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December 2nd, 2011

5 most important parts of the prequalification discussion

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The following post was written by Kevin Ungar, a mortgage broker is New York:

Expert resized-HSH SpecialFor most of us, a mortgage will be the single-largest purchase we will ever make. That said, you need to do your due diligence before starting that process.

The prequalification process is the starting point for your homebuying search. Take my advice: only deal with an experienced loan officer who will carefully and patiently take you through each aspect of prequalification. 

As a mortgage consultant, I’ve talked to thousands of borrowers about the prequalification process. In my experience, the prequalification conversation should take no more than 25 minutes, and after that call, you should be able to answer the following questions:

  • What’s my price range?
  • How much house can I afford?
  • How do my credit scores impact my loan terms?
  • Which of my assets can I use toward a down payment?
  • What are my interest rate options?

The answers to these questions will help provide a clear picture of which homes you can afford and how you can make the homebuying process an easy one.

Here are the five most important components of the prequalification discussion:

1. Income

Not every borrower is a salaried employee with a simple base salary. There are several different forms of qualifying income, and lenders treat each one a little differently.

Bonus income: In order to use bonus income, typically, there must be a two-year history at the same job (although there are cases in which a lender will allow you to use bonus income from two different jobs if they are in the same line of work). If the bonus income in the most recent year is higher than the year before, then you average the two years. If the bonus income was less in the most recent year, lenders use the most recent year’s number. 

Self employed/commission-earning borrowers: You must show that you have been self employed for at least two years in order to use that income. Present your last two years of federal tax returns and the same qualifying rules will apply as the bonus income.

Overtime and hourly: These income streams tend to follow the same qualifying path as bonus and self-employed income. 

Dividend and interest income: Your lender will generate a two-year average from your tax returns.

Capital gains income:  Your lender will generate a three-year average from your tax returns.

2. Assets

Checking and savings accounts, stocks, bonds, mutual funds, and money market accounts are some of the many asset sources that can be used for your down payment. Gift funds from family are acceptable as long as the money can be traced from donor to borrower.

3. Credit

This has become more important with every passing day.  The credit report is the single greatest indicator of a borrower’s ability to repay debts.  Credit scores can have a major impact on mortgage rates and loan products that you can obtain.

4. Closing costs  

Some loan officers do not go over closing costs and that’s a big mistake.  In today’s world where people are struggling to find 20 percent for a down payment, the closing costs may make or break your purchase.  You must have a clear picture of the total fees so you know if you have enough money to cover the down payment, the closing costs and have some post-closing reserves which the bank will want to see.

5. Mortgage rates

 There are several aspects to the mortgage rates conversation that are pertinent.  First, what type of product do you want—30-year fixed, 5/1 ARM?  Each has its own pros and cons and it’s up to the loan officer to explain each one and how those rates impact you. There is never a right or wrong product. Rather, it’s what the borrower is comfortable with and what suits each particular situation. For example, if buying the house is a bit of a stretch financially, you may choose to take a 5/1 ARM where the rate is lower, hence the payments will be more affordable. By the same token, you may need to take the 5/1 ARM in order to qualify for the loan.  It can be a two-way street.

Kevin Ungar has been a mortgage broker for the past 10 years. His company, Apple Mortgage Corp., is a boutique company that specializes in A paper mortgages in New York, New Jersey and Connecticut.  He currently resides in Woodbury, N.Y. with his wife and two daughters.

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One Response to “5 most important parts of the prequalification discussion”

  1. 5 most important parts of the prequalification discussion Says: December 17th, 2011 at 1:13 pm

    [...] 5 m&#959&#1109t valuable &#1088&#1072rt&#1109 &#959f th&#1077 prequalification conversation [...]

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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