We’ve talked before with a local Atlanta real estate agent about buying your first home—but the home buying process wouldn’t be complete without going through the process of getting approved for a mortgage! To fill in some of these knowledge gaps, I sat down with Natalie Koller Cooper, a Mortgage Advisor with Summit Funding Advisors in Atlanta, GA.
Michelle: I think it would be best if you start by giving us all a high-level overview of what you do. What does the mortgage process typically look like?
Natalie: Well, as a Mortgage Advisor, my job is to walk clients through the whole mortgage process, advise them on how much house they can afford, figure out the best mortgage programs for their situation, and generally just be there to answer any questions they have. I’m kind of like the liaison between the underwriters and the borrowers.
The way that most people start the home buying process is that they see a real estate agent first, who then refers them to someone like me. The buyer will call and say they’re looking for a house, wanting to know how much house they can afford.
The easiest way to answer that question is to go ahead and fill out a loan application so that I get all their information: how much income they make, what their debts are, etc. Then, I can run the numbers based on that. What I generally tell people is even though they probably have a purchase price number in their mind, say $300,000, what you want to do instead is figure out an ideal monthly payment. Technically the kind of house you can afford might not translate into that desired monthly amount, since most people don’t consider taxes, fees, insurance, and all that. This first step of figuring out what you can afford is called pre-qualification.
Then, I usually provide a letter to the real estate agent saying that you’re prequalified for that specific amount, which allows you to better focus your home search on properties that might be a good fit. Once you find a house, negotiate with the buyer, and are under contract, that’s when I officially get all your mortgage documents and send you the disclosures associated with the loan. You sign the paperwork, and we submit everything to the underwriter to look at the whole picture and order an appraisal for the property.
Michelle: During the pre-qualification stage, how do you as a mortgage advisor figure out much house somebody can afford?
Natalie: Truthfully, it all depends on what mortgage program you go with. There are a couple main types of mortgages: conventional fixed-rate loans that are issued by various banks and lenders, and government loans, which are backed by the Federal Housing Administration (FHA loans) or the Veterans Administration (VA loans). Each of these types of loans have different guidelines as to what percent of your income can go to debt each year, which influences how much house you can afford.
With a conventional loan, 50% of your monthly income can go towards all your debt and your mortgage. This number is based on algorithms and historical data that have determined that if you don’t use more than 50% of income towards monthly debts, including housing, then it’s less likely that you’re going to foreclose. So if you have a lot of outstanding debt, that reduces the amount of house you can afford, and vice versa. The government programs under the FHA and VA are slightly higher; those allow you to have 55% of your income go towards debt.
When people talk about “affording a home,” they’re also usually thinking about down payment as well, but you’d also be surprised at how much the down payment can vary by buyer. Let’s say you have someone buying a first house or condo, a smaller house, or the buyer is younger and single. It’s not uncommon to see a down payment of 5-10% of the purchase price. If you’ve got a family that’s expanding, or people buying houses mainly in the suburbs, they might have a 10-20% down payment. There’s even a program called the 3% Down Program. This is great for people who make good money but who don’t have the down payment savings yet, or people who move around for their jobs and don’t want to put all their savings into a place. Obviously lower down payments sometimes come with stricter guidelines, such as higher credit score requirements.
Michelle: What does your credit score need to be to get approved for a mortgage?
Natalie: That also depends. The cutoff point for most conventional mortgages is 620. FHA and government loans have slightly more leeway, with a cutoff point of 580. However, to get the best interest rates, you’re looking for good credit score, something in the mid-700s.
Honestly though, how much house you can afford, down payment, credit score, interest rates—all that just depends on the buyer! That’s why I encourage people to call and talk to a mortgage advisor even if they’re not quite ready to purchase. Tell them about your job, whether you’re planning on changing jobs before you buy, and they can give you tips to make the process easier. If you know you want to buy a certain amount of house, they’ll tell you how much to save and what your down payment options are. Having that conversation early helps you figure out where you’re at, as well as make a plan to get yourself in a better position to buy down the road.
I should note that all this “pre-pre-qualification” can be done without even pulling your credit report. For example, I talked to a guy who wanted to buy in 6 months to a year, but didn’t want his credit report pulled. In that case, he pulled his “estimated” credit report through Credit Karma, and we put some basic numbers together outside of the formal pre-approval process.
While you’re saving for your down payment, you can also be working on your credit. If there are late payments shown, try and call the credit card company or whoever you were paying and try to get them to take off any late payments. If you have high debt balances, start paying those down. If you use something like Credit Karma, know that your credit score is going to be a little different from an official FICO credit score, because the algorithms are different. But you can at least make sure that the info on your credit report is accurate and you don’t have any late payments registered.
Michelle: Okay, so getting back to the mortgage process you described at the beginning, you get pre-qualified, you find a house, you work with the seller to get under contract, and then you go back and officially do all the paperwork and submit to the underwriter. What do you mean when you say “submit everything to the underwriter?”
Natalie: Well, the underwriter is the one who gives the approval on a loan, so it’s their job to ensure the accuracy of what you submit. They review all the documents in your mortgage application: tax returns, bank statements, W2s, pay stubs, etc., not to mention they run all the fraud checks to make sure you’ve not stolen anyone’s identity. They also determine based on debt and income, whether you can afford your house. They’re the ones who give the final say on whether your mortgage is approved.
I should note that with many lenders, this whole process can now be done electronically. You can e-sign the disclosures, and there are 3rd party vendors that verify income and assets online so you do not have to gather any physical documents and scan them over. It really streamlines the whole process.
Michelle: If this happens at the end of the process, what if something goes wrong? For example, what if you’re pre-approved so you negotiate with the seller to get under contract… but then the underwriter rejects your mortgage. Does that ever happen?
Natalie: I started out in the business as a processor, basically organizing all the documents and making sure everything is there for the underwriter to make their job easier. Since I essentially served as the pre-underwriter, and that’s how I learned everything, I learned what underwriters are looking for. That’s made me very detail-oriented, perhaps overly cautious, but that reduces the risk of something like this happening.
It does happen sometimes, however. Obviously, if you lie on any part of your application, the underwriter is likely to find out. Another area where things can get weird is if you’re in a commission-based role. There are more rules for buyers that have commission jobs, since that money is less stable than someone who works on salary. For example, you need two years’ income data for a commission job—some people don’t have that, so they put themselves down as salaried employees and run into trouble.
Honestly though, a good advisor will ask those kinds of questions to make sure that you’re filling out the right information and try to avoid those kinds of situations in the first place. So usually the underwriter only declines the application if something important was left out and the mortgage advisor didn’t get the full picture or ask you the right questions.
Now, if you are actively looking and don’t have a property yet or if you think you’re maybe ready in the next 3-4 months to buy a house, what you can do is go ahead and get fully approved. This is called a TBD approval, in that your exact property is to be determined. The underwriter reviews everything so that when you do find a property, we can provide a commitment letter that says you’re fully approved as long as the property appraises and there are no title issues. It’s lets you close in two weeks. If there are any concerns or red flags, we take care of that before you find a property, and that approval is good for four months. That takes some of the stress out of the situation, plus gives you time to work out any kinks that might come up.
Michelle: You mentioned that a “good” advisor will ask those kinds of questions about your situation. What other things should buyers be looking for when choosing a mortgage advisor?
Natalie: Well if you think about the way that the home buying process works, it’s fairly common to see houses on nights and weekends. It’s not like a mortgage lender will have their phone on 24/7, but you do want someone who can be responsive outside of normal business hours, just in case. For example, sometimes if you’re already pre-qualified for a given amount but want to put in an offer for a specific house, you may need to revise your pre-qualification letter with that address and send it as soon as possible. If you have to update that letter and send it on a Saturday, you’re going to need to get a hold of the mortgage officer, or else you might miss that opportunity.
It’s also important to work with someone who is transparent, someone who will walk through all the different fees with you. That’s my main goal at least, making sure the buyer understands what they’re signing, all the costs involved, and just the whole process in general. When I bought my condo, I wasn’t in the industry and I had no idea what I was signing. My friend was my loan officer and I trusted her, but she didn’t explain everything to me. Now that I know the ins and outs of the process myself, I don’t want my clients to be confused about it. I want them to feel comfortable with it. This is one of the biggest purchases you’re ever going to make, so you should feel at ease, not pressured to sign in any way if you’re not ready.
There are usually a few good ways to find a mortgage officer. Most find theirs through their realtors, or through word of mouth. You can look online too, but either way I recommend talking to two or three people, seeing whether you’d enjoy working with them, and getting some fee comparisons. When you get a quote, get a fee sheet and compare them apples to apples. Just note that rates also change daily, so if you get a quote on Monday from one place and Tuesday from another place and the rate’s different, it could just be that the rate changed. That said, mortgage advisors’ fees don’t usually fluctuate, so those tend to be easier to compare.
Michelle: How do mortgage lenders or advisors get paid?
Natalie: It depends. I’m commission based, but lending is a highly-regulated industry, so brokers and advisors must agree to a commission structure and stick to it. You can’t even lower it for friends; it’s just set. Commission rules were more flexible before the 2008 housing market crash, but unethical brokers were taking advantage of that, so that’s since changed. Some places do have salaries. Big banks usually have pay salaries and then give an additional bonus based on the number of loans closed. It depends on the company.
Michelle: We talked about the initial mortgage process, but what does the refinancing process look like?
Natalie: If you buy a house and don’t get a good interest rate for whatever reason, refinancing can be an option in some cases. But what people don’t understand is that refinancing comes at a price; it involves closing costs. There’s a breakeven calculation involved that we can do: if you lower your rate, you’ll incur some amount of closing costs, so if you’re going to move before you hit that breakeven point, you’re not actually saving money. That said, if you plan to stay in your home for more than five years, than usually it does make sense to refinance to a lower rate.
There’s another similar situation that isn’t technically refinancing, but can save you money on your monthly payment. if you have a low initial down payment, you are required to pay for monthly mortgage insurance (MMI). However, you can ask for an appraisal after you’ve lived there for two years. If the money you’ve put into the house, combined with the “equity” you get from the rise in home value, means that your loan drops below 78% of the value of your house, then you can drop that MMI early, thereby saving you money. This is particularly relevant now that home prices are skyrocketing. It’s a seller’s market; prices are going up since there’s very little inventory.
Michelle: This site is called Young + Scrappy, so now that we’ve covered the basics, I want to also hone in on any mortgage advice you might have for younger home buyers. Any tips?
Natalie: There’s a few things that I’ve seen my younger clients do that might be relevant here, actually. This isn’t relevant to everyone, but I have seen people use their home equity as a way to pay down student debt. If you have a lot of equity in your house and you have higher-interest rate student loans (think 6% or higher), you could in theory do a cash out refinance to pay down student debt, or pay it down using a lower-rate home equity line of credit. Depending on what your interest rate on student loans are. Right now, interest rates are in the upper threes to low fours, so if your student loan debt is higher than that, this kind of action might make sense.
Another thing of interest to Millennials and other younger generations is that a down payment can now be 100% paid for using gift money. It used to be that gifts from parents or family members were restricted, and you had to put at least 5% down with your own money to buy a house, but that’s changed.
Some younger people with less credit history or not enough commission-based work history can also have a parent co-sign on a mortgage; this is called signing as a non-occupant co-borrower. I will say though that the success of this strategy depends entirely on the relationship between the child and the parents, as well as the creditworthiness of the parent. If something goes wrong and the child doesn’t pay, it can ruin the other person’s credit or even ruin the relationship.
Finally, don’t be afraid to look for other programs that can help you afford a house. There are programs that provide for down payment or other assistance out there. Different lenders are approved for different programs, make sure you ask if they participate in any programs that offer assistance.
Michelle: Thank you for all this, Natalie. You’ve been a fountain of knowledge. Before we part ways, any closing thoughts or final advice for our readers?
Natalie: I guess I’d just say that the most important thing in the entire process is finding someone you can trust, who’s going to be there for you along the way, answering any and all questions you have. Don’t be afraid to talk to someone before you’re ready to pull the trigger. Educating yourself early is the best thing to do.
If you’re interested in reaching Natalie to get more information about the mortgage buying process, she can be reached via email at firstname.lastname@example.org!