We’ve all seen the ads on billboards and the bold claims on television, “a mortgage is just a click away” or “call now and get approved for a mortgage in minutes!” Sadly, the real-world does not actually work that way – it is far more complicated.
The truth is that obtaining a mortgage requires you to navigate a complex obstacle course, with no guarantees that you obtain a mortgage when you reach the finish line. This article will provide the reader with tips to win 3 critical battles, which they should be prepared to survive before they even have a chance of obtaining a good mortgage.
(1) Don’t Forget to Get Pre-Approved!
The housing market in Los Angeles is incredibly competitive, and failing to get pre-approved for a mortgage, prior to making an offer on your dream home, is about as close to “shooting yourself in the foot” as you can get. A pre-approval is where a lender commits to providing you a loan for the purchase of your home up to a certain amount. With a pre-approved limit in hand, it accomplishes two critical tasks: (1) it provides you, the buyer, with a sum certain budget – after all, the lender won’t lend you more money than they already said they would loan you, and (2) it lets the seller know that you are truly committed to purchasing their home, as opposed to just window shopping. In fact, many sellers will only accept offers from buyers who have been pre-approved.
Pre-approval is not the same as a “mortgage pre-qualification.” In order to obtain a “pre-qualification,” the lender simply takes you at your word about your income, savings, and expenses – it’s a best-case scenario, and has no practical effect other than to apprise you of the maximum you could borrow if everything you said was true. A pre-approval, on the other hand, occurs after the lender has investigated your claimed assets; a pre-approval is a guarantee to loan you the stated amount of money.
In order to obtain a pre-approval, you will need to provide your lender with a lot of proof. Typically, this proof includes:
(a) A pay stub from within the last month evidencing your gross income for the year-to-date;
(b) Federal tax returns from the last 2 years;
(c) W-2 tax forms from the last 2 years;
(d) A quarterly statement of all your asset accounts, including
a. Checking Accounts;
b. Savings Accounts; and
c. Investment Accounts, including IRAs, CDs, and other bonds or stock you own
(e) Any real estate you currently own;
(f) Residential history for the previous two years (including your landlord’s contact information if you were a renter); and
(g) Proof of funds for a down payment, which might include a bank account statement.
(2) Play “The Price is Right”, and Nail the Home Appraisal
In light of the fact that your new home will be the collateral for your mortgage, if the lender provides one, the lender will enforce a condition precedent of granting the loan that the home be appraised. Since your home will be collateral for your agreement with the lender, they want to be sure that they will be able to recover any deficit on your account by selling the home; thus, it is critical that the amount you are paying for it is the amount it is worth.
Assuming the appraisal shows that the home’s value is the same as what you are paying, then you are in great shape! If you are paying more than the home is worth, you will be forced to find additional funds from somewhere else.
(3) Don’t Let Your Credit Score Oscillate While Under Contract
Many lenders conduct a last-minute credit check, immediately before disbursing the funds necessary to complete your purchase. While there is some variance in the minimum credit score necessary to obtain a loan (based on the loan program, the borrower’s specific credit history, and the lender the minimum credit score could be as low as 580 or as high as 660). Typically, your credit score remaining stable is a precondition to your pre-approval, and too much variance from when the lender approved your loan and the final credit check could jeopardize all your hard work.
To avoid altering your credit score, avoid opening new credit accounts. Every new line of credit opened under your name has a direct impact on your credit score. Further, you don’t want to close old accounts because your debt-to-credit ratio will be thrown off, and that ratio is one of the many factors considered in calculating your credit score. Finally, don’t forget to pay all your bills on time, a late payment can take someone with a credit score of 780 down to below 700; this is certainly a wild swing in your credit score, and may jeopardize your ability to purchase a home.
This is by no means a comprehensive list of all the battles you will need to fight, and win, to land your dream home. At the Chernov Team, we believe that the person who comes to the table most prepared, will leave the table with the most as well. We take pride in always leaving the table with the most, and that means we are always the most prepared people at the table. We hope our advice helps you land the home you’ve always dreamt of, and the home you’ve always deserved.