Helping Washington State homeowners learn more about their mortgage options.
Get Rich Slowly recently posted How to Save Up for a Down Payment Fast. I’d like to respond to some of the ideas offered in GRS’s post from a Mortgage Professional’s viewpoint and offer my advice.
Here are some of the suggestions on How to Save Up for Down Payment Fast along with my 2 cents (in italics).
If 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:
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.
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:
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NOTE: Rates quoted below are from October 2009 and are outdated.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.
Whenever 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:
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.
Rhonda Porter is a Licensed Mortgage Originator MLO121324 living in the greater Seattle area. Rhonda began her career in 1986 in the title and escrow industry and began her mortgage career in 2000. She enjoys helping people understand the mortgage process and started writing The Mortgage Porter in late 2006. Read More…
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