.
Tables and cheat sheets are a little like thinking that citing a law or a ruling encompasses the intent of the law. When an attorney or judge cites a law, they presumably understand the depth of it, the intent and compensating factors.
As stated, in mortgages there are compensating factors also, viable and legitimate reasons to color a little outside of the lines because we understand the intent behind those tables and cheat sheets.
Likewise, highly trained mortgage professionals understand there are things that make up your story.
If I gave you a cheat sheet, it would be like encouraging you to represent yourself in court before a judge.
Falsely arming you with a few facts and figures, sending you off to make your own decision, and maybe argue your case. Instead, speak to a highly trained mortgage professional!
Few of us brave going into court without an advocate representative. That highly trained mortgage professional is the advocate representative in front of the underwriter and the long-term investor.
We are often helping the underwriters make a ruling in your favor instead of just sticking to the black and white because we document and present the compensating factors for your case. There is nothing wrong with that.
It’s the same reason we hire an attorney and then hope to get in front of a judge, to explain our story.
Final Thoughts before Scratching that Itch — to Pre-Qual or Pre-approve?
Remember, unless you have an unusually challenging situation you may not need to hassle with a pre-approval for that new home.
Realtors regularly accept a pre-qualification to support a purchase/sales contract, so don’t believe the lie that you have to be pre-approved to get a house.
In many cases, a pre-qualification is more than enough.
While I completely understand the convenience of the one-stop shops— getting a loan from a big box institution that holds your checking or insurance accounts might seem natural because you’ve never considered looking outside that box.
Specialists specialize. If you’re interested in speaking to a specialist, and what a highly trained mortgage veteran can do for you, I’d be glad to visit with you about your Hopes. Fears. Dreams. Goals. and Boundaries. Call me, Michael Chalker today at,
480-345-1005. Email, Michael@MichaelChalker.com or find me on Facebook at
The Chalker Team – Service First Home Loans.
