As a mortgage salesman, I've noticed most people like to pretend they know more about this than they really know. But most of them would never admit it. So, for that reason, we can think of this as a "Review".
Here are a handful of Frequently Asked Questions (FAQs):
What is a mortgage? That’s what the loan is called, isn’t it?
Technically, a mortgage is the ACT of putting your house up for collateral IN EXCHANGE for a loan. But, in California, they are called “Trust Deeds” instead of mortgages due to the way the lawyers set them up.
However, for our purposes here, we will call them home loans, mortgage loans, or just mortgages, and we will know that we’re referring to the loan to buy a house.
Where do I get a loan?
Most commonly, people go to their Personal Bank where they have their checking account and apply for a loan. We’re talking about places like Wells Fargo, Bank of America, as well as smaller local banks and credit unions in your hometown. The benefit here is the relationship between you and the bank.
Borrowers can also go to “Mortgage Bankers” who only do mortgage loans. They don’t do savings accounts, credit cards, car loans, etc. Sometimes these are called “correspondent lenders”. They have a bunch of lenders they work with, and depending on the circumstances of the loan, they can choose who they want to sell the loan to AFTER the loan is closed. That means they have tremendous flexibility if and when issues arise. Instead of a loan falling through because of some new regulation, they can pivot, and you're back on track.
There are also “Mortgage Brokers”. The difference here is brokers find the lender BEFORE the loan is made. They will look over the borrower’s financial situation, do some digging, and then find the best lender to work with, and put the two together, and then the Broker is out of the picture.
Lastly, there is “Seller Financing”. This is when the borrower gets the money from the person selling the house. Now, the sellers don’t physically write the buyer a check or anything. Instead, they will set up payments, interest rates, and with the seller and start collecting the money over a long period of time. Sometimes, they will stipulate that they must get a loan to pay them in full after a couple years. When it starts getting difficult to get loans from banks, the more common this option becomes.
What are Pre-Qualifications and Pre-Approvals? Are they the same things?
When you start looking at houses with Realtors, you’ll hear these words, and the difference between the two is important:
Pre-Qualification: A pre-qualification is very informal. The point is to give you a “ball park” in regards to what you can afford and what your monthly payments might look like. It’s a nice first step to begin your searching for a house, but pre-qualifications shouldn’t be given too much importance due to their informality.
Pre-Approval: A pre-approval, on the other hand, can be quite useful and carry a lot of weight. However (and this is a big however), all pre-approvals are not created equal. In other words, the more “hoops” you jump through, the more weight they carry. Technically, anytime a loan application is underwritten under these circumstances, it is a Pre-Approval. But to be on the safe side, consider the following questions:
- Did your application see a real-life underwriter or just a computer program?
- Did the lender verify your income or take you at your word?
- Did they run through your credit report or just look at the score?
- Are you self-employed?
- Have they seen your tax returns?
- Does your income fluctuate from year-to-year/month-to-month?
- Has your condo association been approved by the underwriter?
What does my credit score need to be to buy a house?
Theoretically, there is no minimum, but you are going to have a hard time getting a loan with a credit score under 580. Even with that score, it’s going to be difficult. My two cents: I can’t foresee a lot of circumstances where someone would really NEED to buy a house within a deadline, so if it’s at all possible, I might recommend you wait, work to improve your credit, continue saving, and keep searching—passively, for the time being.
This goes without saying, but the higher your score, the more buying power you have. This is for three reasons: First, better scores can get you a better interest rate which means a lower monthly payment for the same loan amount. Second, better scores mean it might be easier or faster to get approved which can help you at the negotiating table. Third, better scores can mean less money for a down payment, little or no mortgage insurance.
Lenders want to make good and solid loans with trustworthy people, make it easy on your lender, and it will pay dividends for you in the future.
How much money do I need for a down payment?
Unless you’re a veteran using a VA loan, you’re going to need money for the down payment. With the different types of loans out there, the minimum amount lenders will accept varies.
With a “government loan” like FHA loans, you can buy a house with as little as 3.5% down. However, the less you put down, the more you’re going to pay each month in “mortgage insurance”. Think of it this way, the more money you put down, the less likely you are to walk away from the house and stop making the payments because of all the money you’ve already put into it with your down payment.
The magic number for lenders is 20% down. Lenders can feel very confident in lending you money when you’re that “invested” with a big down payment like that. But, this is easier said than done. For many, it takes a lot of time, patience, and a lot of willpower to save for the down payment.
As you can tell, this is a very broad spectrum of down payment options: 3.5% to 20%. When we’re talking about buying $600,000 properties and up, these down payments can be very sizeable. Luckily, in an area like Los Angeles where property values are a lot higher than other areas of the country, local lenders can give buyers a lot of flexibility with down payments. But, as I’ve said before, lenders like to make good and solid loans with trustworthy people. So, make it easy for your lender to say “Yes!”