The Basics:
There are two ways you can buy a house, either in cash or financing. Cash is very simple, you wire the amount of the purchase price from your bank to escrow/title and they can proceed with closing and recording. Financing however is where it gets complicated. You will make a small down payment (Traditionally it's 3.5% for FHA and 5% for conventional, but there are many products that are 3% down payment for conventional as well, please check out my mortgage page for more information regarding loans) and the rest will be loaned from the bank or lender.
Find a Lender:
- Mortgage Broker: A mortgage broker shops your loan to many different lenders trying to find the best deal or products that matches your situation. There are many products out there for everyone and many creative ways for you to structure your loan that it will make sense for you in the long run.
- Banks: Go in and talk with a loan officer at your current bank that you bank with. Banks are different than brokers because they only lend through one lender which is themselves. You will have less flexibility with products and strategies but some people prefer working with a bank that they have an established relationship with
Pre-qualifcation vs Pre-Approval vs Underwritten Approval
You probably hear these terms thrown around a lot when you are trying to get information regarding real estate. Most real estate agents will want their clients to be pre-qualified before showing them properties. The reason for that is because many real estate agents will not want to risk losing time if the client is not financially able to purchase to being with. So what exactly is the difference between Pre-qualification, pre-approval and underwritten approval?
Pre-Qualification: This is the most basic letter you can receive for loan qualification. The loan officers can issue a pre-qualification letter based off of the information you told him regarding your finances. Based off of that data, the loan officer will see if you are qualified to purchase a house. (To learn more about what lenders look at to qualify you, click here) This letter basically states, based off of the information provided to me by the borrower, you should be able to qualify up to this amount, subject to credit, employment, and financial verification.
I believe working with a lender you can trust on pre-qualification is extremely important. From my personal experience during the initial consultation (as a loan officer), I will always let my clients know how realistic their loan is. There is no reason for me to sugarcoat the whole consultation making it seem doable when it really is not. In the past, we can choose to issue a pre-approval by asking for more information, but do to recent changes in regulation, we cannot ask for the information if the client does not want to provide it. So many times, a good Realtor would ask for the information to be provide so we can get more of an accurate estimate with a Pre-Approval
Pre-Approval: This is a letter you will receive from the loan officer after they review some of your documents, such as pay stubs, tax returns and credit report. They will have a better understanding of your finances and the amount you qualify for. I highly recommend providing at least the tax returns and pay stub over to the loan officer so they can give you an estimate of how much your income is usable and an estimate of how much the lender will actually lend to you. I understand most people do not want the loan officer to run their credit because it will "ding" it (lower the score, by roughly 1-3 points). It's not as important because the credit score is used to see what products and interest rates you can qualify for, so there can always be a rough estimate unless you are really shopping for that specific rate. (Low rates does not equal more savings, I'll do a blog post about that in the future).
Underwritten Approval: This is the best approval. It means the loan officer has ran all your information provided income and credit through DU or LP (Desktop Underwriter or Loan Prospector). Those are two automated programs used by Fannie Mae and Freddie Mac, to see if your qualification meets their criteria. You have probably heard of Fannie Mae and Freddie Mac (big banks you hear from the news). If your qualification is accepted by their automated system, then your loan should be good to go with a lender as long as you meet their other requirements. If your qualification does not meet their criteria, then most lender might not accept your loan, unless you are working with a private lender or a lender that holds their own loans.
It might sound confusing but click here for more information regarding how lenders actually lend to consumers