1st Time Homebuyer Seminars ..... Pre-Qualification Process

1st Time Homebuyer Seminars ..... Pre-Qualification Process.  Once those in attendance at the 1st Time Homebuyer Seminar and I have discussed the opening questions I provided in my previous blog 1st Time Homebuyer Seminar ..... Openning Questions we go into what is involved in the Pre-Qualification Process.

In my opinion the first thing someone who is thinking of purchasing a home should do is to Get Pre-Qualified for a Mortgage by contacting a trusted local Lender.  All of the Realtors I know and partner with will not take a Buyer to see a house unless they are comfortable the Buyer is qualified to purchase a home in the price range they are interested in.  This is very important, because otherwise both the Buyer and the Realtor may be just wasting each others time.

I explain to the 1st Time Homebuyers in attendance that I have a specific process for how I Pre-Qualify Borrowers.  My process is as complete as it can be without the Borrower actually applying for a mortgage.  I will not provide a Borrower or Realtor with a Pre-Qualification Letter unless each of the steps below are completed.

• Basic Information - The first thing is to take the Buyers basic information, like full names, social security numbers, date of birth, and home address. This initial information will enable me to pull their credit.

• Credit Report - Looking at the Buyers credit is a MUST.  I will not continue a conversation with a Borrower who wants to be Pre-Qualified for a mortgage if they do not allow me to pull their credit.  No matter how certain a Buyer thinks they know their credit, a Credit Report has to be pulled for the following reasons.
  • First, by pulling a Credit Report there is no doubt as to what the Credit Scores are, which will be important later in determining what Loan Programs will be available to the Buyer.
  • Second, the Buyer's revolving monthly debt is automatically pulled into the application, and the Buyer does not have to try to think about everything  they owe, account balances, and monthly payments.
  • Third, it will show if the Buyer has ever been late on any of their payments, if they have liens, collections, or judgments, etc.

• Income- How do they get paid salary, hourly wage, or are they self-employed.  It is important to know this not only to determine what they make on a monthly bases, but how they get paid will determine how I calculate the income. So it will be important for them to have their paystubs, W2's, 1099's, and if possible their Federal Tax Returns handy so there is no guess work.

• Debt-To-Income Ratios - Once I have pulled Credit, and determined their income, I now can calculate their Debt-To-Income Ratios base on the different house price ranges they want to qualify for.  There are two Debt-To-Income Ratios the:
  • Front or Top Ratio (Housing Ratio) - Percentage of the monthly mortgage payment to their income
  • Back or Bottom Ratio (Total Ratio)- Percentage of the monthly mortgage payment, plus all of their monthly revolving debt, which was on the Credit Report, to their income
• Two years work history.  The two years do not have to be two years at the same employer, or even continuous employment between multiple employers.  There can be gaps, but the gaps in employment have to be explained.

• Two years of residency.  Where they have lived for the past two years.

• Number of dependents.  This information is very important for State Bonded Loan programs which have income and selling price limits.

• Assets  - How much money do they have to put down on a house, while keeping in mind there will be Closing Cost they will need money for as well. So we will look at all savings and checking accounts, 401K programs, as well as stocks, bonds, and even gift money that might be available. 

• Loan Programs - Based on the Credit Score, Debt-To-Income Ratios, and available money for a down payment, we can now start to discuss what loan programs they may qualify for, and what the advantages and disadvantages are to each loan program.

• Other Information- After I have all this information I will complete the loan application by answering a few yes and no questions they need to answer, as well as three questions for the government pertaining to race, nationality, and sex.

• Automated Underwriting- After gathering all this information and completing a preliminary loan application I can now run the information through one of the Automated Underwriting System.  By doing this I am no longer just depending on my opinion.  Also if I missed anything derogatory on the Credit Report, or mis-calculated the Debt-To-Income Ratios, the Automated Underwriting System will pick it up.  Up until about five years ago if I got an Approved/Eligible all that remained to be done was for the Underwriter to verify the information and documents submitted once the loan was put into process.  But these days all an Approved/Eligible does is provide the means to continue.  These days the Underwriter will not only verify all information, but they also have the discretion to override the Automated Underwriting Findings and deny the loan if they do not like the credit, work history, or Debt-To-Income Ratios.
  

At this point I can tell the Buyers with confidence what price range they can look for a house in.  But even at this point we still need to be careful, because the situation could change based on what the taxes are on each property they choose to look at.  Taxes can be very different from one house to another, especially in different towns.

The Buyers are now either ready to go out and look at homes, or we begin the process of correcting what ever they need to do to be in the position to begin looking at houses.  If the Buyer is not working with a Realtor, I will suggest Realtors I partner with and trust, who will hold their hand along with me throughout the home buying process.

In my next blog "1st Time Homebuyer Seminars ..... Choosing A Realtor", I will go into what I suggest they need to look for in picking a Realtor to work with.

Previous Blogs In This Series:

• 1st Time Homebuyer Seminar Series
• 1st Time Homebuyer Seminar ...... Opening Questions