Part 1 – Where to begin? The preapproval process, different types of lenders, and underwriting.
In the following four-part series we will discuss the daunting paperwork that you will be faced with when you decide to purchase a home. By the end of this series, you should feel confident to go out there and find the home of your dreams.
You want to buy a home. You know you will need to finance, however that is as much as you know at this point. Who to go to for information? How long does this process take? What exactly is the process? Where to begin?
Don’t worry, I will walk you through the entire process with the help of an expert in the field, Wanda Keenan, VP, Mortgage Lending of Guaranteed Rate Affinity. Wanda has been working in the lending and title industry for over 20 years and she has agreed to sit down with me to unravel the complicated process of buying a home with financing.
Hopefully, you have been working with an experienced Real Estate Agent as your buyer’s agent. He/she should have suggestions for banks, mortgage companies, or mortgage brokers. These most likely have been people the agent has worked with before and has a good working relationship with, who can help make this home buying experience stress free and enjoyable. Each of these establishments is different and we will discuss each one later on.
Q: Let’s begin with pre-approval. What is it? Do I need it? Where do I get it?
A: Pre-approval is a letter stating that a financial institution, mortgage company, mortgage broker, or online mortgage company has looked over your finances and determined you would be able to obtain a loan. Yes, this is very important in the real estate market today. With inventory being so low and homes receiving multiple offers, it is important to put yourself in the best light possible, and having a pre-approval letter helps do that. You would get this letter from any of the institutions listed above.
Q: As buyers agents, we ask clients to get a pre-approval letter. Wanda, can you explain what a pre-approval letter is and the pre-approval process?
A: First thing is to have a conversation with the buyers. What does your monthly budget allow for a full mortgage payment, what do you have available for money to put into the transaction, and what is your long-term goal? What price point are you comfortable with? You probably could qualify for a lot more than you think you do, however, that doesn’t mean you should borrow that much. I want to make sure I don’t put someone in a mortgage position that lessens their quality of life. A new home should enhance your quality of life, not keep you from doing the things that you love to do with your family, like going out to dinner, the movies, skiing, etc. So, we really have a true conversation about what their payment needs to look like and I build the loan backward.
At Guaranteed Rate, we have a program called Red Arrow Express that allows us to get the buyer pre-approved not only from the automated underwriting system but by a manual underwriter as well so that when they go into negotiations they have what is called a commitment to lend, which is an enhanced pre-approval. This allows the buyer to do a shorter closing time because all that is needed at this point is the collateral.
Q: How about the timeline for a pre-approval letter?
A: The timeline for the preapproval process is not long. There are a couple of ways to do it. There is the digital mortgage application. I send the link to the buyers and it should take about 10 min for them to fill it out. They then send it back to me and I verify the information and then can make recommendations of programs that may be available to them. That is a pre-qualification or unverified pre-approval and you can have that in about 20 minutes. I prefer to have them upload W-2s, paystubs, and bank statements so I know what they put in matches what I can tell the underwriter is accurate and they can prove it. That is the stronger pre-approval. That can happen in about an hour. And then of course the manually underwritten is the strongest. That can take about a week.
Q: Is a pre-approval letter specific to a particular house or can it be a general letter to verify the buyer is legit and is qualified to purchase?
A: We can do it either way. What I would like to do is have that initial conversation where I talk to the clients and go over what we discussed earlier regarding their particular scenario. The reason for that conversation is because that will really determine what price range the buyers should be looking for. On the other hand, if they go to an open house and they want to put an offer in, you will want them to call and get a letter of pre-approval right away, so as to put themselves in the best possible position.” Additionally, in our current market, most listing agents require preapprovals to schedule showings. In that case, the lender will request the address and update the preapproval for that specific property.
Q: You mentioned underwriting, so many people don’t understand what underwriting is and how it works. Can you explain?
A: Certainly, there are two types of underwriting, when we do a pre-approval we are running an AUS, which is an Automated Underwriting System. That is artificial intelligence that we have in relation to Fannie Mae and Freddie Mac, the government programs. We plug the scenario into the application and then run AUS. It then gives us what is called findings which are computer-generated. Then there is a physical underwriter who is educated on the guidelines for every program. He/she has to then look at every document and every piece of information we have input and verify that when that loan is sold on the secondary mortgage market that no one will find something that doesn’t match the guidelines and will send the loan back. So the underwriter is a person that will literally verify everything that has been submitted to make sure it is true. Basically, they are the research and verification department.
Q: Earlier you mentioned banks, mortgage lenders, mortgage brokers, and online mortgage lenders. Can you explain the differences between these establishments?
A: Guaranteed Rate is a mortgage lender. We actually fund the loan and then after closing sell it on the secondary market. Financial institutions, (banks) also fund the loans. They also will sell them on the secondary market, however, they also may choose to hold the loan at the bank in their portfolio. If the mortgage is kept in-house, you would pay your mortgage to the bank. If it is a mortgage broker, they actually take the client’s scenario and go out to a number of investors. It is then funded by that second investor. They shop for different investors. Most of the online companies like Rocket Mortgage and Loan spot are mortgage lenders like Guaranteed Rate. They will fund and then sell on the secondary market.
We have covered quite a bit of information in this first part of the Mortgage process series. We have gone over the different institutions available to borrow money for a mortgage and what they do. We have discussed the preapproval process, how it works and the different kinds of preapproval and we have explained underwriting and how it works.
In Part II we will go over different buyer scenarios, Letters of Explanation in regards to loan applications, and first-time home buyers.