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Since buyers often contact an agent long before they’re ready to meet with a lender, it’s essential that agents are prepared to answer their buyers’ basic questions about obtaining a mortgage. The question is how well prepared are you to answer them?
Obtaining a mortgage is a complex process that can be challenging for even the most sophisticated buyer. Here are Google’s top 10 mortgage questions that buyers ask, as well as tips about how to answer them.
What is a mortgage?
A residential mortgage is a long-term loan (usually 15 or 30 years in length) provided by a bank, credit union or other financial institution secured by the property the buyer is purchasing. If the buyer defaults (fails to make payments in a timely fashion), the lender may start foreclosure proceedings to force payment of the debt through the sale of the property.
How much can I afford to borrow?
Agents should avoid giving a specific answer to this question since the buyer’s ability to purchase depends upon their income, credit score, debt-to-income ratio and down payment amount.
You can, however, explain the basic guidelines that lenders use. Specifically, the monthly mortgage payment should not exceed 28 percent of the buyer’s gross income. Second, the buyer’s total debt payments should not exceed 36 percent of the buyer’s gross income.
A different approach is to use a mortgage calculator. The Street has identified their top six mortgage calculators you can share with your buyers.
Please note that if your buyer is self-employed or has 1099-income rather than W-2 income, qualifying for a loan will be much more difficult.
What are the most common types of mortgages?
There are a wide variety of loans available to borrowers. Here’s a list you can share with your buyers:
These include Federal Housing Administration (FHA), Veteran’s Affairs loans (VA), and US Department of Agriculture (USDA) loans. Government backed loans offer various types of down payments, interest rates, repayment terms and eligibility standards.
Fixed-rate purchase mortgages are typically 15 or 30 years in length and the interest rate is locked for the entire term of the loan.
Adjustable-rate mortgages (ARMs)
The rate on ARMs fluctuates based on changes in the index to which the ARM is based. According to BankRate.com:
ARMs have variable interest rates which float up or down with the fed funds rate. This means if the fed funds rate goes up by a quarter of a percentage point, your ARM rate will increase as well at the next reset. However, there are caps on the amount of interest you’re on the hook for. There are three types of rate caps:
- Initial adjustment cap: This is the maximum interest rate on an ARM, if the rate rises, after the fixed-rate period ends. Usually, 5 percentage points is the maximum amount.
- Subsequent adjustment cap: This is the maximum rate after the initial adjustment.
- Lifetime adjustment cap: This is the maximum interest rate you can be charged over the entire span of the loan.
Home equity loans (HELOCs)
A HELOC is a line of credit borrowed against the homeowner’s equity in their home. Their home equity is the difference between the appraised value of their home and their current mortgage balance.
In an interest-only loan, none of the principal is paid down. Consequently, most interest-only loans either require a balloon payment where the entire principal must be repaid at the end of the loan, or the loan shifts to being fully amortized after a period of being interest only.
According to Bank of America:
A loan is considered jumbo if the amount of the mortgage exceeds loan-servicing limits set by Fannie Mae and Freddie Mac — currently $726,200 for a single-family home in all states (except Hawaii and Alaska and a few federally designated high-cost markets, where the limit is $1,089,300).
Jumbo mortgages are available for primary residences, second or vacation homes and investment properties, and are also available in a variety of terms, including fixed-rate and adjustable-rate loans. A jumbo loan will typically have a higher interest rate, stricter underwriting rules, and require a larger down payment than a standard mortgage.
What are the interest rates for home mortgages?
Interest rates vary due to a wide variety of factors including the type of mortgage, the length (term) of the loan, the borrower’s credit score, as well as market conditions including the indices to which the various types of loans are based. For example:
- The 30-year fixed-rate mortgage is currently tied to the 10-year treasury rate.
- For ARMs, the two most commonly used indices are the one-year treasury and LIBOR.
- The prime rate is a third benchmark usually used for HELOCs. The most widely used ones are the 11th District Cost of Funds, the Federal Discount Rate, and the Fed Funds Rate.
What are the closing costs and fees associated with getting a mortgage?
Closing costs are the fees and expenses associated with finalizing a mortgage, including loan origination fees, appraisals, fees, title insurance, and escrow fees. They vary based upon the type of loan and the lender. As a rule of thumb, three percent of the loan amount is often a good estimate of the amount of closing costs.
Due to all the regulations governing closing costs and their disclosure, i.e., TRID, TILA-RESPA integrated disclosures, NEVER provide a detailed estimate of closing costs. Instead, it’s best to refer your buyers to the Consumer Finance Protection Bureau using the link above.
It’s also important to advise your clients that:
- Closing costs are usually in addition to the down payment amount, although in certain situations, they may be rolled into the loan amount.
- Unlike rent, the buyer’s mortgage payment is paid at the end of the month rather than at the beginning. (For example, the payment made on July 1st is for the month of June.)
What is the difference between pre-qualification and pre-approval for a mortgage?
According to the CFPB, the prequalification letter is:
A document from a lender stating that the lender is tentatively willing to lend the borrower up to a certain amount. This document is based upon a certain assumptions and is not a guaranteed loan offer.
Rather than settling for a prequalification letter, buyers should always obtain preapproval if possible. According to Bank of America:
Preapproval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. You will complete a mortgage application and the lender will verify the information you provide. They’ll also perform a credit check. If you’re preapproved, you’ll receive a preapproval letter, which is an offer (but not a commitment) to lend you a specific amount, good for 90 days.
Preapproval is a more in-depth process and provides buyers with a substantial advantage, especially if they find themselves in a multiple-offer situation.
What are the documents I need to get a mortgage?
The documents required for completing a mortgage application typically include proof of income (W-2 statements, tax returns, and pay stubs), credit history including current credit card balances and monthly payments, employment verification, recent bank statements, and identification (which typically includes the borrower’s residences for the last 10 years.) Additional documents may be required depending on the buyer’s financial situation and the type of mortgage.
How does the mortgage application process work?
The mortgage application process consists of several steps: prequalification, preapproval, loan application submission, underwriting, appraisal, title search and closing. Each step involves the collection and verification of various documents and information, culminating in the final loan approval and property purchase.
The process can take as little as 30 days (and sometimes less) although 45 to 60 days is the most common. If there is a problem with the appraisal, a lien on the property, a title problem or a different issue, loan approval can take much longer.
Ideally, buyers should be preapproved for a loan prior to writing an offer on any property.
What happens after I get approved for a mortgage?
After being approved for a mortgage, you’ll receive a loan commitment letter outlining the terms and conditions of the loan. You’ll then proceed to the closing process, which involves signing the loan documents, transferring funds, and ultimately acquiring the property title.
In escrow states, the buyers sign their loan documents usually a day or two before the scheduled closing date. After all required documents are signed and the buyer’s down payment and other closing costs are deposited as a cashier’s check or wired to the title company, the property typically closes the next business day. In other states, the title company handles both the escrow and title function.
Many states require the buyer and their agent to attend a closing at the title company, usually within 24 to 48 hours before the property is scheduled to close. The buyers sign their loan documents and deposit the funds required to close the transaction at that meeting.
In attorney states, the process varies a great deal. For example, New York buyers are required to have an attorney prepare the first draft of the sales contract, process all other contracts and represent the buyer at closing. In New Jersey, the real estate closing process breaks down into four major parts: the attorney review, inspections, the mortgage process, and the final closing.
Since the closing process varies so dramatically across the country, agents should make sure their buyers are aware of the exact steps in the closing process in the area where they are purchasing.
What are the common mistakes to avoid when getting a mortgage?
Some of the most common mistakes buyers make when obtaining a mortgage include:
- Not shopping for the best interest rate.
- Failure to reach out to a mortgage professional to determine exactly how much they can qualify for and whether they are eligible for down payment assistance.
- Not knowing that closing costs are on top of the down payment amount.
- If interest rates are rising, failure to lock in their interest rate for 60 to 90 days when they first apply for a loan.
- Choosing the wrong type of mortgage for their situation.
- Settling for prequalification rather than doing the extra work to obtain preapproval.
- Lack of understanding about how credit scores impact the buyer’s interest rate and their ability to qualify for a loan.
- Making unnecessary purchases while they’re under contract. This can include buying furniture or other items for their new home which can negatively impact their debt ratios and cause them not to qualify for their loan.
The mortgage process is complex. Agents must be prepared to answer their buyer’s basic mortgage questions including the types of mortgages available, basic lender guidelines for obtaining a loan, the difference between preapproval vs. prequalification, as well as helping their buyers understand the exact closing process in the area where they are purchasing.
Bernice Ross, president and CEO of BrokerageUP and RealEstateCoach.com, is a national speaker, author and trainer with more than 1,000 published articles. Learn about her broker/manager training programs designed for women, by women, at BrokerageUp.com and her new agent sales training at RealEstateCoach.com/newagent.