Is a Mortgage Pre-Approval Letter Necessary To Make An Offer on a House?

On February 4, 2019   /   Mortgage  
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application

Do you need a mortgage pre-approval letter to make an offer on a house? You know you need to get your ducks in a row before looking at homes, but does that include securing a pre-approval letter from the bank?

The truth is, getting pre-approved can actually improve your chances of falling into the sellers’ good graces, so you want to get it done as soon as possible in the home-buying process.

So how organized do your financials need to be before you start looking? Let’s take a look, starting with clarifying what a pre-approval letter actually is.

What is a pre-approval letter?

Mortgage pre-approval is an assurance from a lender to provide you with financing to buy a home up to a certain loan amount.

“It’s a letter from your lender, written on the lender’s letterhead, stating that you are approved for a loan of a specific dollar amount,” says Denise Shur, a Realtor® with 1:1 Realty in San Jose, CA.

To get approved, your lender will collect a stack of paperwork from you that will include pay stubs, federal tax returns, W2s, investment accounts, and residential history. Once your complete financial portfolio is analyzed, the lender will decide whether or not to issue you a pre-approval letter.

Do you need a pre-approval letter to see a house?

Real estate agents prefer showing homes to buyers with a pre-approval letter, because it shows the buyer is financially capable of purchasing.

Agents “need to know if you can really buy a home,” Shur says. That said, a pre-approval letter isn’t mandatory to tour a home.

“All agents are allowed to show you homes, even if you do not have a pre-approval letter,” she adds. It just might not be in their best interest, so don’t be surprised if you get some pushback if you say you don’t have pre-approval.

How a pre-approval letter benefits you

If you don’t take the time to get pre-approval, it’s not just the real estate agent’s time you’re wasting—it’s possibly yours as well.

“There is no sense in wasting your own time and that of an agent to see homes until you are ready to purchase,” says Rosanne Nitti, a Realtor with RMN Investments & Realty Services in Laguna Beach, CA.

Getting a pre-approval letter should be one of your first steps in the home-buying process, she says. “Then when you see something you like, you can act on it.”

As a buyer, that ability to act quickly gives you an edge over people who don’t have certification from a mortgage lender.

How to get a pre-approval letter

Serious about getting serious? Here’s how to get started. You can work with either a loan broker, who can connect you with the right lender, or directly with a bank, if you like the loan program they offer.

“Some banks, like Wells Fargo for example, may even give you a ‘priority buyer’ letter, which puts you on a fast track to get your loan closed quickly once you find a home,” says Shur.

Shur describes the process as follows:

  • Fill out an application. This can be done in person, online, or over the phone.
  • The lender runs a credit check to get your FICO score.
  • It also determines your expenses and income by looking at your financial portfolio.
  • The bank then determines if you qualify for a loan, and if so, what kind and for how much.
  • Finally, the lender puts this in writing as the pre-approval letter.
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Can Consolidating Your Mortgages Save You Money?

On January 23, 2016   /   Mortgage  
Tags: , ,
mortgage consolidation

By: Credit.com

Combining your first and second mortgages into one can save you money if you do it right. Here are some smart, money-saving tips to be aware of when you submit a loan application to refinance and consolidate your mortgages.

When you apply to refinance your home with the intent of financing more money beyond the balance of your first mortgage, your total loan amount could fall into being categorized by your lender as a cash-out refinance, even if you are not pulling funds at the closing table.

The reason consumers should pay attention to this is because when you do a cash-out refinance, the loan costs more.

There are two types of refinances: rate and term refis and cash-out refis. If your goals for refinancing include shortening your repayment term and/or reducing your mortgage payment, then your loan is generally considered to be a “rate and term” refinance. However, if you are cashing out any equity (including a second mortgage you obtained after you bought the home), paying off debt, or pulling funds out for any other purpose, your loan will viewed as a “cash-out” refinance.

Cash-out refinances cost .375% more in loan pricing, which can affect fees and terms and have tighter equity requirements. For a cash-out loan of $400,000, for example, a .375% adjustment to the pricing would mean your $400,000 loan would cost more. Specifically, $1,500 more based on the loan amount ($400K X .00375) than if your purpose was rate and term.

(Mortgage pro tip: You can always change the structure of your loan during the loan process, meaning you can go from a rate and term loan to a cash-out option or vice versa.)

Here are four ways to get a cheaper refinance.

1. You had more than one mortgage when you originally financed

If you bought your home with both a first and second mortgage—for example, with an 80/10/10 loan where you put down 10%, got an 80% first and 10% second mortgage—as long as the first and second mortgage were used to specifically acquire the home and you are now looking to refinance the first and second mortgage into one, that loan will always be considered a rate and term loan as long as your intention is to not extract additional monies out beyond the debt owed.

(Mortgage pro tip: Financing closing costs do not make your loan cash out. You can finance the fees, and the loan will still be rate and term.)

2. You want to use an FHA loan

The Federal Housing Administration will allow you to combine a first and second loan into one as a rate and term refinance and will finance up to 97% loan to value on big loan amounts. In Sonoma County, CA, for example, the max FHA loan limit is $554,300. Depending on your financial circumstances, this could be a savvy approach to take, especially if your equity is limited.

3. Your combined loans are greater than $417K

In most U.S. counties, $417,000 is the conforming loan limit. If your first and second mortgage total is bigger than $417,000, and is considered to be a cash-out refinance because the second mortgage was used for some purpose other than buying the home, you will generally need at least 30% equity in your home (in some cases more depending on your credit score and property type). You can check your credit scores for free on Credit.com to see where you stand.

However, there are some jumbo investors in the market that will do a rate and term refinance all the way down to a loan size at $417,000 or bigger. This can minimize the impact a cash-out refinance could create depending on your equity position and financial profile. Be sure to check with your mortgage company for specific jumbo investor guidelines.

4. You haven’t taken money out on the second mortgage recently

Many lenders will combine a first and second mortgage into one as a rate and term refinance even if the second mortgage was taken out after the original loan was made (for home improvements, etc.) as long as the second mortgage has no draws in the past 12 months. If you fit that requirement, the needed equity position drops to 20%. The devil is in the details. No draws in the past 12 months on your second mortgage could make all the financial difference for you.

Not sure if your loan will be considered? Talk with a mortgage company. You might find a lender, a bank, and a credit union to be far different from one another in terms of what can or cannot be done. If you’re looking to save money, you owe it to yourself to check on this continually, especially if you’ve been turned down in the past. Check every few months. You might just find you actually can get your loan done after all.

 

 

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10 Questions to Expect From Your Mortgage Lender

On January 23, 2015   /   Mortgage  
Tags: ,
earnings

By: Craig Donofrio

Your lender won’t put you in an interview room and demand answers, but completing a loan application can feel like an interrogation. But you’ll sweat only if you don’t know the answers to these 10 key questions:

1. Where’s your proof of income?

You should have proof of about two years’ worth of income at the ready. Come prepared with pay stubs, copies of checks, paid independent contractor invoices, and other documents that verify your employment. Be sure to disclose any other sources of income, including child support or alimony.

2. What are your assets?

Your lender wants to know about any cash reserves you have. A balanced investment portfolio demonstrates that your investment planning and goals aren’t solely pinned on a home value appreciation. They’re also resources that can be tapped in an emergency in case you need money for a mortgage payment.

3. What are your outstanding debts?

In general, the more debt you have the less likely you are to get a mortgage. More debt also means you’ll likely have to pay a higher interest rate on the money you borrow. The debt-to-income ratio limit on most mortgages is 43%.

The debt-to-income ratio measures how much of your gross (before taxes) income is used to pay housing costs, including principal, interest, taxes, insurance, mortgage insurance (if applicable), and homeowners association fees (if applicable).

Other debt, including credit cards, student loans, and car loans, will also affect your debt-to-income ratio.

4. What’s your credit score?

You should already know this, because you should have already pulled your credit report and checked it. Before you approach a lender, get your credit score in the best shape possible by paying off debts and disputing any discrepancies on your report. Even if it takes extra time, it can save you thousands of dollars over the life of a loan. Get your free credit reports from AnnualCreditReport.com.

5. Now that you are about to close, how’s your credit again?

When it’s time to close, your lender will ensure you haven’t mucked up your credit or debt-to-income ratio. Your credit report will be pulled again to make sure you haven’t opened any new credit or added new debt.

From the moment you apply for a mortgage right up until closing, don’t take on any new debt.

6. How much do you have for a down payment?

The larger your down payment, the more you will convince a lender that you take homeownership seriously and won’t walk away when times get tough. Your down payment will also determine if you can qualify for a mortgage, how much money the lender will give you, and what interest rate you’ll receive.

7. How will you use this property?

Owning a home as the occupant comes with a different set of regulations, qualifying requirements, rates, terms, and risks. If you’re buying an investment property, let your lender know up front. To get you the right loan, your lender needs to know what you plan to do with the property.

8. Are you involved in a lawsuit?

A lawsuit involving a financial judgment could affect your financial position. If you’re in this boat, you’ll have to prove why the judgment won’t harm you financially.

9. What are the details of your divorce?

If you are recently divorced, your lender will want to know about it. The lender doesn’t need to know about any of the drama that led to a divorce, only how it affected you financially.

10. What is your ethnic background?

This question isn’t discriminatory. It’s in place for federal oversight, so the government can crack down on discriminatory lenders.

Updated from an earlier version by Broderick Perkins

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Mortgage Brokers vs. Banks: Who Gets Your Business?

On November 9, 2014   /   Home Buying, Home Finance, Mortgage  
Tags: , , ,
mortgage

By: Angela Colley

When you’re looking for a mortgage, you can use a mortgage broker or deal directly with the bank.

Each choice has pros and cons, and depending on your personality, you’ll have to decide which is right for you.

Going it Alone

If you go it alone, you deal with the bank directly. If you’re a regular customer and have a great relationship with your bank, you might receive better terms and interest rates.

If you don’t have a good working relationship with a particular bank, you should shop around. Even if you do have a bank you’ve worked with, you should consider shopping around anyway—don’t trust your bank is automatically giving you the best deal.

Keep in mind that when you’re on your own, comparing rates and terms can be time consuming and complicated. You may not know how to compare mortgage products correctly or be savvy enough to slice through all the financial jargon.

Each bank typically offers just a few mortgage options, so in order to find the best one, you will have to research them each individually.

Pros of Using a Broker

Brokers are mortgage experts. They know the market, follow trends and know which institutions offer which mortgages products. They’ll also know which lenders are offering discounts or deals.

Importantly, brokers can save you time. A smart broker can identify the most appropriate lender for your specific circumstances and know which mortgages will be most appropriate. They also handle the hassle of paperwork and interaction with lenders, which can help relieve stress from the process.

This saving of time, work and stress is a big factor for many individuals who use a mortgage broker. Some brokers develop personal and professional relationships with lenders, which may accelerate the application process.

However, these relationships aren’t always a good thing.

Cons of Using a Broker

You may want to use caution if you pick a broker. Here are three reasons why.

1. Mortgage brokers aren’t free. Broker fees typically range between 1% and 2% of the mortgage. You also need to consider who pays the broker’s fee. While many mortgage brokers receive payment from the lender, some charge sizable fees to the borrower. This is especially true if there’s a situation involving credit issues or other financial hurdles.

2. A bad broker can favor lenders, not you. The deep relationships that some mortgage brokers develop with particular lenders can work against you. For example, a broker might steer you toward a lender with whom they have a long history—and not the one that offers the best terms. Likewise, if a broker is more concerned with netting the highest commission, they won’t have your best interests in mind.

3. They’re not all created equal. Mortgage brokers aren’t equally skilled and knowledgeable. Some brokers may not know of all the deals and options, which means you won’t get the best deal out there. To find the best broker in your area, ask around. Recent home buyers and a REALTOR® may be able to steer you toward a broker who can get you better rates.

Updated from an earlier version by Moshe Pollock.

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Think You’re Playing Mortgage Rate Roulette?

On October 19, 2014   /   Mortgage  
Tags: , ,
mortgage

By: Michelle Lerner for Realtor.com

If you’re shopping for a home, you’ve probably already met with a lender and obtained a pre-approval letter based on your credit history, income and assets.

Hopefully, your lender also explained to you that mortgage rates fluctuate daily and from one loan program to another. If not, make sure you ask for an explanation of what changing interest rates can mean for your home loan and housing payments.

For example, if you plan to borrow $250,000 for your home purchase and want a 30-year fixed-rate loan, your monthly payments for principal and interest at 4% will be $1,194.

If your interest rate is 5%, your payments will rise by $148 to $1,342 per month. Even more importantly, you will pay an additional $53,465 in interest over the life of your loan at the higher rate.

While everyone wants to find the lowest mortgage rate, you need to understand the rate you’re quoted depends on whether you’re paying one or more discount points to bring down the rate. A discount point, equal to one percent of the loan amount, can bring down your interest rate by varying amounts.

When you compare mortgages, be certain that you’re being quoted an interest rate based on the same number of points—or zero points.

Why Mortgage Rates Change

Mortgage rates are heavily influenced by economic trends as well as supply and demand. When other interest rates are low, mortgage rates also tend to stay low, but they can fluctuate based on employment reports, consumer confidence and, in particular, investor activity in the bond markets.

Often, bad economic news will drive investors to purchase more bonds, which sends yields lower along with mortgage rates. The Federal Reserve’s decisions about interest rates also have an impact on mortgage rates.

When mortgage lenders are experiencing a period of low volume of mortgage applications, this also can send mortgage rates lower.

Try our mortgage calculator to check what your monthly payments would be, with different interest rates, for a given loan amount. Keeping up with weekly or even daily reports of trends in mortgage rates on the realtor.com® News blog can be helpful as well.

The rates you see online are typically reserved for those with the highest credit scores. Your individual mortgage rate will vary according to multiple factors.

Locking In Your Mortgage Rate

Your lender is the best source of advice about when to lock in your mortgage rate and what the fee is for the rate lock.

Typically, loan lock-ins are for 30 to 90 days. Technically, you can lock in your mortgage rate when you are approved for a loan, but very few buyers choose to do so—because it can be difficult to know how long it will take you to find a home and have your offer accepted.

Many borrowers choose to lock in the loan rate when they have a ratified contract, because at that time you’ll have a better feel for when the settlement will take place.

However, if mortgage rates appear to be rising quickly, you should discuss with your lender locking in a lower rate as soon as possible. Your lender can tell you what the fee is for the loan lock and what will happen if interest rates drop while your loan is locked.

Some lenders offer a “float-down” if rates decline during the lock-in period. If the lock expires before you close on your loan, you may be able to extend the lock or you will have to relock the loan at current mortgage rates.

When you’re shopping for a home, it’s best to stay aware of mortgage trends and in close touch with your lender.

Updated from an earlier version by Emmet Pierce.

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