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Money Monday – Applying for a Mortgage? Here’s what you need to be thinking about.

Hello Money Warrior. It’s Monday, April 19th. Welcome to another episode of Money Monday! Last week I talked about how debt isn’t necessarily a bad thing and I cited mortgage debt as an example of when owing money can be productive. So let’s talk about mortgages, shall we?

Because when you’re ready to get your own place and you’re ready to say…

🎶“Country roads, take me home

To the place I belong

West Virginia, mountain mama

Take me home, country roads”🎶

When you are ready to say that, you do have to find a way to pay for that home. Neither those country roads, nor your mountain mama are just going to give it to you. Sorry.

Since a house is the single largest purchase of most people’s lives, you’re probably going to need a mortgage from a bank. And like most financial topics, there are a lot of options and it gets really confusing really fast. Yay! In the hands of a good loan officer, those options mean there is a better chance you’re going to get the money that you need. But it doesn’t hurt to know some basics. In fact, it will probably help if you can advocate for yourself a bit.

Let’s start with your team: a mortgage officer at a bank is only going to work on loans offered by the bank. Their responsibility will likely be to their employer. Depending on what that bank has decided to offer, you may be limited in your structuring options. If you are working with an independent loan originator, they will likely be able to check out multiple different lenders for you. Either way, don’t be afraid to shop around and don’t be afraid to let whomever you’re working with know that you’re shopping. 

While a lot of buyers focus on the interest rate they are going to pay, it is also very important to consider what fees or closing costs the lender is charging. They can run between 2-5% of the loan amount. Since these charges are typically rolled right into the loan, a mortgage with a lower interest rate but higher fees may actually end up costing you more over the life of the loan than a slightly higher interest rate with lower fees. And most of those fees are negotiable. A lender’s costs will be listed in the loan estimate when you apply; make sure you read them and understand them. Don’t be afraid to ask questions! There are no stupid questions.

A major factor in a homebuyer’s lendibility is their credit score. I could do a whole ‘nother video about credit scores (and I’m planning one {wink}), so I won’t go into those here, but you do want to check your score before shopping for a home. You are allowed one free report from each of the three major scoring organizations once a year. When you’re making a major purchase like a home is definitely when you want to use one of those. 

While credit score is important, the biggest determinant of if you’re going to get the loan and at what interest rate will be your debt-to-income ratio. It’s calculated by taking the total house payment (which includes the principal & interest, taxes, insurance, and mortgage insurance, if applicable), adding all “long-term” debt payments (any that will continue for more than 10 months), and stating that number as a percentage of your pre-tax monthly income. Many lenders will deny a household at 43% or higher. As a CFP professional, I prefer to see 36% or less. Housing expenses without the other long-term debt should be less than 28%. I know some of these numbers can seem lofty when you’ve got student debt to contend with, but trust me when I say these guidelines are in your best interest. If you cannot save enough in downpayment to make up the difference, you need to reevaluate your priorities. Tough love, baby; that’s what I’m here for. But I promise it’s your best interest. 

To calculate the debt-to-income ratio, your lender will want to see the last 2 years’ worth of tax returns, income statements, and/or W-2s. They wanna see stable income. The more boring your financial life is, the happier an underwriter will be. Have all of these documents ready. They are also going to request any and all bank statements, investment statements, retirement accounts (legally, lenders can’t use a retirement account as collateral for a loan but it gives a picture of income), and details on any other debts you have. 

They are looking for proof of funds saying that you can pony up the downpayment you promised, as well as a steady flow of other assets. Sudden, large deposits of money will send off wild alarm bells because it looks like you may have other loans outstanding that might affect your ability to repay the mortgage, or you’re hiding something. If a family member is going to help you out with the downpayment, make sure you let your lender know ASAP and make sure you get a letter from the person giving you the money. 

I know when you’re dreaming about how life is going to be in this new house, it’s not nearly as fun to be thinking about your finance ratios, securitization, and the amortization schedule of your interest vs principle, but without careful consideration of how your loan works, your dream house can become a stressful nightmare. You should be completely pre-approved before you start making any offers. As an advisor who has been on the helping side of making home deals happen and have been forced to scramble because the purchasers didn’t think all of this information through, I am *begging* you to please take time to lay out an honest assessment of what you want and how you will afford it. 

As usual, this was just a teeny-tiny overview of some of the things you need to be thinking about, but I hope it was helpful and I hope it got you thinking. This has been Money Monday, tune in next week to see if I can continue singing songs about financial topics.

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