Episode 4: Mortgage Basics – part 2 with Rebecca Hansen
What is a pre-approval letter?
- A pre-approval letter is what the lender will provide to you after they speak with you about loan product options, review your financials, credit, and work history. This letter will outline the type of loan you are planning to use, the loan amount you qualify for, and the amount of money you are using as your down payment.
Why is a pre-approval letter from a lender so important?
- A pre-approval letter shows a seller that you have been through the process of speaking with a lender and have preliminary confirmation that the lender will allow you to borrow the necessary money to purchase the home.
How do you obtain pre-approval status with a lender?
- Meet with a mortgage professional such as a loan broker, a credit union, bank, etc.
- To get your loan application started you will need to provide your name, address, social security number, and your basic two-year work history. Work history can be shown with paystubs, W-2s, tax returns, and bank statements. These documents will help the lender determine what loan options are available to you, the interest rate estimate, and the purchase price.
Credit (FICO) score range estimates: Lenders use a tri-merge credit report (3 scores from 3 credit bureaus) to determine what type of loan you qualify for.
- A score of 700+ = Conventional
- A score of 620-700 = FHA
What does debt to income ratio (DTI) mean?
- Your debt to income is the relationship between all of your debts compared to your income.
For example: Current Outstanding debts (i.e. car payments, student loans, credit card payments, etc) + new mortgage payment / Income
- 40-45% or less ratio target.
What does your work history need to look like?
- A minimum of two years – these two years do not have to be with the same company. Gaps of unemployment are ok if you can patch together a total of two years. If you are right out of college and don’t have the minimum amount of work history, as long as you can prove that you have secured a job within your field of study, this will be adequate.
At this point, the lender will take all of this information and work with you on what amount you are comfortable with for your monthly payment, what you have available for a down payment, and what amount of cash you are going to need on the day of closing.
What are closing costs?
- 1-2% of the purchase price and this amount is in addition to the down payment. This total includes interest on the loan from the day of closing to the end of the month, title closing fees and insurance, your credit report, appraisal, underwriting fees, and loan escrows (pays your property insurance and taxes throughout the year).
What will the pre-approval process tell you?
- The loan type
- The total amount you qualify for
- The amount of your down payment
- Your monthly payment
What are Down Payment Assistance Programs?
- Most are income based and driven by your credit score.
- Grant program: These are where the funds are gifted to you and there is no repayment.
- Loan programs: The money is paid back when you sell the home or refinance the loan.
Please note – you do not have to be a first time homebuyer to be eligible for these programs.
What is the difference between pre-approval and an approval for a mortgage?
- Pre-approval: You have filled out a loan application and spoken with the lender.
- Approval: The under writer for the lender reviews all of your documents (paystubs, W-2, etc.) and confirms that you are qualified to receive the loan.
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