Tuesday, November 30, 2021 / by Sarai Diaz
This is Josh Orrantia with Country Real Estate. Welcome to our Wizard Wednesdays. This is our opportunity to take real estate and break it down into a 101. So it's very easy for all of you to understand.
A lot of misconceptions out there on what you have to have, what your credit score should look like, what kind of money you should have in the bank what kind of loans are available and how do you get those? We can talk a little bit about how you project looking at rates and we'll talk about what rates mean in this conversation as well.
What is the most important thing or what are the most important things when you get a loan? What do you have to have ready to go when you talk to a loan officer?
Well, the most important thing in getting pre-approved for a loan is starting early in the process So the biggest mistake I see buyers make is that they just assume that they'll be able to get a loan. It happens so often that the buyer spills out the application, sends over the documents, and they can't quite get a loan yet. So, sometimes there's work that needs to be done; the sooner that they can talk to their loan officer the better, in case there is work that needs to be done. This can be anything from working on credit scores to coming up with more money for savings for the down payment and closing costs.
Sometimes buyers feel like they're not prepared, "I'm not ready yet to talk to a lender because I want to do this, this and this". It's better to talk to the lender first because sometimes buyers might have something in plan. Like for example, they say, "well I want to pay off this credit card first". Well that money might be better spent for your down payments instead of going towards a credit card. The loan officer is going to help you make those decisions.
How does credit score impact your rate, your payment and your ability to get alone?
Credit scores are definitely one of the most important parts of getting a loan as far as the pricing. It determines a lot of what interest rate you're going to get, what your payments are going to be, even what types of loan programs you're going to qualify for. The biggest mistake I see when it comes to credit scores is borrowers are looking at credit scores, whether it be from Credit Karma or directly from the Credit Bureaus, Experian Trans Union Equifax. They go online and they see their credit score and they say I have a 700 credit scores. "It's great and I should be ready to go!" What they don't realize though is that they're looking at a consumer credit score and we have to use something called the mortgage credit score. It's a totally different equation, totally different score. While you're saying one thing when I (loan officer) run your credit, when you get your credit run by a lender, they're going to see mortgage credit scores. Those are generally going to be lower than your consumer credit scores.
What is pricing of a loan?
So we use the term pricing to describe the interest rate, the payments and then if that interest rate will come with a cost or a discount- meaning a credit. A lot of people don't realize that when the lender is looking at their rate sheet, you don't just have a rate, but you have several options for rate; meaning you could get one rate that has no credit and no extra cost for it.
And we like to call that ATAR rate. So there's no extra cost, no extra credit. This is just what the rate is. You can either choose a higher rate, and that will come with a credit, or you can choose a lower rate and that will come with an extra cost. So to get that lower rate to pay that extra cost, we also refer to that as as a buy down or buying down the rate. These are different options and not every lender will tell you about these options. They might say this is your rate, but it's important. Every time I(Kevin) show pricing to my clients, I always tell them about the multiple options that they have. The biggest determinant of whether a borrower is going to choose a par rate or a lower rate and buy it down or a higher rate and get a credit that's going to determine which one they're gonna choose is how much money they have to use.
What kind of loans are available out there to somebody who's interested in buying a home?
A lot of different loan products out there right now when I'm looking at what loan product will be best for a buyer, the questions I asked them or how much do you have available for your down payment and then looking at their credit scores because every loan program has different requirements in terms of a minimum down payment and in terms of credit scores.
Starting off with the ones we've heard about:
V. A. Loan- a zero down loan
Then we have ones that are less common:
USDA loan, which is a zero down loan
Then you even have some other first time Homebuyer programs:
Golden State Grants for California
F. H. A loan.
Do you really need 20% down to get a loan?
Definitely don't need to have 20% down! It is really great because you get to avoid private mortgage insurance. It's just a monthly fee that's added on to your payment when you're going to put down less than 20%. However, there are multiple options as far as getting a loan in putting down less than 20%.
Starting with a conventional loan that has programs with 15% down, 10% down, 5% down, and even 3% down. Then you have F. H. A. Which is a minimum of 3.5% down. And then you have some first time Homebuyer programs which are 0% down and the USDA and V. A. Which is 0% down. So if someone is short on funds, they should still talk to the loan officer and see if there's a loan program that fits for them.
Can someone buy a house for free?
Even on a 0% down loan, the buyer would still need to have money set aside for not just appraisals, but other recurring and non-recurring closing cost type things.
“I want to buy a house but I don't have any money”. So with that person, we're first going to see if we can get you pre-approved for a loan. The Cal Haffa loan is one that's not only a zero down loan, but it also has a loan to cover part of the closing costs. Closing costs are generally more than what people realize. That can vary a lot depending on the loan program and the price range that you're looking at. However,let's say we can get most of the loan closing costs covered, and the down payment covered, we're still gonna want to see some reserves.
We're not going to be able to put someone in the house, in a zero down program and cover their closing costs and then them not have any reserves; meaning they don't have any money left to pay the mortgage next month. Reserves can vary depending on the type of loan program it is, but minimum, we want to see it at least a month of reserves meaning you can at least have enough money in the bank to pay your mortgage for a month or two. Aside from that, you're going to have to pay an appraisal fee, maybe $500 to $600 during the process. You might want to get a home inspection, pay home inspection fee. which could be $300 or $400. So those are the two upfront costs that we can't roll into the loan or the closing, and those can add up to about $1,000 right off the bat as well. So with those two costs plus your reserves, that's you know, minimum is kind of what we're looking for the minimum amount of money you're going to want to have.
What about Insurances and Property Taxes?
Home hazard insurance, fire insurance, property taxes, are all part of the monthly payment, and they do come up at closing underneath your closing costs. Then, there's the monthly part of it you're talking about like if you're gonna do an impound account right where you're gonna make your principal interest, your taxes, and insurance payment all in one. But even at the close of escrow, sometimes there's some small preparations involved as well.
The impound account is basically what 99% of home buyers opt to do. It's where we're going to collect a little bit of money upfront at closing to cover some of your FUTURE property tax bills and homeowners insurance bills. Then we're going to take that money that we're collecting up front and we're going to put it in a side account- it's going to be a side escrow account. That account is going to go ahead and pay those property tax bills and homeowners insurance bills when they're due, so that you don't get hit with a big two big bills every year for thousands of dollars.
So it's much easier that way. So most people choose to get the impound account.
What is the importance of getting prequalified or preapproved before you start looking for homes?
Without talking to somebody you really can't tell what payments are going to make you comfortable and you could be looking at houses that are too expensive or houses that aren't expensive enough and you're short changing yourself on getting some of the features and amenities you're looking for in a home, what other reasons would be great to pre qualify prior?
Aside from not knowing what your comfort range is for payments and what you qualify for. There's also all the other things that come along with getting a loan, such as all that preparedness. As far as getting preapproved, where you might have to pay off some debt, you might have to save up some more money for a down payment, or you might not realize that your monthly private mortgage insurance is going to be several $100 a month.
There's so many different factors that you have to take a look at before you go out shopping for houses so that you're shopping for a house that's in the budget that you are going to be satisfied with.
Why is it important for the lender, the realtor and the buyer to have open communication? What is the confidentiality part of it?
Not every buyer is gonna want the realtor to know their financial situation. The buyer should understand that what they tell the loan officer is confidential. As a loan officer, we look at everything that you can think of financially in this person's life. We can't just go tell the realtor, or other people, or anyone about that confidential information. So, when we are updating the realtors, we have to let the realtors know: is this loan solid? Is it ready to go? Are there still things that you're working on? Do you need more time?
The most important thing is timing because the lender and the realtor have to work together to time the pre-approval process, being ready to get your loan, and finding the house, finding the house when you want it and everything has to be timed perfectly. Most of our conversations between the lender and the realtor is about timing and making sure that everything can happen in a timely manner, that the author is written up in a way that fits what the buyer can do with their loan, and with their timelines and deadlines. If something comes up where there is a surprise and we do need to let the realtor know, then I, as a loan officer, will always ask my borrower “Hey, I need to update the realtor, is it okay if I say this?” So I'll always get that before I share any confidential information.
From the realtor side, before I write any offer, I'm always having that conversation with the lender just to make sure that I am writing the offer the correct way, especially if there is help in the closing costs, then I can be more creative with my offer to the seller. We never want to write something that we have to figure out how to get out of- meaning it's going to cost money to get out of a bad situation.
I think a lot of people need to realize that there are, it's more than just the realtor and the buyer, there's also the realtor and the seller and there's communication that needs to happen back and forth there. It can be difficult for a realtor to ask a client. “Hey, can you ask the lender these things?” because it's almost like we're speaking the completely different language and realtor and the lender are on the same page, but the language- the lingo, and we know what we're talking about. So having a really good relationship with a lender is really important and that's, I think probably the biggest reason why you'll hear realtors say, “hey, do you have a local lender?”, or “Here's the list of people that I've worked with a lot. And I've already established every rapport (communication system) with.”
Communication is huge. I mean you have a lot of moving parts and a lot of scenarios and every transaction is different. It all comes down to communication on how things are handled.
This is our first Wizard Wednesday- making real estate a 101 real basic thing. And I would also invite anybody who has any questions about this video just to place them in the comments below. And between myself and Kevin, we can get back to you individually and answer those or if you're looking to enter the market you know, buying, selling or whatever, you need the services of either one of us. We are definitely here for you. 24/7!
Kevin Sanderlin, who is with Platinum Home Mortgage, Been in the real estate industry for 20 years. He is a real estate broker and also has been a loan officer for the last six years.