It seems that most people tend to leave it to the professionals who work in mortgage lending to give them accurate information, advise them of the best loan type, get them the best interest rate and a closing with a little money out of pocket money as possible. Okay, yes that is why they earn their salary or commission and yes that is their job. In short, it is not always the best policy and this is no reflection on the Loan Officer or Account Executive.
In this fast pace world we live in; it is best to know what type of loan you are interested in, what the going rates today are and what the average closing cost should be. It means that you should understand the fast difference in a fixed rate loan and an adjustable rate loan (ARM). Some people do not understand that an Interest Only loan means that you pay interest for the initial period of the loan, usually five to ten years and no principal is being paid. It is wise to understand the different types of adjustable rate loans and how the interest is derived at; when the interest rate will change and how often. I am sure that most know that the fixed rate product is guaranteed for the life of the loan; where the ARM loan is not. There are numerous other Mortgage Loan Changes that have taken place in the market since the meltdown. There are other loan types such as balloons, first time homebuyer loans and graduated payment loans. Ask questions and seek answers. It is wise to be knowledgeable.
It is also best to seek a lender with the easiest approach to getting pre-approved but in so doing; be aware of what you can afford prior seeking financing. It is not so complex that you can figure out what your income calculation is and then what you debts are.
Income for mortgage lending is probably not calculated the way you might think.
Weekly Income= 800wk x 52 divided by 12 = $3,466.67
Bi-weekly Salary = 2500 x 26 divided by 12 = $5,416.67 monthly
Bi-monthly Salary = 2500 x 24 divided by 12 = $5,000.00 monthly
Hourly income = 40 hr x 28.85 x 52 weeks divided by 12 = $5,000.67 monthly
Of course you can see that if you are paid bi-weekly you make a little more money than being paid bi-monthly.
Most of us know what we pay out monthly for other obligations and this does not include; utilities, or other household debts such as car insurance or life insurance. It can be quite complicated for some who forget that regardless of these other debts not being counted in the debt to income ratios; they do exist and sometimes increase with the purchase of a new home; utilities, that is. These things should always be considered at home for the prospective homeowner prior to going to the Loan Officer. Why is this important? These bills are there for the duration and the money has to be there for the other obligations and this is what happens a lot times to homeowners; they forget and then they get into a bind financially. They forget they have childcare expenses of $400 monthly. They forget they have to pay the car insurance; and they forget that their homeowner's insurance may be increased.
Back to debt to income ratios; if you are looking to see what you can afford; you can easily go to a mortgage calculator online for your payment. You can just as easily find out what the tentative taxes and insurance and if there is a homeowner's monthly charge if it is a PUD or Condo. Once you have these figures you should add the total PITI (principal, interest, taxes and insurance)(if applicable) plus your other obligations (installment, revolving changes to credit cards, any other debts you are paying to someone else that has a balance and will not be paid out within the next 10 months). Once you have this figure; you divide this into your monthly income and you have your debt to income ratio (DTI).
After you know what you can afford; it is then that you gather your documentation to take to the application process. If you take it upfront you are saving time. The Loan Officer can then use what he/she needs for the application.
The minimum documentation is:
- Paystub for one (1) month
- W-2's for two (2) years
- 1040 tax returns (2) years *if you have 2106 expenses, commission income, bonus income, tip income, interest and dividend income, unemployment compensation; schedule C (sole proprietor income statement) Schedule E (rental income statement) and any self employment income. *if a corporation; you may need to bring your Business returns.
- Two (2) months, 60 days of bank statement * funds used for down-payment and closing cost must be seasoned at least 60 days. For conventional lending; five (5%) percent must be from the applicant's own saved funds and cannot be gifted. FHA funds may be gifted from a relative.
- Retirement funds most current statement which indicates the amount vested and 70% of these funds may be used for calculating funds available to borrower.
- You should be up to date on what your debts are; if you pay alimony, child support or separate maintenance, or if you receive these payments (certain parameters apply) and you must have the documentation to reveal by court order or divorce decree and evidence of paying or receiving payments for the past 6 to 12 months (depending on the strength of the file and of course how long this has existed). The history of this information and the continuation of the debt or income must be documented.
- Names and addresses of your banking institution, employer for the past two (2) years, residency for the past two (2) years. If you have rented you will need to provide your rental history with the landlord information.
This is the minimum needed to get started and it may not be conclusive of all documentation needed to get a final approval on your loan. It will depend upon your case file and you financial situation.
Be ready and know your rights and what you need to meet your financial needs. Do not let anyone else tell you what you need. You should be aware of what you can afford and be comfortable with and try to analyze any unforseen circumstances. It is to your advantage to be prepared.