Karen Lawley's Blog
Applying for a mortgage is a big step towards homeownership and financial independence. If it’s your first time buying a home, you might be curious (and a little intimidated) about all of the things that go into your mortgage application.
When reviewing your application, mortgage lenders are trying to determine how risky it is to lend you money. If all goes well, and they determine that lending to you would be a worthy investment, you’ll get approved for a mortgage.
There are three main things that lenders will use when weighing your application (however, there are other factors as well).
First, they’ll run a detailed credit report. This will tell them how much other debt you have, what kind of accounts you have open, how long you’ve had this debt, and how responsible you are when it comes to making your monthly payments in time.
Second, they’ll consider how much money you’ll be using toward a down payment. A larger down payment alleviates some of the risk associated with lending to you. Therefore, people with little or no down payment saved can have a difficult time getting approved for a mortgage. And, if they do get approved, they’ll have to pay monthly private mortgage insurance on top of their regular mortgage payments.
Finally, the third main consideration will be your current income. Lenders will look at your previous two years of income (including tax returns) and will seek out current income verification from your employer.
The latter is a key part of getting approved, as lenders will want to ensure that you are in a stable financial situation and will be able to immediately start making mortgage payments.
Today’s post will center around income verification and how mortgage lenders will use your income to determine your borrowing eligibility.
How Do I Verify My Employment?
If you’re employed with a company, most lenders will reach out to your employer directly to verify your employment. You’ll be asked to sign a form that authorizes your employer to share these details with the lender, and then your part of the job is done and you can move on to the next step of your application.
Things get trickier when you’re a freelancer, are self-employed, or work with several clients as a contract worker. In these situations, lenders will typically require you to file a Form 4506-T with the IRS. This form allows your lender to obtain your tax returns directly from the IRS.
Can I submit additional information to verify my income?
There are some situations where providing additional income information can bolster your case in terms of getting approved for a mortgage.
If you own a business, your lender of choice may ask for a profit and loss statement. If you’re an independent contractor or freelancer, your clients who have paid you at least $600 or services or $10 in royalties will be required to send you a Form 1099-MISC.
If you have mixed income, such as a full-time job with freelance work on the side, showing these 1099-MISC forms can help increase your income on paper so that lenders will approve you or a higher mortgage amount or lower interest rate.
A mortgage pre-approval can be a valuable tool for understanding how much you can afford to spend on purchasing a home. It can also make you seem much more attractive to sellers and help to identify any potential problems that may make it difficult to get a loan. In fact, many lenders claim that if a buyer isn’t pre-approved for a mortgage, they will have a difficult time navigating the real estate market. But what does pre-approval really mean?
What is a Mortgage Pre-Approval?
While it can sound like you’ve got a sure thing locked in when you’re pre-approved for a mortgage, being pre-approved doesn’t promise that you’ll be able to secure a loan for the home that you want to purchase. A mortgage pre-approval simply means that a loan officer has reviewed your finances and decided how much money you're allocated to borrow, what you should be able to pay each month towards your mortgage and what your interest rate will be.
Once, you’ve been pre-approved by a lender, you will get a letter that can be shown to sellers. This letter indicates that you’ve already established a working relationship with a lender. This helps to give sellers peace of mind in knowing that you’re serious about putting in an offer on their home, and they don’t have to risk wasting time with a buyer who isn’t serious.
What Are the Benefits of Getting a Pre-Approval?
A pre-approval doesn’t guarantee you’ll get a mortgage but it does offer a few key advantages during your search for the ideal home. It helps to give you confidence while looking at potential properties, as you look at homes that are within your budget. There’s no need to fall in love with a home that you can’t afford. Additionally, it establishes credibility as a buyer, showing that you have your finances under control and can help to put you on the fast-track to closing once you’ve found the perfect home.
Are Pre-Approval & Pre-Qualified the Same Thing?
Unfortunately, no. These two similar real estate terms are not interchangeable. When you are pre-qualified for a mortgage, this indicates that you have given your lender information regarding your income, debts and assets. Without doing further research, the lender then tells you that you should qualify for a certain mortgage. Pre-approval is a much more in-depth process, requiring your lender to verify the financial information provided by pulling your credit history, as well as verifying your income and assets.
You’ve been a renter for a long time because you knew you had wanderlust and might pick up and move at the end of your lease. Now you've stayed in the same place for a couple of years. You've put down roots and built relationships. You have a sense of community. But are you ready to buy?
Buying a home feels like a big commitment, and it is, so it should! You may not be choosing your forever home just yet, but no matter if it's a starter home or the one you want to raise a family in, buying a home locks you into the community, to a mortgage payment, and to the structure.
Learn all you can
When you rent, you only have your rent and a few utilities to factor into your budget. With a home, you'll have your principle and interest on your mortgage. You'll also have property taxes and insurance. And, depending on your underwriting situation, you may have PMI (private mortgage insurance), too!
Practice making payments
Use one of the many online mortgage calculators to determine your potential principal and interest. Then, check out the county taxes for where you want to buy—some online calculators even have a place to enter this as well as PMI. Add in an average insurance premium for your area. Now that you more closely have an idea of what your monthly payments will be. If it is higher than your current rent, start setting aside the difference now. You need to know that you can make the payment before you get into the house.
Factor in maintenance
The area buyers are most surprised about is the cost of maintenance. The A/C goes down, oops $4000. The roof leaks, that’s another $2500. Plumbing backs up and ruins the carpet? Now you have to pay for both plumbing and flooring. Insisting on a home warranty (that the seller provides) and mitigate some of these costs in the early years, but ongoing they are all yours, baby!
You may be planning to do your own and will have the one-time expense of equipment, but if not, you'll need to add in extra for regular landscaping. If you have a pool, you have to figure extra for pool care.
Since you won’t have a landlord to call, you’ll need to factor in pest control for bugs and rodents.
Ownership is a beautiful thing, but being prepared is more beautiful. Ask your real estate agent about classes or seminars on home ownership that you can participate in to adequately prepare.
There are a number of programs, government-sponsored and otherwise, that are designed to help aspiring homeowners find and get approved for a mortgage that works for them.
Among these are first-time homeowner loans insured by the Housing and Urban Development Department, mortgages and loans insured by the USDA designed to help people living in urban and rural areas, and VA loans, sponsored by the U.S. Department of Veterans Affairs.
In today’s post, I’m going to give you a basic rundown of VA loans, who is eligible for them, and how to apply for one. That way you’ll feel confident knowing you’re getting the best possible deal on your home mortgage.
What is a VA Loan?
VA loans can provide soon-to-be homeowners who have served their country with low-interest rates and no private mortgage insurance (PMI).
If you’re hoping to buy a home soon and don’t have at least a 20% down payment, you typically have to take out private mortgage insurance. This means paying an extra insurance bill on top of your monthly mortgage payments. The downside of PMI is that it never turns into equity that you can then use when you decide to move again or sell your home.
Loans that are guaranteed by the VA don’t require PMI because the bank knows your loan is a safer investment than if it wasn’t guaranteed
VA loans may also help you secure a lower interest rate, or give you some negotiating power when it comes to discussing your interest rate.
Finally, VA loans set limits on the number of closing costs you can pay in your mortgage. And, if you’ve ever bought a home before, you’ll know how quickly closing costs can add up.
Who is eligible?
There are some common misconceptions about who can apply for a VA loan? So, we’ll cover all the bases of eligibility.
If you meet one of the following criteria, you may be eligible for a VA loan:
You’ve served 90 consecutive days during wartime
You’ve served 181 days during peacetime
You’ve served six or more years in the Reserves or National Guard
Your spouse died due to their work in the military
There are some restrictions to these eligibilities. For example, your chosen lender may still have credit score minimums.
Applying for a VA Loan
There are two main steps for applying for a VA Loan. First, you’ll have to ensure your eligibility. You can do this by checking the VA’s official website. Be sure to call them with any questions you may have.
Next, you’ll need a certificate of eligibility. The easiest way to acquire one is through your chosen lender. If you haven’t chosen a lender, you can also apply online through the eBenefits portal, or by mailing in a paper application.
Once you have a certificate, you can apply for your mortgage and you’ll be on your way to buying a home.