Real Estate 101 - The Lending Process

As a Realtor, I frequently get calls from people that want to own a home, but have no idea of how to go about buying one. They may say, “I think I want to buy a house but I don’t know what to do.” Or, “I saw a house I would love to buy but I’m not sure where to start or how to do it.” Or even, “Can I afford to buy a home?” If you are thinking, “Yes! That’s me!” you’re in the right place. The question you should be asking is this: Can you afford NOT to buy one. OK, here is dirty little secret number #1: If you can afford to rent a house in Waco, you can afford to BUY one. Let’s be honest, landlords don’t buy a house and then rent it for less than the payments, insurance, taxes and upkeep cost them. They are making a monthly profit on that house (or apartment) you are renting — you could be putting that money in YOUR pocket, instead of theirs. The only real problem in making the transition from a renter to a homeowner (doesn’t that word have a nice ring to it?) is this: Can you come up with the necessary cash to buy that home you’ve always wanted?

Since most of us don’t have tens or hundreds of thousands of dollars in the bank or in a sock under our mattress, we come at last to the real crux of home buying, which is also, conveniently, the starting point of the process of buying a home. The home buying process starts with getting pre-approved for a loan (called a mortgage) with a lender. Why start there? Well, if unless you do have $100,000 in a sock under your mattress, you’re going to have to borrow it from someone willing to lend it to you. And if no one is willing to lend it to you, there’s not really much point in shopping for a house. If in fact you can’t find anyone to lend you the money to buy a home, a good loan officer should be able to point you in the right direction to get your finances in order so that you can buy that home you’ve always wanted. The other reason for starting with the lender is that they are typically the slowest aspect of the entire transaction. So it only makes sense to get them started on their part first.

Folks often wonder where they should go to borrow for a home. There are two basic types of lenders in Texas: banks and mortgage brokers. They do essentially the same thing except that banks are generally loaning their own money and mortgage brokers are lending the money of others. Banks obviously loan money to reap the benefits of interest and while mortgage brokers charge a fee for making the loan while the entities that actually loan the money receive the interest. So, banks must be cheaper right? Not necessarily. Banks also charge fees to make loans and sometimes they charge higher fees or possibly higher interest rates. How then to choose. I recommend talking to 3 or 4 different lenders and compare their fees and rates. They will give you a “good faith estimate” of what the interest rate, the various fees and your payment will be. A good place to start is with the financial institution with which you have your checking and/or savings account. Your realtor can recommend some other lenders that he/she has had favorable experiences with in the past and can help you make sense of all the numbers they will throw at you. As a general rule, a local bank with in-house underwriting makes for a quicker and smoother transaction than internet lenders.

The five stages to obtaining a loan are as follows: pre-qualification, application, underwriting, approval and funding. The lender can’t actually approve the loan until you’ve picked out a house but they can “pre-qualify” you. Most lenders these days can do this over the phone in 15-20 minutes. They will need some information from you regarding your income and expenses. So it will be much quicker if you are prepared when you make the call. For income they will want to know how much you make each week or month. This is easy for salaried employees but for hourly employees it’s a bit more complex. How much you make per hour is useful but then there are issues of hours and overtime, etc. Better to be prepared to provide a weekly/biweekly or monthly wage before taxes and Social Security and etc. are taken out (a few months of pay stubs are useful for making this calculation). You’ll also need to have information about any savings accounts, stocks/bonds or retirement plans you may have, as well as any other sources of income (trusts, rent or other royalties, etc.). Then you’ll be asked about your financial obligations: rent, utilities, and other debts such as car notes, credit cards, child support or any other loans you currently owe. For any loans or other sources of credit, you will need to provide balances, and monthly payments at the least. Of course, you can get “pre-approved” or “pre-qualified” without all this information in front of you but the more accurate a picture you can give to the lender, the better idea he can give you of what you might actually be able to borrow. If your estimates of these figures are way off, the amount that you’re pre-qualified to borrow may be way off as well.

With all the talk of pre- this and pre- that, you may wonder what it takes to be “qualified” or “approved” for a loan. The answer: documentation. Unless your credit score is very high, you will need to provide proof of all the numbers you give to the lender. You will have to make a formal application for the loan at this point. This will entail an application fee which varies from lender to lender. The lender will ask for bank statements, pay stubs, and other documents to verify the information you provide. It is very important to relay these documents to the lender as soon as possible after he requests them. When you make your application, the lender may give you the option to “lock” in your interest rate. This is not going to be a free option, however, and if rates don’t go up it could be money down the drain. If they do go up it could potentially save you a LOT of money over the life of your loan. It may only cause your payment to go up a few dollars but ask your lender or realtor to show you the effects of the additional interest in the long term.

Your lender is going to review your application and accompanying documentation and relay them along to the most difficult person to please in the entire lending process: the Underwriter. The underwriter is the person that reviews your entire loan package and accompanying documentation for accuracy and determines whether it meets pre-set guidelines. If the underwriter isn’t satisfied, it’s not going to matter how nice your loan officer is or how much he likes you, the loan is not going to be approved in the end. So, to that end, whenever your lender asks you for more paperwork, give it to them as soon as possible, that day if you can. This will speed the entire process along smoothly. Before your loan goes into underwriting, you will have to have a valid agreement between you as a buyer and the seller(s) to purchase a house. This agreement is called a contract and will be discussed in a future installment of Real Estate 101. Once the loan is out of underwriting, it is considered approved, but beware, things could still get messed up. If, for example you go and buy all new furniture the day before you are supposed to finalize your home purchase, you may find yourself unable to borrow that money after all, since this would likely unbalance the underwriter’s careful assessment of your ability to pay back the loan. Approval is conditional, you can get unapproved a lot quicker than it took you to get approved.

Funding is the final step in the process. This occurs after both parties (buyer & seller) have signed all the necessary paperwork, and the bank actually hands over the money so that the seller can be paid. Then you actually get the keys to your new home and the sellers finally begin smiling. In the good old days, funding typically happened at “closing”, the loan officer would come with a check and everyone would sit around the table and eat cookies, tell funny stories, and sign papers. It is becoming more frequent that funding occurs only after the underwriter or a bank lawyer has reviewed the loan documents (and often takes one last look at your credit) and the money is wired to the title company who then disburses it. Sometimes this happens quickly but all too often it takes what seems a ridiculously long while and the smiles are fewer and farther between. In Waco, there are still a few lenders that do things the old fashioned way, it sure is a lot less stressful that way.

Now that you’re up to speed on obtaining a mortgage, check back soon for the rest of the Real Estate 101 series:

2. Offers and Counteroffers

3. Under Contract and the Option Period

4. Closing


WacoHomeSellers.com

Waco Real Estate Weblog

I've been working with real estate in Waco since 1993. I have prior hands-on experience in all phases of home construction and remodeling. I have managed and owned residential rentals and also flipped a number of houses over the years. I\'ve also been a Realtor since 2002, helping buyers, sellers and investors realize their dreams.