GETTING PRE-APPROVED FOR A MORTGAGE IS A SIMPLE PROCESS

People often ask us what we like about our job. In addition to helping people achieve something they really want, home ownership, we love the complexity involved – especially in the pre-approval process.

As consumers we all enjoy comparison shopping. There is that thrill of finding whatever product we want for a few dollars less. We have even carried our lust for bargain hunting into shopping for a mortgage. But what seems to have gotten lost in the process is that what gets you the “best deal” on a mortgage is not multiple phone calls to local institutions or daily internet searches, but a skilled and talented lender. A mortgage is not a product, like a microwave. A mortgage is the sum total of your life experience at the time you apply.

The following four factors determine the interest rate you will obtain on a loan: down payment; income and assets; your credit score; and what many people forget about – the property. Let’s take a look at these in more detail.

Show Me the Money

The down payment that will get you the best interest rate is twenty per cent. It will also help you avoid paying mortgage insurance. But with some loan programs paying mortgage insurance will allow you to put as little as 5% down without a “hit” to the rate. Many of the “popular” piggyback mortgages, where you borrow part of your down payment” not only can carry a higher interest rate on the first mortgage but also on the second. And don’t forget loan amount. Small loans under $100K can have tiered pricing and loans over $417K can carry higher interest rates.

Show Me the Ability

Next we look at your ability to pay the mortgage through employment, self-employment, or retirement income. Sometimes people have assets but are transitioning into a new area and hence have no income. Again, the degree to which you can document the source and the regularity of your income is a key factor in determining your interest rate. Many self-employed people show that they make little income on their tax returns as a result of legitimate deductions. Stated income loans were created for the self-employed, but normally come with a higher interest rate.

You also need to be able to show some ability to pay the mortgage if your regular source of income is temporarily interrupted. The lender needs to see bank statements, and or proof of mutual funds and retirement accounts. Strong reserves and good credit can offset a lower income depending on the nature of the transaction.

Show Me the Intent

And finally, there is your credit score – the biggest single determining factor as to what interest rate you will be offered. Without examining your credit a lender is just pulling a rate out of thin air. Federal law allows you to have your credit pulled up to twenty times within a two week period when shopping for a mortgage and have it count as only one hit to your credit score. In addition the lender needs to understand your total debt to income ratio to see if you fall within lending guidelines when the proposed mortgage payment is added to the mix.

Finally you have to factor in the property type. The interest rates quoted in the paper or over the internet are for single family, primary residences. Some condos, multifamily units, investment properties, and raw land all offer different interest rates since they represent a greater risk to the lender.

There used to be a popular television comedian who would provide answers to questions before they were asked. The joke was in comparing the question to the answer. When you call a lender to ask about interest rates without divulging any information about yourself what you get is a rate for “the perfect borrower” – which depending on your situation could be meaningless. Pick a few lenders with whom you feel comfortable with. Share your information and don’t let the joke be on you.