By Lyssa Seward
Alexandria, VA – Are you starting to look for a new home? Whether you are a first-time home buyer or a homeowner looking to downsize or upsize, it is helpful to consult a trusted real estate agent and a trusted local lender before you begin the process in earnest.
For a buyer, the first step in the home buying process is to secure a pre-approval from a trusted and respected lender. I had a lovely chat with one of my trusted local lenders, Rob Clark, of Guaranteed Rate Affinity, in Old Town Alexandria. Here are some of his insights.
What is the difference between a pre-approval and pre-qualification?
A pre-approval requires a higher level of detail from the borrower. The lender is going to pull credit, verify income, and verify assets
A pre-qualification is simply a basic conversation with the buyer. The lender may gather information but has not verified much, if any, of it. A pre-qualification will not be given serious consideration by a listing agent in our current market.
What are common hurdles that buyers face before a pre-approval is complete?
The biggest hurdle is a reoccurring situation where the buyer can’t cover the down payment and the closing costs. Down payment options of 3%, 3.5%, or 5% are readily available. Closing costs in Northern VA will add another 2.5% of the selling price. Most often, buyers have sufficient credit and debt ratios but don’t have enough cash on hand.
Other pre-approval hurdles include:
- Self-employment: Lenders generally require a 2-year self-employment history.
- Lower credit scores
- Student loans impacting debt to income ratios
People often think you must put down 20% to buy a home. Can you dispel that myth for us?
Yes, there are zero-down VA loans, 3.5% down payment options for FHA loans, and 3% and 5% down payment options for conventional loans. The 20% down payment requirement days are over and have been for decades.
Note from the author: The issue buyers may face in a seller’s market is that multiple offers can negatively impact the chance of an offer based on a low or no down payment loan being accepted.
What misconceptions do some buyers have about the home lending process?
The biggest misconception (that Rob hears day in and day out) is that Private Mortgage Insurance or PMI is super expensive, but it’s not if you have good credit scores. People often expect mortgage insurance to be $300-$500/month. In reality, it is much less expensive than that.
Rob shares two examples:
Two borrowers were buying a home for $600K and putting 5% down. Both have credit scores over 760 and could pay mortgage insurance for less than $100/month. For the same buyers, with a 15% down payment, PMI could cost as little as $46/month. With a 20% down payment, PMI goes away.
Again, in our current market, low down payment loans have been problematic in terms of acceptance.
What are some of the pitfalls you have seen that can negatively affect final underwriting approval?
Biggest problems that crop up during the underwriting process:
- Not telling your lender about any significant work/life changes that happen between pre-approval and settlement.
- Acquiring additional debt
- Spending liquid cash to pay off debt
- Changing jobs in the middle of the lending process
The underwriting process ensures the loan meets the guidelines required by the secondary market. This is the last defense for the lender; the underwriter is the gatekeeper to the loan. These guidelines are constantly changing.
What are your primary recommendations for anyone interested in purchasing a home in the next couple of years about maximum financial health?
- Save money, reduce revolving credit card debt*
- DO NOT close a credit card when you pay it off because this negatively impacts debt ratios.
- Talk to a recommended local lender (your real estate agent knows who’s good), and talk to your favorite realtor.
While the home buying and home loan lending process comes with inherent stress, a great real estate agent and a great local lender can make the process as seamless as possible. We hope this provides some insight into this ever-changing process.
Please reach out to Rob Clark with any lender specific questions:
Rob Clark: NMLS ID: 182527, VA – MLO-1965VA
(240) 460-0757 Direct, [email protected]
Legal disclaimer: Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. The receipt of an application does not represent approval for financing or an interest rate guarantee. Restrictions may apply.
This column is by The Seward Group of TTR Sotheby’s International Realty
www.Seward-Group.com, (703) 298-0562
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