Low Down Payment Mortgage

Preparing a Buyer for their First Open House

Before meeting with a Realtor, it is very important to have buyers pre-approved for a mortgage. A pre-approval will identify your buyer's price range, uncover any potential weaknesses, discover any special Grants they may qualify for and clarify which mortgages options are in their best interest.  Each mortgage product varies from the amount of money needed down to the acceptable debt-to-income ratios and it is important to know these factors upfront.   

What is a Pre-Approval ?

A mortgage pre-approval is a written commitment identifying the mortgage amount you qualify for.  Part of the mortgage pre-approval process is to obtain  bank statements, tax returns for the past two years, calculate annual income, and pull a credit report to confirm you meet the Lender’s credit criteria.

When Should I Get Pre-Approved For A Mortgage?

The answer to when you should get pre-approved for mortgage is simple.  Complete this before you contact a Realtor and begin looking at houses. Below are a few key reasons you will be glad you obtained a pre-approval before looking at houses.

Correct inaccuracies on your Credit Report

Did you know there are over 50 credit score models and they are all different? Don’t rely on the credit score you received from a credit card company, department store or even from a recent car purchase. The most common problem we encounter when we pull a credit report is the consumer has no knowledge of a particular item or the payments or amounts owed are reported incorrectly.  Each lender has minimum credit score requirements for every one of their loan products.  So many activities impact your credit score and while you are looking for houses with a Realtor we can help you improve your credit score by fixing any errors or inaccuracies.  It can sometimes take a couple of months for it to get corrected on your report and for your score to be readjusted.  This can happen seamlessly at the same time you are shopping for your home.

 Eliminate Disappointment

Most Realtors will require a pre-approval before even showing you potential properties, but unfortunately some real estate agents will show you houses with no clue whether you can afford a home or not. Top Realtors will strongly agree this is a disservice to you. Why is this a disservice?  The fact of the matter is, you could  “fall in love” with a home, submit a purchase offer, and find out once they speak with a mortgage lender you cannot finance that home due to credit problems or because of other reasons. Being in this situation can understandably leave a buyer upset, heartbroken, and disappointed.  Moreover, you could even lose the Deposit you made on the sales contract!  We work with many professional, reputable Realtors and will gladly introduce you on request.

Understand All Of The Costs To Buying A Home

There are substantial closing costs when buying a home.  It’s not as simple as a 3% to 30% down payment. By getting a pre-approval, you will have a very strong understanding what costs to expect when buying a home.

A Mortgage Professional will help you identify the following:

• Total Loan Amount you qualify for
• Closing Costs and how to get the Seller to pay your Closing Costs!
• Where to find Free Grant Money for the Downpayment
• How to properly document a gift for the Downpayment
• How much you personally need to save

How to Deposit and Document a Downpayment Gift

First time home buyers often receive assistance when buying their first home.  Whether it is hand-me-down sofa from an aunt, help with landscaping and weeding, or even a hand moving, everyone wants to pitch in to make sure a young couple can get their dream home.

A common gift from parents to children is cash assistance with the downpayment.   Parents know if they can assist with getting 20% of downpayment, their children will save on mortgage insurance and interest.  Over the life of a loan, it is truly a gift that keeps giving.   In other situations, even having 3.5% down will help a couple qualify for a home.   Gifts are common, but often given incorrectly.

Before accepting a gift, make sure it will meet the mortgage guidelines.  I know at first, it might seem ungrateful to only accept a gift in a certain form, but it is truly necessary in this case.   Follow the steps below to make sure you gift will be allowed by the Lender:

1. Use a check.  Lenders like to trace back the funds and if you use a money order, it creates an extra step for the generous donor.  No need to create unnecessary stress.
2. Be sure to deposit in person.   Yes, it is easier to snap a picture with your IPhone, but you will need to produce a front and back picture of the check.   The images included with the monthly statements makes this easy for the borrower.   Seeing “image not available” with mobile or ATM deposits become a bigger challenge.
3. Do not co-mingle funds.  When you make this deposit, do not throw in a rebate check, birthday money, ect. on the same deposit slip   You want it to be easy to find this amount and have it match perfectly.
4. Choose the right account to make the deposit.   If you make a deposit to the same account you plan on writing the check for the downpayment, you only have to produce one bank statement.  It is so easy to see the gift deposit and earnest money (downpayment) coming from the same bank statement.   Lenders will appreciate it and so will your printer.   Why make more work if you do not have to?

If you really want to stay ahead of the game or your parent live a few hours away, be sure to get a gift letter signed along with your check.  The Lender WILL ask for this during the process.   A signed and dated letter should state the amount of the gift, the subject property address, the relationship with the buyer, and the fact it was a gift, not a loan.

Why do we have these guidelines?   Lenders want to make sure that a gift is just that – a gift and not a loan from your parents or a cash advance from a credit card.   Lenders are determining whether you are able to pay a mortgage based on your current debt and income.  If you cannot account for the funds being a gift, then it just becomes debt you have to pay back and will factor into their decision whether you can “afford” the mortgage you are applying for.   Just make sure you deposit and document your  downpayment gift properly and it will be a smooth transaction.

Check, Please! Sourcing Money for a Mortgage

It appears in the brave new world of mortgage lending, paper checks have all but disappeared.  They have been relegated to the land of shredded paper or electronic storage.  Banks no longer even keep paper copies.   Great news for the trees, however, this is often bad news for borrowers. When making a large purchase, it is important to keep the associated paperwork in order to meet the lender’s documentation requirements.   We are all aware of that fact since we filed our first tax form.   What makes mortgages different is that not only the paperwork counts, but the “source” as well.

Over the last few months, I have had more and more buyers use money order to pay their earnest money deposit when entering into agreement to purchase a home.   That decision just created another step (or three!) in the loan process.   So, realtor and buyers make sure you save yourselves some time and effort. Please use CHECKS, not money orders.

Borrowers must “source” money orders.  What that means is the Lender not only needs a copy of the original money order and the realtor verifying the deposit, but now they also need a bank statement (or statements!) to show where they withdrew the cash for the money order. Perhaps the buyer withdrew it over three months as a “savings plan”, which means they have to produce three more months of bank statements where the withdrawals match the earnest money amount exactly.

Lenders want to make sure these funds used for the money order are not a gift towards down payment or a cash advance from a credit card.    The gift process creates a different set of paperwork that I will talk about in a separate blog.  So, my advice to buyers and real estate agents:  Please use paper checks and be sure to keep copies to make your loan process smoother.  It will create a better transaction for all.

Sell Homes the Way Buyers Buy

Let’s start with a short quiz to see how well you know the cost of living these days.  Write down how much each of these items cost:

1. Milk

2. Gas

3. Shoes

4. Health Insurance

5. Rent

The answer key is below, so you can scroll down and check and see how you did.  You are now probably wondering why a mortgage broker would be asking about the price of gas. The purpose of this short exercise is to see if your answer are small, affordable, unintimidating numbers.  Chances are they probably are small numbers and you did not add up the total cost over your lifetime, or more pointedly, 30 years. You are probably seeing where I am going with this exercise. It is no different to how your Buyers want to buy a home.

Buyers are often told their home is their largest expense, when in fact it, is usually their best performing investment (that is for a different blog). Based on our experience, when a Buyer learns the monthly cost of a home, that is when they end up buying. Buyers know what they can afford each month.   Sometimes mortgages can end up being less than they are paying in rent or just a few dollars more each month to invest in their future.

At Lord Mortgage our goal is to synergistically help you sell more homes and we have NUMEROUS ways to help you accomplish this. Contact us today and we would love to partner with you on presenting buying options to your buyers that appeal to remain within their budget. The best way for us to accomplish this is to consistently and constantly offer the lowest mortgage rates in PA and helping our Realtor partners show their buyers the affordability of buying a home.

Milk $7,800

Gas $55,380

Shoes $18,600

Health Insurance $36,170

Rent $432,000

Are your Buyers feeling Scrutinized by Lenders?

Buying a home is a more difficult process than it was a few years ago. Real Estate Agents and their Buyers are starting to question all the documentation and paperwork that goes along with the mortgage process.  Some people accept the changes in the process while other still long for the old days where the process was less regulated.  I feel the need to explain the change and communicate what it truly takes to get a mortgage in 2015.

You are probably aware of the reputational damage done to the Nation’s Primary Lenders, Fannie Mae, Freddie Mac, and FHA in 2009.  (For the purpose of this article, we will refer to them collectively as “FFF”) which has resulted some of the new procedures I will discuss in more detail.

To help Buyers understand the process, I need to explain where the money comes from to fund a mortgage.  All funds ultimately come from the FFF.  A Mortgage Broker or a Bank takes an Application and submits the loan file directly to the FFF for an Automated Underwriting (“AU”) The AU is based on Uniform Underwriting Standards that are in place to protect a Borrower from any discrimination. The AU system does not care where the property is located, the borrower’s race, or consider any of the protected classes in Fair Housing, but does follow uniform guidelines for approval.

The system generates the AU findings and the Broker/ Bank then requests Documents from a Borrower based on the AU findings.  We informally call this “Round 1”. We then collect the initial documents from the Borrower and then have them sign over 20 different forms, so we can submit the loan package to an Underwriter.  

Once an Underwriter reviews “Round 1” documents, they issue an Official Approval.  This approval is not final because it is impossible to collect all the documents in the beginning of the process.  Moreover, to prevent material findings, the underwriters will verify assets and employment one last time before the loan is closed.   You would be surprised to learn that some borrowers spend assets on items such as furniture and do not have enough to close a loan or suddenly get laid off in the middle of the loan process.

It is understandable that items such as the Appraisal and Title Insurance are completed after inspection.  There is an order to the process and it is also important to realize it is a continuing, and ever-evolving process.  It is extremely common to receive requests for Letters of Explanation after the underwriting team reviews bank statements. It is impossible for Bank/Brokers to know what will be requested after Phase 1 and need to wait for the first review.

While the Underwriter continues to run reports internally, they will issue a Commitment Letter.  In the industry, we consider this the Formal Approval because FFF is committing to doing the loan.  It also means that the loan passed the fraud test and passed CAIVRS and a Full Factual Credit Report. Borrowers are ready to move into Phase 2.

Phase 2 is normally received by the Borrower with a combination of excitement and nervousness.  Commitment Letters are filled with acronyms and financial lingo.  Normally a Broker / Banker will share the Commitment Letter with a Borrower and Realtor.  However a good Broker/Bank will also explain (in plain language) what items are needed from the Borrower, from the Realtor and which items can be secured through third parties. 

Once Phase 2 items are submitted, is when a Borrower often really feels nervous because each day the closing deadline is getting closer. Phase 3 requests are the questions a Lender has after reviewing the Phase 2 Documents. The FFF requires Letters explaining large deposits and verification of where the money came from or they look for additional debts showing on a Bank Statement that are not listed on a credit report from Phase 1.  These requests can range from a full factual report because of additional real estate the Borrower may own (Not sure how borrower “forget” to mention they own other properties) to another copy of a bank statement because a blank, numbered page was missing on the Phase 2 Documents.  To be fair, the Underwriter cannot confirm a page if blank if they do not have a copy.

So I think we can safely agree it’s the Government’s fault J. Joking aside, what is the intention of these requests from the FFF? Their intention is to protect Investors, Tax Payers and the Borrower.  It is a fact that over 16% of the Applications involve fraud or dishonesty. Fraud can potentially cause damage to Investors and Tax Payers.

If you feel like it is hard to get a mortgage today, you are not alone.  “If someone is saying that it's harder to get a mortgage today than it was at the height of the boom -- when there was no income documentation requirement -- yes, of course it's harder to get a mortgage today than it was at the height of the insanity," says Bob Walters, chief economist at Quicken Loans.  However, that does not mean it is impossible to buy a house in 2015. The current perception that it's "extraordinarily difficult" to get a mortgage, when in reality, “borrowers have no problem getting one when they have stable incomes, some equity or down payment, and decent credit scores” according to Walters.

So why is there a perception that it's so difficult to get a loan?

Borrowers have to jump through more hoops to get a loan these days, says Pava Leyrer, president of Heritage National Mortgage in Grandville, Mich.  "The scrutiny that goes into a mortgage now is much tighter," she says. "There are great-credit borrowers that are having to jump hoops, and it's a matter of how many hoops and whether or not the underwriter lights them on fire or not." Leyrer confirms one common hurdle homebuyers face when getting a loan is when lenders question "unusual" deposits in their accounts. A mere transfer from the borrower's savings to checking account or a cash gift from Grandma can be viewed as a red flag by the lender. That's especially true for loans backed by the Federal Housing Administration, or FHA loans.

Unless it's a direct deposit from your employer, lenders generally want you to show the source of any large deposits to ensure you are not relying solely on gifts or borrowed money to qualify for the loan.  What is considered a large deposit? It depends on your income, but some requests are almost laughable to borrowers who had to prove a $500 birthday check really came from his grandparents.

If you take a bird’s eye view, there is no question borrowers have to provide more documentation these days. While the tight documentation requirements can be a hassle, they don't necessarily prevent the borrower from qualifying for a loan and in my opinion it is more of an inconvenience, as opposed to a true hurdle to getting a mortgage.  My advice is remember applying for a mortgage is a continuous process.   Be organized before you start and finding those documents as they are requested will become less inconvenience and by no means considered a true hurdle to home ownership. 

Overcoming the Down Payment Hurdle

You have heard the same financial advice over and over again to save for a house.  Perhaps you have tried to save, but one “financial emergency” after another keeps cropping up.   After you found your dream home, you decided it is crunch time and you are 100% dedicated to saving up enough money for a down payment. 

Do not despair if it seems overwhelming for just two people…or even one!  There are others willing to help you reach your goals.

Are you a first time homebuyer?  Look for local grants and loans.  For example, Cumberland County provides up to $5,000 in closing cost assistance for qualified first-time homebuyers with a gross household income of less than 80% of the county’s median income.  Not all programs are income based, so do your homework or ask your Mortgage Broker and/or Real Estate Agent for more details on local or state programs. 

Have generous relatives or friends?  They can contribute to your down payment in the form of a gift.   Before you receive the gift, make sure you clear it with your Mortgage Broker so you have the proper paperwork to accompany the funds.  Usually, lenders re

quire a letter signed by the person gifting to the money to confirm it is not just a loan that needs to be paid back as well as copy of the deposit slip.   Getting married?  Consider creating a bank account for down payment gifts in lieu of silverware, towels, and other traditional wedding gifts you might have already accumulated.  There is a special HUD form your broker will need to fill out to setup the account.

Is your 401K worth more as a down payment than its earning potential?  This decision might require a call to your accountant or investment advisor, but consider the tax consequences against the type of loan you can get with more down payment funds.   Some companies and accounts allow penalty-free withdrawal for certain major life events.   For example, some IRAs allow up to $10,000 in penalty-free withdrawal for the purchase of a first home.

Be wise with your nest egg.   Are you hiding that future downpayment money under your mattress?  Or investing to increase its value as you save up for your home? Some couples prefer to put their savings into a CD they can't access until it is time to purchase their home.  It keeps their spending on target with their goals. Moreover, they are earning interest on that money which can also be used towards that goal.  Credit Unions and online banks offer better interest rates and the highest-yield savings accounts.  If you are really planning ahead and have years to save, consider short-term bonds, but make sure you are not paying any commission which would cut into the savings.  Avoid long-term bonds which are more subject to market risk.

No matter the amount of the down payment, you can save enough funds with a little planning and strategy.  Do not be afraid to ask the advice of trusted professionals who can help you reach your home purchasing goals.