What Others Won't Tell You
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The Mortgage Financing Process Simplified
Since we practice both real estate and mortgage origination, we head off problems simply because we know pitfalls others don't.
It’s easy to explain the mortgage process, but be aware that the process itself can be bothersome (it is what it is – anyone claiming otherwise is puffing) due to repeated document requests and/or explanation requests and/or errors by the processor or underwriter on understanding the facts, repeated requests for the same info, etc.
The experience can be frustrating because every lender seems to question every piece of information you submit. They just keep asking for more, e.g.,“what’s the source of this deposit - please deliver the check copy or other verification”, and even more.
There is a good chance your credit score has errors on it (old accounts not closed, incorrect former address, so much more) that they’ll ask about.
No one will admit it upfront, but the truth is, the experience gets hairy because every lender seems to question every piece of information you submit. They just keep asking for more, e.g.,“what’s the source of this deposit - please deliver the check copy or other verification”, and so much more. You get into a flow and you get it done. Millions do, every year.
Mortgage Interest Rates Explained (Really!)
Anyone can tell you that there are many factors influencing interest rates overall. (The following excludes consideration of your individual circumstances; see “How Lenders Evaluate You”.)
The primary factor in all interest rates (home loans, credit cards, personal loans, auto loans, etc.) is the Federal Reserve Prime Rate. Set and changed periodically, according to their assessment of economic conditions, by the Federal Reserve Board, a government institution, this rate has been set at zero since the early pandemic, to help economic activity as much as possible. The “Fed” has, at this writing circa 1/1/22, announced 3 separate ¼ point increases for 2022.
They can, and do sometimes, change their mind or modify any plan. So, at zero today, with interest rates having ticked up now already from an all-time 50-year low last year of about 2.67%* to about 5.0% now, an unprecednted historically dramatically fast increase. (That's a 30 year conventional mortgage; lesser terms carry lesser rates, and you have options.) Since the Fed announced at least 3 rate increases of 1/4 point each for 2022, so we are still going up at this writing (05/22). Due to other factors, it could go higher. The Fed might change their mind due to evolving economic conditions too, adding or deleting any planned rate increase.
Bottom line: For every $100,000 in mortgage debt, a 1/4 point change in interest rate is about $15/mo. So, for say, a $400,000 mortgage, that 1/4 point rate change causes a payment change of about $15 x 4 = $60.
Other factors influencing interest rates include retail banking competition (in credit cards, mortgages, etc.), demand for loans, institutional banking activity and higher-level competition on those and other fronts, inflation and other measures of economic activity (influencing decision-making), and more that nobody can understand or predict. A PhD candidate in economics might do a dissertation on some facet of interest rates – it can be construed as that complicated.
*Any figures quoted are strictly anecdotal – that is, we relate experiences of our agents on actual deals. We aren't pre-occupied with national numbers since the only numbers that matter are for your area, in your price range, with your credit score, etc. We do not mean to imply any sort of "statistically significant" or widespread research, unless specifically noted.
1) Choose a lender in consultation with your agent - this may or may not be the lender who provided your pre-approval.
2) Procure and submit a fully executed contract to buy a home; you need the document to commence the mortgage process.
3) Procure and submit initial documents – photo ID, 2 mos bank statements, 1 mo. pay stubs or dd receipts, 2 years’ W2s and/or 1099s, 2 years’ tax returns if self-employed.
4) Receive and service document requests from your processor – updates, other items your processor may deem useful for the underwriter.
5) Formally submit your application and receive your first “loan estimate”. A lender then has 3 days to deliver a first draft loan estimate” and often it’s incorrect and so-acknowledged, so it is just a placeholder.
6) Your first conditional “commitment letter” arrives, which answers your contractual obligation to procure it within a timeframe. It will have many document requests and other conditions like “pay off the credit cards” etc.
7) Subsequent commitment letters may arrive (lenders vary) until all conditions have been answered and you receive a final approval in the form of a “clear to close” notification from your lender.
8) Receive your final approval as a “clear-to-close” (CTC) from the lender.
9) Receive and review your final loan estimate.
10) A closing date and time is set among the bank attorney, seller’s attorney and buyer’s attorney.
Please take note of these examples of dynamics that are out of our control that can affect things negatively or positively: sellers' or buyers' or agents' or lawyers' personalities, perspectives, and inclinations; HOA or coop or condo rules; good or bad attorneys and agents (competence); uncle Joe’s effect on your thinking in lack of trusted professional counsel.
How Lenders Evaluate You
(it’s NOT rocket science, as some would have you believe)
There Are 4 Things That Matter:
1) Your credit score (and your partner's) – they use the lowest person’s score. What’s used for each person is the middle of all 3 credit agencies’ scores (Equifax, Experian, and TransUnion).. 780+ gets the best rates. Other break points for a given lender might be 680, 700, 740, etc. Some lenders can finance down to 580 (but that will be a high rate).
2) Debt to Income Ratio (“DTI”) – Your debt is defined as projected housing cost (excluding utilities or maintenance), plus any other monthly, fixed obligation (credit card minimums, alimony, car payments, etc.). Divide that figure by your gross monthly income (that’s the top line on your paystub); if you are at 28% or less, and all other items are favorable, congrats, you may qualify for the best interest rates. If you’re 57% or more, think about a smaller mortgage, meaning, a smaller home. Up to 55%, the FHA might finance you. (Some sellers won’t accept FHA financing because the appraisal is more rigorous.) You are qualified for a conventional mortgage if you’re at 45% or less. Again, if you don’t quite qualify you can reduce your loan amount (by increasing your down payment) and re-calc.
3) Loan to Value Ratio (“LTV”) – What % of the purchase price is your down payment? Deduct that from 100%. So, with 20% down, your LTV is 80%. Generally the maximum is 95% and an FHA loan gets you another 2.5 points in slack. Sellers prefer big down payments, relevant in any bidding war.
4) Reserves - Lenders may not say it but you'll be treated better if you can show you'll have 6-12 months of payment money left in the bank after the transaction.
Note About Self- Employment – Self-employed people are disadvantaged. For no good reason, they are scrutinized a lot more (more document requests, more explanations needed) than “W2” people, that is, who are employed by big company for a sufficient time. Length of self-employment and prior time in your field will matter. If you deduct a lot and don't show your real earnings ("AGI") on your tax return, you may not get the best interest rates. Sometimes the loan is called "no doc". The "no documents" designation is misleading - the lender will demand all sorts of documents, focusing on your bank statements to see money in and out over 1-2 years. We help lenders deduce your real income, using your tax return and then adding back items like depreciation, personal expenses charged to the business (it's fine!), etc., to show a lender your real qualifications to keep your interest rate as low as possible. Most agents just don't care or know that much. We do.
Truths You MUST Know!
Truths: Every front-person at any lender should (they don't, we do) write an explanatory letter for you, no matter how simple you think your situation may be. Very few even think of it. The right letter can foster an approval and avoid weeks of delay and/or an outright rejection due to real misunderstandings that many don't bother to dig into to try and correct. They just lose the house.
Click here to schedule a free 10-60 minute consultation (your choice) regarding both your real estate and mortgage questions – our unusual agents have both licenses, and/or have worked as both a real estate and mortgage professional. That is, all of our agents are eminently qualified to advise on every front - that's not the normal industry paradigm, and our clients love it. You will too!
Contact us - click above, or email info@reinventiverealestate.com, or email Eric Illowsky directly at erici@reinventiverealestate.com, or call us at 914.413.3689. In any case, we'll make your life easier:)
*Important qualifications regarding all information on this site: All numbers represent the experience of our agents and may not accurately reflect national averages or others' numbers. All examples are anecdotal, and should not be regarded as relevant to your own circumstances. Our firm provides the information on this website for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, real estate advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, finance, realtor estate r other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. All information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. To review your situation, reach us at 914-413-3689.