Pre-Qualification and Pre-Approval

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When you are selling your home For Sale by Owner or even with an agent, you’ll need to understand what kind of approval is provided with an offer. Many people get pre-qualification and pre-approval mixed up but they are entirely different as to how secure their financing is.

Always inspect lender letters carefully

The mortgage industry often times provide relaxed letters of qualification or approval for clients who may or may not be able to close on the house. 

We will look at pre-qualifications and pre-approvals further below.

Pre-Qualification

What is a pre-qualification Letter

Pre-Qualifications are lender letters based on estimates of a buyer’s overall financial situation.

Estimates on debt, income, and assets are provided to the bank or lender. The lender then reviews everything and gives a price range of how much the borrower can expect to receive.

These can be done online or directly with lender. Furthermore, they are typically free to complete.

How is it Different than a pre-approval?

Pre-qualification is quick, usually taking just one to three days to get a letter. Keep in mind that loan pre-qualification does not include an analysis of credit reports or an in-depth look at the borrower’s ability to purchase a home.

The lender in a pre-qualification usually does not receive any documentation. The potential borrower is verbally providing an idea of who they are financially.

A pre-qualified buyer does not carry the same weight as a pre-approved buyer. As a Realtor, I tend to stay away from pre-qualified letters for offers and request that the borrower go back and get a full pre-approval.

Pre-Approval

What Is a Pre-Approval Letter? 

A pre-approval is an offer (but not a commitment) to lend a specific amount, valid for 90 days.

Getting a pre-approval involves extra steps for the buyer, but it further ensures a borrower can close a deal.

This type of letter is usually based on firm financial records. Bank statements, W-2, 1099, tax returns, investment accounts or credit scores are generally used.

The borrower must complete an official mortgage application to get pre-approved, and supply the lender with all the necessary documentation to perform an extensive credit and financial background check.

The lender will then offer a pre-approval up to a specified amount.

Lenders will provide a conditional commitment in writing for an exact loan amount, allowing borrowers to look for homes at or below that price level.

This puts borrowers at an advantage when dealing with a seller because they are one step closer to getting an actual mortgage.

Side note

Remember there are still conditions to be met on the mortgage side, even with a pre-approved letter.

You should always call the lender and have a brief discussion about the pre-approval letter.

Find out if there is anything major lacking from the file that could cause the loan to pause or be denied at later date.

Make sure they have reviewed credit, all documents and ask if they owe the lender anything.

Sellers

DO NOT BE AFRAID TO ASK QUESTIONS TO THE LENDER OR BUYERS AGENT!

Pre-Qualification and Pre-Approval

Service Coverage

If you have a question about buying or selling your home, please reach out to Joseph Walter Realtyat 248-294-7849 or via email: info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.


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What is a VA Loan?

A VA loan is a mortgage loan in the United States guaranteed by the United States Department of Veterans Affairs (VA).

The basic intention of the VA home loan program is to supply home financing to eligible veterans. They also help veterans purchase properties with no down payment. A VA loan may be issued by qualified lenders.

Veteran Affairs (VA) does not originate loans, but sets the rules for who may qualify. They issue minimum guidelines and requirements for which mortgages may be offered while financially guaranteeing loans that qualify.

When you are selling your home, whether it is For Sale by Owner or traditionally with a real estate agent/Realtor, you will have to understand the offers presented to you and the financing they have been approved for.

Each type of financing can be different, and each have their pros and cons.

Who Can Get a VA Loan?

The program is for American veterans, military members currently serving in the U.S. military, reservists and select surviving spouses (provided they do not remarry) and can be used to purchase single-family homes, condominiums, multi-unit properties, manufactured homes and new construction.

VA Loan Benefits

The VA loan allows veterans 103.3 percent financing without private mortgage insurance (PMI) or a 20 percent second mortgage and up to $6,000 for energy efficient improvements.

A VA funding fee of 0 to 3.3% of the loan amount is paid to the VA; this fee may also be financed, and some may qualify for an exemption.

In a purchase, veterans may borrow up to 103.3% of the sales price or reasonable value of the home, whichever is less.

Since there is no monthly PMI, more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment.

In a refinance, where a new VA loan is created, veterans may borrow up to 100% of a property’s reasonable value, where allowed by state laws.

VA loans allow veterans to qualify for loan amounts larger than traditional Fannie Mae / conforming loans.

Standard VA guidelines state that the VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills, although there is no hard limit to the DTI for a VA home loan.

Veterans have been known to be approved with a DTI of up to 80%, if there are other factors that strengthen their loan application. These factors include a low Loan-To-Value (LTV), sufficient residual income, additional income received but not used to qualify for the loan, good credit, etc.

Let me break down the pros and cons of this type of loan. This will allow you to get some insight on how the borrower was approved and what guidelines they will be facing.

VA Loan Pros and Cons

Pros

No down payment

This is the most significant benefit. Qualified borrowers can borrow as much as a lender is willing to lend, all without needing a down payment.

FHA loans typically require a 3.5 percent minimum down payment, and for many conventional loans it is a 5 percent minimum.

On a $175,000 home purchase, that is a $6,125 down payment for FHA and a $8,750 for conventional.

No private mortgage insurance (PMI)

Usually required for conventional borrowers who cannot put down at least 20 percent. FHA borrowers have mortgage insurance that is at the time of purchase and another that is paid monthly.

PMI typically disappears once you have about 20 percent equity in your home. There is no PMI on a VA loan.

Higher allowable DTI ratio

Lenders will look at the ratio of your total monthly income to your total monthly expenses. The VA typically wants to see a debt-to-income ratio of 41 percent or less. That benchmark is higher than what you would see on conventional and even FHA loans.

It is possible for qualified borrowers with a DTI ratio greater than 41 percent to still secure VA financing.

No prepayment penalty

VA loans can be paid off early with no prepayment penalties.

Refinance options

The VA home loan program has a pair of refinance loans that can help qualified buyers lower their monthly payments or get cash back from their equity.

The Streamline refinance, also known as the Interest Rate Reduction Refinance Loan (IRRRL), is for homeowners with existing VA loans.

The VA Cash-Out Refinance allows VA and non-VA homeowners to refinance and get cash at closing to pay down debt or take care of other needs.

Refinancing may result in higher finance charges over the life of the loan.

Flexibility with bankruptcy and foreclosure

Some borrowers who qualify can be eligible for a VA home loan two years after a bankruptcy or foreclosure. The wait can be much longer for different loan types.

Cons

not for everyone

The VA loan program is a benefit you must earn, which makes it relatively rare to obtain compared to other loan products. VA home loans are only available to eligible service members who have served their country in the United States military. Spouses of veterans who have died in the line of duty or because of a service-related disability may also be eligible.

VA Funding Fee

All VA loans come with a mandatory VA Funding Fee charged by the VA. This fee goes directly to the agency and helps keep the VA home loan program running for future generations.

It is a cost you can finance into the loan, and borrowers with service-connected disabilities are exempt from paying the fee. But this is not something you will pay on a conventional loan or FHA loan.

You can learn more about how much the VA Funding Fee is, who pays what and who is eligible for a refund.

VA Loans are provided For primary residences

This is not a loan program you can use to purchase a second home or an investment property.

Sellers are not always on board

Some home sellers are not open to receiving offers from VA borrowers. A lot of this undoubtedly has to do with some of the myths and misconceptions surrounding VA loans.

 

The information here is provided for informational purposes. The writer is not a mortgage or financing professional. It is always best to discuss financing matters with a mortgage or financing professional.

 

If you have a question about buying or selling your home, please reach out to Joseph Walter Realtyat 248-294-7849 or via email: info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

Michigan Licensed Broker 6505431020
Ohio Licensed Broker 2020008974
Florida Licensed Broker BK3491231
Texas Licensed Broker 9010704
Arkansas Licensed Broker PB00090741
Georgia Licensed Broker 79028

More states 2021


3275 Martin Parkway, Ste. 125, Walled Lake, MI 48390

What is an FHA Loan?

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An FHA insured loan is a US Federal Housing Administration mortgage insurance backed mortgage loan that is provided by an FHA-approved lender. FHA insured loans are a type of federal assistance.

These loans have historically allowed lower-income Americans to borrow money to purchase a home that they would not otherwise be able to afford.

Because this type of loan is more geared towards new house owners than real estate investors, FHA loans are different from conventional loans in the sense that the house must be owner-occupant for at least a year. 

When you are selling your home, whether it is For Sale by Owner or traditionally with a real estate agent/Realtor, you will have to understand the offers presented to you and the financing the buyers been approved for.

Each type of financing can be different, and each have their pros and cons

FHA Loan Benefits

FHA allows first time homebuyers to put down as little as 3.5% and receive up to 6% towards closing costs. However, some lenders will not allow a seller to contribute more than 3% toward allowable closing costs.

Since loans with lower down-payments usually involve more risk to the lender, the homebuyer must pay a two-part mortgage insurance that involves a one-time bulk payment and a monthly payment to compensate for the increased risk.

If little or no credit exists for the applicants, the FHA will allow a qualified non-occupant co-borrower to co-sign for the loan without requiring that person to reside in the home with the first-time homebuyer. The co-signer does not have to be a blood relative. This is called a Non-Occupying Co-Borrower.

FHA also allows gifts to be used for down payment from the following sources:

  • the borrower’s relative
  • the borrower’s employer or labor union
  • a close friend with a clearly defined and documented interest in the borrower
  • a charitable organization
  • a governmental agency or public entity that has a program providing home ownership assistance.

Pros and Cons of FHA Loans

Now we will look at the pros and cons of the FHA loan so you can further understand the buyer you will be working with. The pros and cons are directly about the loans themselves. By understands the good and the bad of the loan product, you can choose to accept the FHA offer or state in your MLS listing you will accept FHA loans.

One thing I would like to point out from a Realtor perspective, is that just because someone cannot afford 20% down, it does not make the offer less desirable. If the client is approved for the offer amount in purchase agreement, the offer has merit to consider.

Pros

Low down payment with low credit scores

FHA loans require a 3.5% down payment with a credit score of 580 or more, much lower than the 620-score required by conventional lenders.

Employers, close friends, family members or charitable organizations can contribute gift money towards your FHA down payment.

In contrast, some conventional loan programs do not allow gifts or restrict who can contribute gift funds for a down payment.

Lower credit score with a higher down payment

The lowest credit score for an FHA mortgage is 500 to 579 with a 10% percent down payment.

Applicants with credit problems, including bankruptcy or foreclosure in their recent financial history, may still qualify for an FHA loan.

Higher debt-to-income ratio (DTI) is allowed

Your debt-to-income (DTI) ratio is calculated by dividing your total monthly debt payments by your gross monthly income.

FHA loans allow for a DTI ratio up to 43%, although some lenders will accept a higher DTI under certain conditions. Meanwhile, a higher DTI may require a 740 score for minimum down payment conventional financing.

Housing options

An FHA loan can be applied to several housing types:

  • Single Family homes
  • Multi Family homes with up to four units
  • Condominiums
  • Manufactured homes on a permanent foundation.

Another perk: You can use an FHA loan to buy a multi family (two-to-four unit home) with a 3.5% down payment and qualify with rent on the other units as long as you live in the home for a year.

No income limits

Higher-income earners with credit problems can qualify for FHA financing with a minimum down payment. You cannot qualify for 3% down conventional loan programs, such as the Fannie Mae HomeReady® loan, if your household income is more than 80% of your area’s median income.

Cheaper monthly mortgage insurance for low credit scores

If you cannot swing a 20% down payment, lenders usually charge mortgage insurance to cover the risk of default if you fail to repay the loan. You’ll pay the same FHA mortgage insurance premium regardless of your credit score. On the other hand, conventional private mortgage insurance (PMI) premiums are much higher if you have bad credit.

Cons

Higher total mortgage insurance costs

Borrowers pay a monthly FHA mortgage insurance premium (MIP) and upfront mortgage insurance premium (UFMIP) of 1.75% on every FHA loan, regardless of down payment. A 20% down payment eliminates the need for PMI on a conventional purchase loan. You can also cancel PMI once you build 20% equity in your home.

Restrictive housing standards

The government requires that all homes bought with FHA-backed loans are structurally sound and secure, and meet minimum health and safety standards. A picky appraiser can make it difficult for a house need renovations to be approved for an FHA loan.

Lower loan limits

Each year, the FHA sets FHA loan limits by county. This may impact how much home you can buy with an FHA loan, especially in high-cost areas. In general, FHA limits are 65% of an area’s conforming loan limits. For example, conforming loan limits in most parts of the country are $510,400, compared to $331,760 for FHA loan limits for 2020.

Limited to a primary residence only

You can only use an FHA loan to buy a home you plan to live in as a primary residence. To finance a vacation or investment property, you will need a conventional loan.

Lifetime mortgage insurance expense

If you opt for an FHA loan with a minimum down payment, you are stuck with the MIP for the life of the loan. The only way to get rid of it is to refinance into a different loan type, such as a conventional mortgage. 

 

The information here is provided for informational purposes. The writer is not a mortgage or financing professional. It is always best to discuss financing matters with a mortgage or financing professional.

If you have a question about buying or selling your home, please reach out to Joseph Walter Realtyat 248-294-7849 or via email: info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

Michigan Licensed Broker 6505431020
Ohio Licensed Broker 2020008974
Florida Licensed Broker BK3491231
Texas Licensed Broker 9010704
Arkansas Licensed Broker PB00090741
Georgia Licensed Broker 79028

More states 2021


3275 Martin Parkway, Ste. 125, Walled Lake, MI 48390

Joseph Walter Realty

 

What is a Conventional Loan?

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A conventional mortgage or conventional loan is any type of home buyer’s loan that is not offered or secured by a government entity.

Conventional mortgages are available through private lenders, such as banks, credit unions, and mortgage companies. However, some conventional mortgages can be guaranteed by two government-sponsored enterprises: The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Conventional mortgages typically have a fixed rate of interest, which means that the interest rate does not change throughout the life of the loan.

Conventional mortgages or loans are not guaranteed by the federal government and as a result, typically have stricter lending requirements by banks and creditors.

When you are selling your home, whether it is For Sale by Owner or traditionally with a real estate agent/Realtor, you will have to understand the offers presented to you and the financing they have been approved for.

Each type of financing can be different, and each have their pros and cons. Let’s look at the conventional loan.

Conventional Loan Requirements

In the years since the subprime mortgage meltdown in 2007, lenders have tightened the qualifications for loans—“no verification” and “no down payment” mortgages have gone with the wind, for example—but overall most of the basic requirements haven’t changed.

Potential borrowers complete an official mortgage application, then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.

No property is ever 100% financed. In checking your assets and liabilities, a lender is looking to see not only if you can afford your monthly mortgage payments, which usually shouldn’t exceed 28% of your gross income.

The lender is also looking to see if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage.

Among the items required are:

Proof of Income

These documents will include but may not be limited to:

  • Thirty days of pay stubs that show income as well as year-to-date income
  • Two years of federal tax returns
  • Sixty days or a quarterly statement of all asset accounts, including your checking, savings, and any investment accounts
  • Two years of W-2 statements

Borrowers also need to be prepared with proof of any additional income, such as alimony or bonuses.

Assets

You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need gift letters, which certify that these are not loans and have no required or obligatory repayment. These letters will often need to be notarized.

Employment Verification

Lenders today want to make sure they are loaning only to borrowers with a stable work history. Your lender will not only want to see your pay stubs but may also call your employer to verify that you are still employed and to check your salary.

If you have recently changed jobs, a lender may want to contact your previous employer. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.

Other Documentation

Your lender will need to copy your driver’s license or state ID card and will need your Social Security number and your signature, allowing the lender to pull your credit report.

Most sellers tend to favor the conventional loan. These borrowers tend to be putting more down, they tend to have better credit, and they meet tighter requirements that lead to their approval. This does not mean, FHA or VA offers will not close or are inferior, it is just another or different type of financing.

As a Realtor, I do prefer conventional, but look at all offers to decide which one will benefit the client. All offers are different when they come in, just like the financing. It is sifting through all the information to decide which offer and financing meets the needs of the situation.

The information here is provided for informational purposes. The writer is not a mortgage or financing professional. It is always best to discuss financing matters with a mortgage or financing professional.

If you have a question about buying or selling your home, please reach out to Joseph Walter Realtyat 248-294-7849 or via email: info@josephwalterrealty.com 

Thank you,

Scott Fader and Gary Brincat
Joseph Walter Realty

Joseph Walter Realty is a veteran owned company located in Michigan. Scott Fader and Gary Brincat are two of Michigan’s multi-million-dollar top producers. They have been working in real estate as brokers, Realtors, investors, property managers and real estate company owners for over 20 years. Together they would like to share their experiences, knowledge, success and failures to help buyers, sellers, Realtors, brokers and anyone else in the real estate and business, so that together we can grow as a community.

Michigan Licensed Broker 6505431020
Ohio Licensed Broker 2020008974
Florida Licensed Broker BK3491231
Texas Licensed Broker 9010704
Arkansas Licensed Broker PB00090741
Georgia Licensed Broker 79028

More states 2021


3275 Martin Parkway, Ste. 125, Walled Lake, MI 48390

Joseph Walter Realty