Let us go into the world of financing (real estate financing), which is super sexy and exciting, just like most other topics Midwest Money Mentor jumps into (you will see this super sexy topic theme throughout our blog posts and trainings, as I’m sure you have noticed. Midwest Money Mentor, himself, is also super sexy, in case you were wondering). I’ll try to make this very detailed so you become educated, but I will also throw some curve balls in so I can keep your attention focused (hopefully). Fact of the matter is (I am calling you out), if you want to buy a house at any point in your future, you should really know this information to save yourself as much money and headache as possible and put the rest of your finances in a strong spot. DO NOT SKIP THIS KNOWLEDGE!!! 10 to 60 years of mortgage payments, interest costs, refinance fees, and more can sure add up quickly to a lot of wasted money (10s of thousands to 100s of thousands of dollars) if you don’t do your financing correctly.

A good chunk of Midwest Money Mentor’s background is in mortgage lending and, though most people wish to buy a home as part of their “American Dream”, the vast majority of people have not one iota of understanding of how the mortgage world works. Truth be told, it is an extremely detailed world that is heavily regulated, which of course makes it extremely complex. I am not going to deep dive so much that you need a full scuba suit and air tanks to stay alive. More so, maybe some flippers and your goggles so you can see into the deep end and protect yourself from the sharks (which there are many – some mortgage loan officers can be caring and helpful, but many get into the field to make commissions instead of wanting to help people).

Alrighty, so let us jump in.

Preapproval (also called pre-qualification, but not the same thing – more on this later) for a mortgage is a important beginning step in the process of figuring out if you can buy a home (and if you should be buying a home). It is the process of a mortgage lender (this may be a bank/credit union, direct mortgage lender, or mortgage broker) looking through your financial closet of skeletons (or maybe for you it is sunshine and rainbows) to determine your creditworthiness and approval ability.

(for more on how to make your credit super cool looking, see our blog posts 1-3 on “Making Your Credit Scores Magnificent“

If you are one of those crazy lucky people that has enough cash or gold (congrats to Smaug the dragon in the Hobbit and his city of gold and jewels) laying around where you can purchase a home without a mortgage, then way to be what is called a BA (Big Account [Holder] is, of course, what that means), and you can totally ignore this post. Everyone else, make yourself comfortable.

Here is a detailed explanation of the process and its importance:

First, in order to get approved for a mortgage to buy a home, you need to actually have some income, some credit scores, and some money. If you are not there yet, then hold off on reading more and get yourself a steady job, a credit card, and a bank account.

Second, you need to get your documents over to a mortgage lender by working directly with one of their loan originators (which is just fancy words for a person who helps you qualify for a mortgage, also called a loan officer).

As Midwest Money mentor also mentioned in “Making your Credit Scores Magnificent“, it is going to be highly recommended that you apply with at least two separate mortgage lending companies (in any situation where you are getting a loan) so you can figure out who is the better fit for you to work with. Best fit means that you feel you are working with someone who knows their trade inside and out, wants to make sure you have a great experience & the best options, and has good rates and fees. DO NOT FOCUS JUST ON RATES AND FEES. There are plenty of companies out there that are just built on getting people low rates but they cannot do their job worth a poop and they often times kill the your home purchase because they do not know what they are doing. The purpose of qualifying to buy the home is to actually close on the home purchase, so you can own it and/or live there, and working with someone who knows what their doing with every part of the transaction is extremely important.

But, yes, we also want you to have the opportunity to get yourself the best financial deal you can as well, hence the financial education blog. We will cover the financial aspects in another part of the series.

So let’s go into Submitting an Application so you can actually get approved:

The approval itself begins with the prospective homebuyer (you) submitting a mortgage preapproval application to a lender and their loan officer. This application can be either through an online application (which is traditionally easiest and fastest) or you can complete the application in-person/over the phone with the loan officer. The application requires various financial details to be filled out, including your income, examples of your different assets, a credit check to see debts, credit scores, and more. This gives the lender basic information to work up a file for you so they can begin to see what programs may be the best direction.

The application is only the first step, though. The second piece is that you need to send in your documentation to prove your income and assets line up correctly with what is in the application. If your loan officer does not ask for your documents and does not collect your documents, you are not actually pre-approved (no matter what the loan officer says). Without the documents to verify your information, the loan officer is only guessing about your approval. Find another loan officer to work with if the loan officer you filled out the application with is too lazy to gather your documents to make sure you are truly good to go. Again, if something on the documentation does not line up, your approval may not actually be real.

What documents are the loan officers going to request? Well that is a good question. These are the documents you should be expected to gather in a traditional scenario. But, as normal, each situation is different so you may be asked for others as well.

Traditionally, documents that may get requested by the loan officer would be:

1. Tax returns (usually for the last 2 years). If you are self-employed, expect to have to send in your last two years of personal and business tax returns (though sometimes the most recent year may work just fine).
2. W2s (usually for the most recent year, but sometimes the last 2 years).
3. Paystubs (usually for the last 30 days, sometimes more).
4. Bank statements (usually for the last 1 or 2 months).
5. Investment/retirement account statements (usually for the most recent month or quarter).
6. Other income (social security, child support, etc.) documentation.
7. Documentation on the properties you own, if you already own real estate.
8. And more.

Make sure the documents are not altered, blacked out, smudged, or cut off at the corners/sides. And of course make sure if you scan them or print them that all parties can read them.

With the Credit Check: When the application is submitted, the loan officer also completes a credit pull to view your credit scores and your credit history. The credit pull will be what is called a “hard inquiry”, which simply means your full credit report is being pulled in by the lender. People often fret over hard credit pulls because they have heard (accurately) that your credit scores can be affected when hard credit pulls are done. If you have some concerns about a hard credit pull, you likely shouldn’t because it is unlikely that one or two credit pulls will impact your scores (for more on this, again jump into “Making Your Credit Scores Magnificent” posts 1 through 3, to put yourself at ease). If you have recently had multiple other credit checks done in the last few months, and you have a few credit pulls with mortgage qualifying, you could see your scores decrease a bit. So, as with any conversation around credit, try to not have your credit pulled too often through your general buying activities.

Obviously, if you have good credit scores and credit history, it is much easier to qualify for any loan type, and also put yourself in a position to get lower interest costs, better programs, lower mortgage insurance costs, and more. We will review credit a bit more below.

Another important note with your pre-approval:

It is not enough to submit an application and documents to a lender/loan officer to get your pre-approval. You need to go through the most important part of the process, which is setting aside some time to thoroughly go through all the details of your approval (or non-approval) with the loan originator. DO NOT let someone you barely know tell you they have you approved up to a certain price range and that you can go shopping for homes without deep-diving into the important parts of your approval. That would be like having an attorney say your estate plan is set up without you talking to them about what you want after you die. I mean, I suppose you can just wing it if you want, and get the equivalent of a reality tv show to watch. But, you would be watching the drama in your life, not someone else’s, and that is not going to be a recommendation of Midwest Money Mentor.

What are the important details to review? EVERYTHING!

Ok, so everything is an exaggeration, but it is vital to schedule a time to review your file with the loan officer, so make sure you create an opening for a 45-to-60-minute conversation (in-person or over the phone).

You need to ask and understand:

1. What program do you have me approved with? – Each program has different costs, different rates, different payments breakdowns, different down payments, and different ranges they will approve you for. On top of that, different programs have different requirements for what properties they will lend on. Figure out what program you are approved for and then ask:
2. Why is this program the best option for my approval and would other programs have lower payments, down payments, etc.? – Lower down payment options and lower payment options may not actually be the better programs for the long-term, but it is still good to know your options, and you may find, through this conversation, you would be better off with a different program than the one you were originally approved for.
3. What are the negatives with this program compared to other programs? – There are always positives and negatives with each program, make sure to understand each, even if they are not large.
4. Are there any properties that this program would not qualify me for? – Usually you will see that properties such as manufactured homes, mobile homes, condominiums, properties with large acreage, and other property types can have issues with certain programs. Understand what you should not go to look at so you do not waste your time.
5. What ranges am I approved up to? How do I increase that range (if I wanted to)?
6. What payment would that approval range approximately get me? – If that monthly payment range is higher than you are comfortable with, then time to ask What if I wanted a payment at “X”, what purchase price range would that be around (so you can look at properties you can comfortably afford)?
7. Based on this approval, including down payment and closing costs, what do you expect I will need to bring in for money at closing? Are there ways to lower that amount, and what are your company fees? – When it comes to asking for rates and fees, make sure you ask the loan originator for a copy of a “loan estimate”. This is a breakdown of estimated fees and interest rates so you can ask questions about the fees and compare those fees and rates to another lender to make sure you are getting a good deal. The loan officer/originator has to supply you with this information when you ask. If you do not get a formal document that breaks down all the estimate costs and rates from the loan officer, go find someone more trustworthy that will supply you the information. Also, make sure you pay attention to the “points”, which are fees the loan officer is charging for the interest rate. DO NOT PAY A LARGE AMOUNT OF “POINTS” just to get a better rate. Most of the time people refinance or sell their home long before they make their money back if they pay 2 “points” or more. It is traditionally recommended to keep your “points” costs to 1 “point” or less. You may also see the wording be “discount points” instead of just “points”. 1 “point” means one percent of your loan amount in fees. So, a $400,000 loan amount would equal $4,000 in fees for 1 “point”.
8. Where are interest rates with your company for that program? Are their ways to lower those rates, and what costs would be associated with doing so? – You can lower interest rates by asking the seller to cover closing costs for you to use towards buying down interest rates, among other things. Ask for examples of options of both permanent and temporary interest rate buydowns.

These questions should help you feel more comfortable with your approval and the homes you should be looking at (both in price range and in type/quality). This is a lot of info, so for now, we will call it good with part 2 of the blog and jump into the next part of this blog series, where we will jump into how the loan officer and lender determines what you qualify for, and understanding down payment ranges, closing cost examples, and more. You can jump straight in here –