One of the best ways to create success in a situation is to perform mental modeling. Pro athletes, Navy Seals, Nobel Laureates, successful CEOs and performance driven individuals use mental modeling to visualize high pressure, new situations before they perform them.
You might ask, what does all this have to do with mortgages? Good question. More than you might think. For a lot of borrowers, the mortgage process is new and can be daunting. And even for home buyers with previous experience, the home loan marketplace is constantly changing. Rates are tied to decisions made by the Fed and daily fluctuations in indexes like the LIBOR, the London InterBank Offered Rate. LIBOR is simply the interest rate that the world's leading banks charge each other to borrow money. It is used as the first step in calculating interest rates for various loans, including home loans, throughout the world. Mortgage rates change daily.
Additionally, the real estate market in today's world is competitive. The internet has given rise to the free flow of information, and many portals to access data on real estate for both buyers and sellers. Real estate transactions are high performance, time sensitive transactions, that require borrowers to be prepared mentally and operationally organized.
So what does all this mean for you?
As you begin thinking about the mortgage process, it's a good idea to mentally model out what the process is going to look like. If you are a first time home buyer, our informative first time home buyer blog may help you get started.
You also want to ask yourself the right questions and have a comprehensive idea of what to expect. Here are some questions to help you get started:
Have you chosen a home and do you know what you can afford?
Typically, buyers place a down payment of anywhere from 10% to 20% down on their new home purchase. There are first time home buyer and other programs available, so it is best to speak with a home loan professional to see what you qualify for and what your monthly payments will look like. From there, you can search for homes within your price range.
Is your financial picture organized?
This is a great exercise to do annually anyway. Getting your financial picture organized can help you make all kinds of decisions in your life. It's great for goal setting, and financial security. For your home purchase and mortgage, you will need several years of tax returns to pre-qualify. Three years is recommended, and anything deeper can only help.
Do you own your own business or have non-traditional income?
If you are a business owner or have several revenue streams over the last few years, you will need to provide documentation explaining the structure of your income. Lenders use this information to verify that you are a reliable borrower. So have this information ready and available.
Do you know your FICO score?
It's a good idea to find out a solid and current approximate number for your credit score. There are many free resources to obtain this information. The government recommended site is: www.annualcreditreport.com
You can also reference the Federal Trade Commission Article: Here.
Your credit score will be one of the main variables used to calculate the interest rate charged on your home loan.
Are you being gifted any money from family and friends?
If you are being gifted money for your mortgage down payment, you will need to provide documentation that supports where this gift is coming from, and that it is not a loan, but rather a free gift. As always, expect that you will have to respond to underwriting with any requests for further documentation to verify details about gift funds.
To summarize, we have created a list of what to expect when you are looking for a home loan.
What are the best steps in the Mortgage process?
- Speak with a mortgage professional to understand what your options are for mortgage products, and what you can afford in a home. Apply online or in person and have a conversation with an expert.
- Get pre-qualified for a mortgage. We define pre-qualification as a good estimate of what a borrower will qualify for based upon borrower self reported income and credit score.
- Find a good real estate agent that you trust to help you with the home search and home buying process.
- Use the pricing and product information that your mortgage professional helped you with, to narrow down a home that fits your needs. How long you intend to live in the home, which school district or neighborhood you wish to live in and your work commute time can all be important variables to consider in this step.
- Get pre-approved for a home loan so that you can make offers on homes that you like. In today's competitive marketplace this can be a crucial step in making an offer. Pre-Qualification or Pre-Approval are required by many sellers, and will make your offer stand out.
Pre-Qualification vs Pre-Approval:
Pre-Qualification: Does not require pulling your financial records, and will not pull your credit.
Pre-Approval: Is the second step in the mortgage process and will require a credit pull as well as your tax and banking records. Logically, this step is more accurate and will lock you into a specific rate and price quote offer. This is a sensible step when you are ready to make a serious offer on a home.
Offer Accepted, Now What?
Once your offer is accepted, be prepared with your organized financial information including tax returns, bank documents, explanations of any property that you may own, existing mortgages and / or debts, and your income. This will help in the next step of the mortgage process which is underwriting. Underwriters verify that a borrower is a reliable person that will make the monthly payments required on their home loan. The more efficiently a borrower provides the documents requested by underwriting, the more efficiently the home loan will close. This is an important step in the process, and one that many borrowers don't understand or expect.
As long as you are in constant communication with your Mortgage Loan Officer, and respond quickly to any documentation that the underwriters require, your home loan will move along smoothly.
If you plan out the process, understand what to expect, remain organized with open communication, and pick the right players on your team to help you through the process, your home buying experience should be exciting and smooth.
Hopefully SunnyHill Financial's Mortgage 101 article helps you get off to a good start.