Laura Scheer asks: What are the most important steps to prepare ourselves for our first mortgage? How do you choose a lender?
First, let me offer my congratulations for asking the questions!
The cliché would be to say that home ownership is the American dream. The truth behind the cliché is that home ownership can be one of the most effective ways for an individual or family to begin building wealth.
For someone considering the purchase of a first home, the first big step is to get pre-qualified with a lender. Before doing that, the following preparations should be made.
•- Gather financial documents that will be necessary for financing qualification. As a start, compile the most 30 days of income verification (pay-stubs), your most recent two years of complete tax returns and W2s, most recent two months of bank/investment statements and the most recent quarterly statements from investments (401K, retirement accounts, stock investments, etc.)
•- Determine from your savings and investments how much money you can place as a down payment for a home. The general rule here is, the more the better, although it may not be necessary to use all or even any of those monies. (A good lender will be able to develop strategy as to how to most effectively utilize down payment monies.)
•- Sit down and review your family budget. (If you are not familiar with budgeting, a good lender can help you, but I'll cover that a bit later.) It is most important to be both honest and realistic when preparing your budget. Consider all sources of income (for budgeting, use your net income) and then all expenses, even those that don't necessarily occur monthly (semi-annual auto insurance expense, etc.)
•- Determine how much you think you can afford to make in a monthly housing payment. I recommend you start with your take home pay then subtract all your monthly expenses (excluding rent). This should then leave you with current discretionary income. The discretionary income will be the amount that is the most you can afford in a monthly housing payment (although I would never recommend allocating all discretionary monies for housing.)
•- If you have any credit obligations that may be considered derogatory (credit cards with payments past-due, unpaid medical expenses, etc.) tend to those matters and, while it may not be necessary to pay them off, at least bring them current. (Note: this sometimes goes against prevailing wisdom regarding credit scoring strategies, but if you are going to be a first-time homebuyer, establishing excellent credit as opposed to "playing credit games" is very prudent and a good financial habit to start.)
•- With regard to credit, you can expect that, once you select your lender, and a credit report has been issued, you will begin receiving solicitations from all sorts of lending institutions seeking your business. This is not advisable. To prevent this, opt out from unsolicited credit inquiries. If you want to opt out, here is all you have to do: 1.) call 1-888-5OPTOUT (1-888-567-8688) or go to www.optoutprescreen.com. Both the telephone number and the website are operated by the major credit reporting companies.
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•- The final step is to select a lender with whom to entrust your financing. This leads us to the second question.
How to select a lender:
The first thing to remember is to not be in a hurry to buy a home. As a first-time home buyer, you want to take time to become educated, and anyone whom you feel is rushing you is probably not a good fit.
Word of mouth recommendations from friends, acquaintances, real estate professionals, accountants and financial planners is a great place to start. Finding a lender who is local is a must. How the referral is communicated is also important. "You have got to do business with <so and so>!" should carry more weight than "Well, you might try <so and so>" (given the exception that the recommendation be the referrer's brother, cousin, barber, etc. That is usually NOT a way to obtain a valid referral.) Find out why the referrer recommends the individual. Finally, the recommended individual should be in the mortgage business as a full-time profession and not as a sideline job.
For a first-time home buyer, developing a personal relationship with a lender you can meet face to face is highly advisable. I would not recommend seeking home financing through national online lenders, at least not for a first home.
The number of lenders one talks with is not as important as finding one with whom a real rapport can be built.
A lender should be personable, demonstrate that s/he has time to talk with you and get to know your personal circumstances, show a high degree of knowledge, and take time to educate you and explain things. Most important, you should be able to sense that the lender truly has your best interests at heart.
It is a given that a lender should be knowledgeable with regard to a wide range of loan programs, so I would not even start there. The lender should be able to discuss, with intelligence, matters involving finance (how to most effectively incorporate your down payment monies available), as well as how to most properly and safely utilize your budget available for monthly housing payments. The lender should possess a high level of understanding regarding tax benefits. This goes much deeper than just talking about interest write-offs. Finally, the lender should be well-versed in what is currently happening in financial markets, as well as local housing trends, and be able to discuss other factors, reports and economic releases that may affect the markets in the upcoming week.
In essence, you almost want to get the feeling that your lender should be working in some big corporate finance or accounting department, or perhaps on Wall Street. My point is that you want to feel quite impressed with the lender's level of knowledge.
The most important elements when working with a lender are "chemistry", knowledge and time available to spend with you. The lender should proactively take time to educate you without you having to ask to have things explained.
After you have gotten a feel for a lender and developed an initial level of comfort, be sure to inquire about the level of licensing possessed by the lender. Most states require some type of licensing. Certification in addition to licensing is also important. For example, a certification in Mortgage Planning is very beneficial. Although hard to ask, you may even consider a question as straight-forward as, "Have you ever been convicted of a felony?" Remember, this person is going to have access to very vital personal information, not to mention being responsible for placing upon you perhaps the largest single debt you will have ever had.
Do not get roped into conversations about rate, fees and terms when selecting a lender. A good lender (from an ethics/trust-based perspective) is going to find competitive rates. Do not give a lender documentation or permission to obtain credit information from you until you have decided which lender with whom you will do business.
Once you have selected the lender, you will want to submit the financial documentation listed previously, provide written authorization for the lender to pull credit (s/he'll have a form for you), then you should complete a loan application (also provided by the lender).
At this point, the selected professional will be able to go to work determining programs for which you qualify, as well as how much home you can comfortably afford to purchase.
Finally, the lender should promptly take time to sit down with you and explain the results of his/her analysis, provide you with a Pre-qualification Letter, and put you in touch with the appropriate real estate professional with whom you should partner to assist you in finding the right home.
Greg Polashock is a Real Estate Home Mortgage Loan Consultant and Certified Mortgage Planning Specialist with Cherry Creek Mortgage and resides in Castle Rock, Colorado. He can be reached via email at Greg@GregIsFinancingSolutions.com, by phone at 303-887-0672 or on the web at http://www.gregisfinancingsolutions.com/.
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