Home Financing 101 – Home Lending Best Practices

(Photos courtesy of The Seward Group)

By Lyssa Seward

Alexandria, VA – Are you starting to look for a new home? Whether you’re a first-time home buyer or a homeowner looking to downsize or expand, it’s worth consulting with a trusted real estate agent and trusted local lender before you begin the process in earnest.

For a buyer, the first step in the home buying process is to obtain pre-approval from a trusted and respected lender. I had a nice chat with one of my trusted local lenders, Rob Clark, Guaranteed Rate Affinity, in the old town of Alexandria. Here are some of his ideas.

What is the difference between pre-approval and pre-qualification?

A pre-approval requires a higher level of detail from the borrower. Lender will withdraw credit, verify income and verify assets

A pre-qualification is simply a basic conversation with the buyer. The lender may collect information but has not verified much, if any, of it. A pre-qualification will not be considered seriously by a listing agent in our current market.

What are some common hurdles buyers face before a pre-approval is complete?

The biggest hurdle is a recurring situation where the buyer cannot cover the down payment and closing costs. Down payment options of 3%, 3.5% or 5% are readily available. Closing costs in Northern Virginia will add an additional 2.5% to the sale price. Most often, buyers have sufficient credit and debt ratios, but do not have enough cash on hand.

Other barriers to pre-approval include:

  • Self-employment: Lenders generally require a 2-year history of self-employment.
  • Lower credit ratings
  • Student loans affect debt-to-income ratios

People often think that you have to bet 20% to buy a house. Can you dispel this myth for us?

Yes, there are VA loans with no down payment, 3.5% down payment options for FHA loans, and 3% and 5% down payment options for conventional loans. The days of requiring a 20% deposit are over and have been for decades.

Author’s Note: The problem buyers may face in a seller’s market is that multiple offers can negatively impact the odds that an offer based on a low or no down payment loan will be accepted.

What misconceptions do some buyers have about the home loan process?

The biggest misconception (that Rob hears day after day) is that private mortgage insurance or PMI is very expensive, but that’s not the case if you have good credit scores. People often expect mortgage insurance to cost between $300 and $500/month. In reality, it is much cheaper than that.

Rob shares two examples:

Two borrowers were buying a house for $600,000 with a 5% down payment. Both have credit scores above 760 and could afford 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 leaves.

Again, in our current market, low down payment loans have been problematic in terms of acceptance.

What are some of the pitfalls you’ve seen that can negatively impact final underwriting approval?

The biggest issues that arise during the underwriting process:

  • Failing to inform your lender of any significant changes in professional or personal life that occur between pre-approval and settlement.
  • Acquire additional debt
  • Spending cash to pay off a debt
  • Changing jobs in the middle of the loan process

The underwriting process ensures that the loan meets the guidelines required by the secondary market. This is the last defense for the lender; the underwriter is the custodian of the loan. These guidelines are constantly changing.

What are your top recommendations for anyone interested in buying a home in the next two years regarding maximum financial health?

  • Save Money, Reduce Revolving Credit Card Debt*
  • DO NOT close a credit card when paying it off, as this negatively impacts debt ratios.
  • Talk to a recommended local lender (your real estate agent knows which is good) and talk to your favorite real estate agent.

Although the process of buying a home and getting a home loan comes with inherent stress, a great local real estate agent and lender can make the process as seamless as possible. We hope this gives you some insight into this ever-evolving process.

Please contact Rob Clark for any lender specific questions:

Rob Clark: NMLS ID: 182527, VA – MLO-1965VA

(240) 460-0757 Direct, [email protected]

Disclaimer: Applicant subject to credit and underwriting approval. Not all applicants will be approved for funding. Receipt of an application does not constitute an approval for financing or a guarantee of interest rates. Restrictions may apply.

This column is by The Seward Group of TTR Sotheby’s International Realty

The Seward Group (Photos courtesy of The Seward Group)

www.Seward-Group.com, (703) 298-0562

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