How to Prepare for the Final Phase of the Mortgage Process: Underwriting

You’ve completed a loan application and have provided your mortgage originator with your income and asset documents. You’re told your loan is being submitted to “underwriting”. During the stage, the information you’ve provided is being scrutinized by a person (the underwriter) to make sure that it meets your specific program guidelines and the investor/lender guidelines. 

Hopefully your mortgage originator has done a solid job with your application by addressing possible questions the underwriter may have and gathering supporting documentation. Even if your mortgage originator and you have prepared the perfect loan ap for the underwriter, additional items are often called for after the underwriters review. These additional items are referred to as “conditions” to the loan approval. 

Here are a few quick tips to help make this process a little smoother.

  • Save everything. If you’re a shredder, like me, it’s time to stop… at least until after your loan has funded. Keep your paystubs, bank statements, retirement and asset accounts – you will probably have to continue to provide updated information to the lender.
  • Be prepared to document where large deposits ($1000 or more) came from on your statements. This means providing deposit slips and/or copies of the cancelled checks.
  • Provide “all pages” of items requested unless otherwise instructed. If an underwriter sees that your bank statement shows 1 to 4 pages, and you’re missing the last page (even if it’s blank), you will be required to provide this. “All pages” also needs to be provided of your tax returns, divorce decrees, child support orders and other documentation if requested by the underwriter. Just providing pages you feel are purtinent may delay your loan approval.
  • Avoid moving funds around. You will need to show where the funds came from and just saying “can’t you see I have gazillions in this account” won’t cut it with the underwriter.
  • Do not apply for credit. This creates an “inquiry” on your credit report. Your credit report is checked prior to closing and, if you have a new inquiry on your credit report, you will have the opportunity of explaining this to the underwriter. If you do obtain new credit, your loan will need to be re-underwritten with the new debt — even if there is no payment due (such as 60 days same as cash, etc.)
  • Provide requested documents promptly
  • If you’re planning a vacation, let your mortgage originator know as soon as possible.

Quickly providing everything that is being requested will help avoid delays with the mortgage process. 

In my opinion, a professional Mortgage Originator will essentially “pre-underwrite”  you as they take your application. They know what questions to ask and what documentation to provide the underwriter.  This is much better than working with a mortgage originator who has little to no experience in closing transactions, which you will probably find at large banks or large internet lenders.

If you’re interested in getting preapproved for a mortgage on a home located anywhere in Washington, I’m happy to help you!

What Do You Need for a Preapproval?

preapprovalIf you’re considering buying a home, many real estate agents and/or sellers will require a preapproval letter. A preapproval letter is different than being “prequalified”. Being prequalifed means that you have provided verbal information to a mortgage originator to get an idea of what you qualify for. Being preapproved means that you are providing documentation that supports the information you have provided. Income, employment, assets and credit are verified for a preapproval.

Some preapproval letters aren’t worth the paper they’re written on. Especially if the mortgage originator you’re working with does not require supporting documentation before preparing the letter. If you have not provided supporting documentation (listed below) to your mortgage originator – you’re probably just prequalified and not actually preapproved.

Here is a list of documents you may be required to provide in order to obtain a preapproval:

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What Determines How Much Home You Qualify For – Part 2: Funds for Closing

In Part 1 of this series, I reveal that home buyers qualify for the mortgage payment first based on their income.  The next major factor is the down payment and funds for closing.  Some may say that the down payment more important than the mortgage payment, however the down payment actually can be a variable; one may be able to obtain gift funds to increase a down payment.  You cannot change your income unless you add more qualified borrowers.

Funds for closing include your down payment (the difference between the mortgage loan amount and the sales price) and closing costs that are associated with obtaining the mortgage along with reserves (taxes and insurance) and prepaids (prorated interest, taxes and insurance).  Any funds used for closing must be “sourced” or documented and verified.   Gifts or loans from family members may be acceptable with the loan program, however the mortgage originator needs to know about them in advance (prior to the loan approval).   A seller may also contribute towards allowable closing costs as long as it’s agreed to in the purchase and sales agreement and it meets lender guidelines.  Generally, the greater the down payment (home equity), the more that is allowed for the seller to contribute.

Loan programs have different requirements for down payments.  If someone has a more siginficant down payment, they may consider conventional financing.   And VA and USDA loans still allow for zero down payment.  Currently FHA will still allow a 3.5% down payment.  If a home buyer wanted to purchase a home with a $200,000 sales price, the minimum down payment with an FHA insured loan would be $7,000 (3.5% x 200,000).  Most lenders are going to want to see a minimum of two months of the proposed mortgage payment in the bank after closing, so the borrower would actually need to show they have, at minimum, $7,000 plus two months proposed mortgage payments.   There are closing costs and prepaids in addition to the down payment of 3.5%.   After the buyer meets the minimum down required, it’s possible that the seller may contribute up to a certain percentage.  With an FHA loan, a seller can contribute up to 6% of the sales price towards closing costs and prepaids.  There is no limit with an FHA loan as to how much a family member can gift, as long as it meets documentation requirements.   

The key to funds for down payment is documentation.  Lenders will often use the ending balance of the statements and will require any large deposits shown on the statements to be documented.   Someone who shows having $20,000 in their bank account with $5,000 of deposits that they cannot explain, will be treated as if they have $15,000 in the bank.   “Cash” is typically not accepted by lenders.  If someone has never had any institutional account, they may have an exception but it’s up to the underwriter.

This is why after it’s determined how much mortgage payment you qualify for (which provides the total loan amount), your documented assets will determine how much sales price you qualify for.

If you are considering buying a home located in Washington State, I’m happy to help you determine how much you qualify for. 

How Much Do I Need for Down Payment to Buy a Home?

When you buy a home, most loans require a down payment.  A “down payment” is the difference between the loan amount (what is being financed) and the sales price.   Down payment percentages are based on the sales price.  Be prepared for every dollar that is used for your down payment to be documented or sourced (including large deposits reflected on your statements).  In addition to the down payment, there may be closing costs and reserves.  

Closing costs can be paid by lender credit (via an increase in interest rate) and sometimes the seller can contribute to closing costs.  If the seller is paying for closing costs, there may be restrictions based on the program type and the amount of down payment you are making.  If the seller is paying your closing costs, it needs to be negotiated in the purchase and sales agreement.   Reserves are the savings the lender wants you to have in your account after closing typically measured by months of your proposed mortgage payments.   It’s safe to plan on at least two months of proposed mortgage payments to be in your bank after closing for “reserves” whether your lender or loan program requries it or not. 

Some home buyers select their mortgage based on down payment requirements.  Here are some different programs beginning zero down payment options for homes that are owner occupied/primary residence.

VA Loans.  If you served our country, thank you.  You may qualify for a VA loan which allows zero down payment and the seller is permitted to pay 100% of your closing costs.   Zero down payment is available up to the VA loan limit, which in King, Pierce and Snohomish county is currently $481,250.   If your loan amount is above the current VA loan limit, your required down payment is 25% of difference between the loan limit and the sales price.   There is no mortgage insurance, however VA loans do have a one time funding fee.

USDA loans.  Homebuyers who are willing to live in a rural area and who meet income guidelines can also buy with zero down payment.  Like VA loans, there is no mortgage insurance and there is a one time funding fee.  Again, USDA loans have income and geographic restrictions.

FHA.  Currently FHA will allow a down payment as low as 3.5%.  Current FHA loan limits in the greater Seattle area is $567,500.  FHA loans do have mortgage insurance (upfront and monthly).  Sellers can currently contribute up to 6% of closing costs and prepaids, however this (and possibly the down payment) guideline are expected to change.  A family member can gift the down payment requirement of 3.5% which would effective make an FHA loan “zero down” for the home buyer.

Conventional.  Conventional programs are Fannie Mae and Freddie Mac programs.  If you’re putting down 20% or more, you avoid private mortgage insurance.   Any purchase with less than 20% down payment will most likely have private mortgage insurance.  Seller contributions towards closing costs and gifts from parents vary depending on your amount of down payment.

Private mortgage insurance rates and guidelines vary based on the loan to value (the amount of your down payment), credit scores and programs.  The lower your down payment, the more expensive the cost and the tougher the guidelines are because the loan is more risk for the private mortgage insurance company.

Fannie Mae Homepath.  Fannie Mae’s Homepath allows home buyers to purchase a foreclosed home owned by Fannie Mae with as little as 3% down payment, with no private mortgage insurance and no appraisal.  Fannie Mae often offers additional “special” incentive programs, including contributing towards closing cost.  This program is limited to specific homes that Fannie Mae currently owns.

Non-conforming/Jumbo loans. In the Seattle/King County area, any loan that is over $567,500 is a “jumbo loan”.   The loan limit varies depending on what county the home is located in.  For homes that are not in a designted ”high cost” area, a non-conforming loan amount is any loan $417,001 or higher. 

Plan on at least 20% down payment and having roughly six months reserves after closing depending on how many properties you currently own.  

I do have other resources that will allow a lower down payment of 10% down with a loan limit of $600,000 and “self insurance” (slightly higher rate in lieu of private mortgage insurance). 

What happened to piggy-back mortgages?   Every once in a while I’m contacted by a borrower who is interested in an 80-10-10 which would allow a borrower to put 10% down payment, using a second mortgage to make up for the difference between the first (primary) mortgage and the down payment.   Currently, most lenders are offering a maximum loan to value of 75 or 80% 85% which rules out the 80/10/10 scenario.  UPDATE August 25, 2011: Some of the lenders we work with are offering second mortgages up to 85% loan to value to well qualifed borrowers.

If you are considering buying a home located in Washington state, I’m happy to review your down payment options with you and help you develop your home purchasing plan.

Related post:

How to Buy a Home with $10,000

How Much Home Can I Afford?

How Much Home Can I Afford?

This is a common question from first time home buyers.  When working with home buyers who are just beginning the process, after discussing credit and other information, I like to ask in return:

  • What type of monthly mortgage payment would you be comfortable making?
  • How much money are you planning on using for a down payment and closing costs.

To me, it’s better to solve for your potential sales price rather than finding a home or getting your heart set on a certain sales price first before knowing what you actually qualify for.

For example, Seattle Sally has saved up $75,000 and would like to use $40,000 towards a home purchase.  She has been paying anywhere from $2,200 – $2,000 a month for rent and would like to keep her payment around $2000. 

NOTE: Rates quoted below are from October 2009 and are outdated. If you would like a current mortgage rate quote for your home located in Washington, please contact me.

Beginning with a conventional scenario, a payment of $2038 (principal, interest, estimated property taxes, estimated home owners insurance and private mortgage insurance) with about $40,000 for down payment and closing costs would produce a sales price of $325,000.  This is based on a 30 year fixed rate of 4.625%* (apr 4.790).

A sales price of $365,000 with a 10% down payment and the sellers contributing towards closing costs would produce a payment of about $2283.

The only issue I would have with the conventional financing is that private mortgage insurance is that these days, pmi underwriters are picking all mortgages to pieces.

FHA would provide a total payment of $2076 with about $40,000 for down payment and closing costs and a sales price of $325,000.  This is based on a rate of 4.875% (apr 5.400).

If we have the seller pay most of the closing costs and prepaids, a payment of $2287 would produce a sales price of $365,000 with Sally bringing in approx. $38,000 for down payment and closing.

One thing to consider, beyond more forgiving underwriting, with FHA is that your mortgage will be assumable.  Imagine having a rate of 4.875% a few years from now when rates will most likely be much higher.  If you are a seller competing with other similar home on the market, and you can offer an assumable mortgage at a tempting rate–this will be a serious advantage.   Once inflation happens, mortgage rates will be much higher.

If Seattle Sally’s credit score comes in lower than expected (this is all based on very preliminary information) FHA may become a better option as well.  

*rates quotes are as of 1:30pm on October 8, 2009 and are based on mid credit scores of 740 or higher.  Rates can and do change often.  Follow me on Twitter to see live rate quotes.

For your personal rate quote on a home located anywhere in Washington, click here.

Funds for closing when you’re buying a home

Mpj030576000001Whenever you are buying a home utilizing a mortgage, your lender is going to need to know where your funds that will be used for the down payment and closing costs are coming from.   And in most cases, they will want the funds to be “seasoned” (statements showing the funds have been in  your account for a two month minimum).

A lender wants assurance that the borrower has enough funds for closing and ideally, enough savings when all is said and done after closing, to have a cushion (2-6 months of your proposed mortgage payment aka “reserves”).  Typically a lender is looking for 2 months of asset account statements.   If large deposits are shown on the statements, the lender (or underwriter) may will require to have the large deposits explained and possibly documented.    Many people have their paychecks go into their bank account and, like the tide, out goes the money.  What ever is shown as ending balance is what the lender will use for your loan application and approval purposes.

Depending on the mortgage program you’re utilizing for your financing, different types of funds for closing may or may not be acceptable.   Here is an example of some traditional funds allowable for closing:

  • Checking and savings accounts
  • 401(k)s and other retirement accounts
  • Stocks, Bonds, Mutual Funds, etc.
  • Income Tax Refund
  • Seller closing cost credit (varies depending on program and loan to value)
  • Gifts from family (depending on loan program)
  • Proceeds from the sale of property (real estate or other)
  • Inheritance
  • Sale of personal property

Cash on hand (also referred to as “mattress money”) is a no-no.   If you’re planning on buying a home in the next 3-6 months, you’ll want to get your dough into a bank account where a “paper trail” can be established of your funds.

With today’s automated underwriting and all of the available mortgage programs, more or less documentation may be required from the lender.   The above list is only a sample.  The requirements for your personal financing may be different.    It’s important that regardless of what funds you’re planning on using for your down payment and closing costs, that you discuss it with your Mortgage Professional.

If you are considering buying a home located anywhere in the State of Washington, I’m happy to help you with your mortgage needs, including reviewing your down payment options.

Related Post:  Qualifying for a mortgage: Funds for Closing

EDITORS NOTE:  This post was last updated on April 11, 2011.