In a nutshell, a mortgage is a loan secured by property, and the initial step in the homebuying journey is ensuring mortgage prequalification. In most cases, the pre-approval process is easy for prepared applicants. Since we all know the real estate market is competitive, finding the optimal real estate agent to represent buyers in their home search is critical.
Equally, the mortgage process and mortgage prequalification can run as beautifully as a well-oiled machine when borrowers prepare and have the best lender by their side. Naturally, homebuyers want to determine their price range, decide how much house they can afford, get the best mortgage rates, and secure their eligibility. However, when it comes to loan options and what types of mortgages work best for each client, no one is a better ally than an expert lender.
The first step, yes, even before house-hunting, needs to be finding the lender. In fact, most real estate agents will only show a property if a homebuyer has a mortgage preapproval or prequalification letter in hand. More often than not, homebuyers may be unrealistic about their purchase price eligibility, so house hunting is futile until the numbers are crunched and the process becomes lender-approved.
Loan Officers, Lenders, and Mortgage Brokers, who does what?
As with financial institutions, from credit unions, banks, and online lenders, each financier plays a critical role in the business of lending. A lender is a financial institution that makes loans directly to homebuyers. A loan officer works directly for a lender. A broker does not lend money. A mortgage broker shops loans and lenders to find the ideal lender for their client. A broker may work with many lenders.
Since a mortgage broker acts as an intermediary between borrowers and multiple lenders because they work with a network of lenders regularly, mortgage brokers understand all loan products offered by a variety of lending institutions, not only the loan products a mortgage loan officer would have at their bank. Essentially, mortgage brokers shop around to find optimal loan options that match each of their client’s unique financial situations and needs.
How to get the best interest rate possible in any market.
Although borrowers are at the mercy of interest rates, there are a few action items to set them on the path to finding the lowest rate available. Firstly, prioritize personal finances. Serious buyers should always be relaxed about the credit check. Ideally, borrowers will monitor their FICO credit scores and credit history. Secondly, the prequalification process moves along quickly for applicants with adequate down payments. Thirdly, when it comes to underwriting, the first objective is to ensure the borrower is unlikely to default on the loan and leave the lender holding the bag.
Therefore, underwriting dives into a potential homebuyer’s financial information. Of course, debt-to-income ratios (DTI) are crucial throughout the home buying process since they enable a loan officer to weed through serious buyers versus applicants who are likely not ready for the sizeable commitment that comes with a monthly mortgage payment. Mortgage lenders are committed to lending funds to borrowers, from first-time home buyers to seasoned investors, when the new homeowner is financially responsible and capable of their mortgage responsibility.
Mortgage prequalification and mortgage preapproval: what is the difference?
Prequalification is a general approval based on unverified information the borrower provides to a lender. Lenders grant mortgage pre-approval once a loan officer verifies financial information from a potential borrower. In turn, mortgage preapproval holds more weight than a prequalification letter since a financial institution has vetted the borrower and is ready to fund the loan.
Initially, mortgage pre-approval begins with a loan officer creating a client’s file with two documents – the mortgage application and the credit report. From there, the borrower will need to supply the following documents and information:
Identification – The borrower must supply a state-issued photo ID, like a driver’s license. A passport will also work.
Tax returns – Underwriters need proof of two years of tax returns and W-2 forms. For those who are self-employed, applicants need to provide profit and loss statements (P&L) and federal tax returns for the previous two years. Sometimes, borrowers may need to provide a business license and a letter from your accountant.
Pay stubs – Since proof of current income is required, loan applicants must provide either pay stubs or P&L statements for the last 30 days.
Bank statements – The borrower must provide two months of the most recent bank statements. Include checking, savings, brokerage, 401k, IRA, Roth, and 403b accounts, along with all account numbers, and remember to include complete files.
Additional Documents
Mortgage loans, like borrowers, are all different and unique. In some cases, and depending on individual circumstances and financial situations, applicants may be asked for additional documentation for loan approval. These might include pension, social security, disability, homeowner’s association, divorce statements, bankruptcy discharge documents, or current mortgage statements if you own other properties.
The Loan Estimate & Pre-Approval Letter
Once a loan officer has all the required documentation, they will prepare the loan estimate. It’s also known as a good faith estimate. At this point in the loan application process, borrowers receive itemization of the estimated costs associated with loan origination and ongoing expenses. The underwriter will then assemble and review everything – the application, credit report, and financial documents – and make a yes-or-no decision. When applicants get the green light, the loan officer will create the prequalification letter, which includes details like the maximum loan amount, the type of home loan, and any mandatory conditions. Remember, the letter isn’t a loan guarantee, but it’s an essential first step.
How to ditch PMI
Many conventional loans will come with private mortgage insurance unless the buyer has 20% of a property’s equity as a down payment. However, as we all know, time moves quickly, and home equity can change on a dime. As a result, intelligent homeowners who keep an eye on their home value, paying close attention to the 20% equity ratio, can save a pretty penny with a refinance loan.
Yes, refinancing will adjust the loan term, but removing PMI is typically worth the adjustment. Seeing that refinancing will reduce the monthly payment amount by removing PMI; homeowners can use those funds to either pay off other monthly debt or the optimal use of funds would be to continue making the same monthly payment and pay down the principal loan amount exponentially faster.
It is true loan programs are not all created equal, just as each client brings their individual needs and circumstances. As a result, financing a property should be a financially strategic plan designed to grow wealth and secure the best future for the borrower and the lender. Considering the fact that homeownership is often the most significant decision and financial investment a person can make, having an expert along for the ride is advisable.
How do homebuyers achieve mortgage prequalification?
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insider will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
