Introduction
When applying for a mortgage in MN, there are a number of approval processes that prospective borrowers should be aware of. It is essential that future borrowers understand the information/documentation required for each mortgage approval process in addition to the level of scrutiny that will be applied with each approval process. We will discuss three approval processes in this particular blog: Pre-qualification, Pre-approval and Underwriting Approval. While pre-qualification and pre-approval both give prospective borrowers an idea of what they can afford, they are two different processes with varying levels of scrutiny. Underwriting approval is an entirely separate, rather in-depth process that determines if a borrower qualifies for loan approval. With this brief outline in mind, we can take a more in-depth look into the specifics of each approval process.
Pre-qualification
Commonly viewed as the first step in the mortgage approval process, pre-qualification is designed to provide a general picture of a borrower’s financial situation. Pre-qualification involves a loan officer and can take place over the phone or online, often times coming free of charge. Borrowers may discuss specific preferences, special considerations and needs related to their mortgage at this point as well. As a prospective borrower, you can include as much or as little information as you want on this step, although more information will grant loan officers a better idea the particular loan that you will qualify for. This financial overview is usually not based on detailed analysis or documentation of a prospective borrower’s income, assets, debt, etc. Loan officers may conduct basic ratio analysis, however, these analysis are solely based on the information prospective borrowers choose to provide to their loan officer. After finishing the pre-qualification process, your loan officer will be tasked with issuing a pre-qualification letter. Notably, pre-qualification typically does not include a credit report review as part of the qualification process, although companies may periodically offer pre-qualification with credit reviews. Again, pre-qualification is not designed to check a prospective borrower’s credit report or determine their financial ability to pay a mortgage, it simply acts as a general overview of a borrower’s finances. Pre-qualification is often required before a seller even considers a mortgage application, serving as a foundation for the other two approval processes. Relative to the pre-approval process, pre-qualification lacks the scrutiny and in-depth financial analysis that pre-approval entails. Therefore, even if you are provided with a pre-qualified loan estimate, this estimate is subject to change due to the sheer lack of information underlying a pre-qualified estimate. With this in mind, pre-qualification should not be used to submit an offer on a new home as many details are overlooked during this process and realtors are not likely to value the offer very highly.
Pre-approval
The pre-approval process goes beyond the reach of pre-qualification and is based on financial documentation that the loan officer receives and reviews. At a minimum, the loan officer will review documentation regarding a borrower’s qualifying income, available assets for down payment and credit report to ensure that they meet the loan guidelines. Prospective borrowers will need to complete a mortgage application at this stage prior to receiving pre-approval. Other key actions undertaken by loan officers at this stage include credit history checks and down payment estimates. Ultimately, prospective borrowers will receive a specific loan amount estimation and they may also receive interest rate estimates towards the end of this process. Finally, loan officers will run prospective borrower applications through an Automated Underwriting System, providing a means of approving the mortgage. After this stage is complete, prospective borrowers will be given a pre-approval letter and conditional commitment for the loan amount. Request your preapproval today here: Get Preapproved. Theoretically, the home search can begin at this point as the borrower has knowledge of what they can obtain in financing. It is also worth noting that pre-approval letters are only valid for a certain amount of time, usually 90 days. Mortgages Unlimited’s pre-approval letters are valid for 120 days, providing a wider search window for those seeking out their ideal home. While the pre-approval process is rather in-depth, there are certain pieces of financial information up for interpretation that could be viewed differently by the underwriters compared to the loan officer’s final decision. The importance of moving to the third level of approval is highlighted here as it provides another level of scrutiny and risk assessment. With this is mind, we can discuss the third and final approval process: Underwriting approval.
Underwriting approval
Underwriting approval is the third and most thorough approval process available to prospective buyers. Loan officers will compile a prospective borrower’s financial documents which can then be given to an underwriter. The underwriter assesses risk and ensures that a borrower matches the criteria to receive a loan by reviewing the buyer’s financial documents and accuracy of such documents. Aside from conducting an additional credit report analysis, underwriters may review tax returns, W-2s, pay stubs, credit reports, income statements, employment verifications, asset statements, calculate debt-to-income ratios and other relevant financial information. See typical documents needed here: Documentation Requirements. Mortgages Unlimited provides the added benefit of having underwriters review and verify loan amounts and terms, adding another layer of review to solidify the approval process. Ultimately, underwriters will deliver one of four final decisions after thoroughly reviewing the prospective borrower’s financial documents: Denial, Suspension, Approval with Conditions or Approval. If a prospective borrower is denied approval then the underwriter will include a specific reason as to why the denial occurred and when the prospect can re-apply for approval. This is a rarity, as often the loan officer will see that denial is likely and not submit the file to underwriting. In the case of suspension, a prospective borrower often needs to provide further financial documentation/information. The prospect can then reactivate their application after providing the necessary documentation/information. Approval with conditions indicates that a prospective borrower’s application has been approved but the borrower must meet certain conditions to finalize the approval. It may be that a prospective borrower has accounts they must pay-off or bank statements they must provide, for example. Completing these conditions will lead to the conditional approval of the borrower’s application. Finally, prospective borrowers may receive an approval indicating that their application has been entirely approved with no additional conditions. A Certified Home Buyer Commitment™ will be granted at this point and the approval process is complete. Generally, underwriting approvals may speed up the approval process due to the comprehensive nature of the underwriting process. Additionally, underwriting approvals provide a greater level of certainty to Realtors that the borrower will gain final approval on their mortgage. If time permits, an offer should always be submitted with an underwriting approval letter and not a pre-qualification or pre-approval letter.
Bringing it Together
As stated at the onset of this blog, prospective borrowers should be aware of the various approval processes and their nuances before moving forward with a mortgage application. The more in-depth the approval process, the greater the likelihood is that your application will be approved. For example, Mortgages Unlimited offers an underwriting approval process in which your income, assets, employment and loan program are reviewed are verified. Additionally, your loan will be personally reviewed by a Mortgages Unlimited underwriter and the buyer will receive a Certified Home Buyer Commitment™. In providing these services, we hope to provide an in-depth and transparent path to approval that reduces your anxieties and maximizes your chance of approval. For more information the approval processes available through Mortgages Unlimited, submit your preapproval request today – www.furlongteam.com/apply!
Buyer must qualify under program guidelines. Not all borrowers will qualify. This is not a solicitation and not a commitment to lend. Mortgages Unlimited is an Equal Housing Opportunity lender.
BUILDING WEALTH
When I was 24 and a single guy I bought a four-bedroom house in Bloomington. It wasn’t because I needed four bedrooms for myself, it was because I had three other college roommates that were all looking for a place to live. I thought to myself “what an opportunity – I could charge each one of them $500 a month for a room and have $1,500 a month coming in.” The corresponding mortgage payment of $1,400 per month was covered and I had $100 to spare. Granted that was 2004 and the recession was right around the corner. Had I been smarter I would have sold the house after a couple of years and taken my gains, but you can’t really time the market. So, fast forward 15 years and now property values have reached an all-time high. Sure, the short-term gain wasn’t there, but over the long-term I built a great amount of wealth. And let’s not forget about all the rent money that I had coming in from my roommates all those years. Now I have four rental properties, Partner in a residential real estate development company, and a full-time role as a MN Mortgage Loan Officer. For most Americans owning real estate is the number one way to build wealth. So how do we get included when most of you feel precluded from homeownership? This is where strategy comes in.
AFFORDABILITY AND QUALIFYING
Who says you have to be able to afford a home all on your own? Some mortgage programs allow for rent from roommates to be counted into your income to help you qualify. On a duplex, if you can find one that’s reasonably priced right now, you can use the rent from the other unit to help you qualify. If you buy a big enough house and have enough rooms it is very possible to have your entire mortgage payment covered by the rent and you live there rent-free. Use that money to work aggressively at paying off some of those student loans or other debts that you incurred while starting out your career. It only takes a little bit of strategic planning to make homeownership possible for many who thought that it wasn’t. We have far too many scenarios to play them out Dave Ramsey style here, so the best thing to do is get started with a preapproval request. We’ll go through the strategic planning customized to your scenario.
THE STUDENT LOAN BATTLE
I know many millennials are straddled with student loans. We hear it on the news all the time. I couldn’t tell you the exact statistics, but let’s say on average a millennial has $20,000 worth of student loans. We think this is a exclusionary factor for homeownership, when in fact it’s really not. Consider that mortgage underwriting requires us to use 1% of the student loan balances in a monthly payment analysis – that’s $200 a month. Some programs allow us to even use those income-based repayments to help you qualify for a mortgage. So if you have a salary job making $48,000 a year, have a student loan and a car payment, the student loan is 20,000 the car payment is 400 bucks, that means you could still qualify on your own for a $1,400 mortgage payment. That could still get you a $200,000 home. I know a few Realtors that could find a plethora of $200,000 homes with three bedrooms, you rent out each room at $600 a month and presto you’re living large for a $200 mortgage, less than rent, less than your roommates pay, and now you’re sharing in equity appreciation.
WHY NOT?
Now your parents might say go for it and “get the heck out of our basement.” Your Uncle Larry the financial planner might say “well you’re not considering utilities, or what if something breaks, or or what if one of the roommates doesn’t pay, or moves out, or worse yet trashes the place.” Yes those are all risks but they can be mitigated. Your roommates would have to pay a deposit anywhere else that they move to, and try to pick respectable roommates with a decent job. If they trashed the place you can sue them. As far as something breaking, there are home warranties that you can negotiate for the seller of a house to buy for you to cover everything major. And utilities? – divide them three ways. You’re going to be paying utilities anyway if you’re living with Mom and Dad, and if you’re not paying utilities now – share shame on you.
THE VERDICT
It comes down to a matter of alternatives. Maslow’s Hierarchy of Needs has shelter right there on the basic level. Food, water, shelter. You have to live somewhere. It might seem exciting to live in a tiny home out in the woods, but do you know someone who owns woods? Would they let you just camp out there indefinitely? And do you know anything about building a tiny home? Youtube might have the step by step, but it isn’t going to save you when you wire something wrong and the whole thing burns down. Let’s get real – the alternatives are renting from someone or owning. For some, renting makes sense. Maybe you are planning to move to warmer climates (not far from my mind after this winter, trust me!). Perhaps you want to travel the world and not be bogged down with maintenance (associations have maintenance agreements to take care of it for you). Or, you want to rent because you want to help make people like me richer. Either way, renting does nothing to help you build wealth. Let’s get on the train, take a fresh view at what homeownership has to offer. Stop reading into the news, all the bogus online articles about how homeownership isn’t affordable, or you can’t do it – you can. The American Dream, as we see it, should be available to attain for everyone who has the desire and works for it. Start a conversation with us today and we’ll customize a plan for tomorrow. We’ll review, advise, create a plan, and guide you free – all things you won’t get a from a bank. The age-old wisdom used to tell us every wealthy person has a great attorney and CPA. I would add a damn smart mortgage expert and a Realtor that has the mindset of Indiana Jones to that short list.
Buyer must qualify under program guidelines. Not all borrowers will qualify. This is not a solicitation and not a commitment to lend. Mortgages Unlimited is an Equal Housing Opportunity lender.
Several options are available for construction financing. The first option is a new first mortgage intended for rehabilitation finance – the programs are called HomeStyle and 203k, are offered by Fannie Mae and FHA, respectively, and allow up to 97% of the as-completed value of your home in total financing. The benefits to these programs are that you can do one loan instead of two, they are 30-year fixed loans, and potentially provide for all of the rehab funds that you will need.
The second option is a construction line of credit. With a construction line of credit you can keep your existing first mortgage and add a credit line for the improvements. The benefit with a construction line of credit is that it uses the as-completed value of your home. The disadvantage is that it has to be refinanced when the construction is done.
The third option is a home equity line of credit. The benefit to a home equity line of credit is that you can keep your first mortgage as-is. The disadvantage is that the interest rate is variable, and the current amount of equity is all that is available to borrow.
It might be helpful to get the details of your existing mortgage together with the amount of improvements that you want to make and then we can put figures to this.
As-completed value compared to current value
The as-completed value is an estimation that an appraiser will make based upon the improvements intended for your home. When an appraiser does an as-if appraisal based on an as-completed value, he or she will want to see a bid from a contractor detailing the improvements that will be made. The appraised value that is calculated is then based upon the physical attributes of your property with the to-be-completed repairs included compared to other homes in the area that have sold recently. If the as-if value supports the improvements that are going to be made then financing is available for the project as long as other qualifying criteria are met (credit, income, etc). An example of a repair/improvement that drives value is a kitchen remodel. A repair that doesn’t necessarily drive value is painting to change the color of the property. The appraiser is looking for material changes to the property that drive value. The current value of the property is determined without any of the potential improvements being completed.
Fannie Mae Homestyle
This program allows for financing of renovation/repair funds. The loan amount can be up to 97% of the as-completed value. The financed repair costs cannot exceed 75% of the as-completed value. What this means is the loan program can be used to purchase or refinance a home and include funds to complete the purchase or pay off an existing mortgage.
Here are some commonly asked questions on details:
https://www.fanniemae.com/content/faq/homestyle-renovation-faqs.pdf
The benefit to Homestyle over the FHA 203k program is that mortgage insurance is not required if the amount of financing doesn’t exceed 80% of the as-completed value. If mortgage insurance is required (loan amount > 80% of value), then it comes with options.
Fannie Mae loan limits apply (currently $453,100 for a single family home in MN), and the application must gain approval through the Fannie Mae automated underwriting system. Contact us for details on what we need to submit the application.
FHA 203(k)
FHA has two programs under the 203k umbrella. The 203k Full allows for major remodels that include structural changes (additions, tearing down walls, etc). The 203k Limited does not allow for structural changes, but includes the ability to finance most other types of repairs/improvements.
FHA 203k Limited allows for up to $35,000 in included financing for repairs. Some of this goes towards construction inspection costs, title updates and potentially permits (unless the contractor obtains them). This amount also needs to cover the contingency reserve, determined by the age of the property, and is generally 10-20% of the repair estimate. We advise keeping the contractor bid below $27,000 if you plan to finance all of it.
FHA 203k Full allows for up to $100,000 in repair costs, again including inspection/title and contingency reserves, but also including the cost for a HUD inspector/project manager.
FHA loan limits apply for these programs, currently $356,500 in MN for a single family home (higher for multi-unit homes) and FHA underwriting applies. Contact us for details on what is needed for approval.
We have had many clients lately that have needed or wanted to sell their current home and buy another, so we wrote up some tips about buying and selling your home in a seller’s market.
Selling Your Home in a Seller’s Market
The sell side is generally the easier part (though it may not seem that way as you are painting and boxing up all your belongings getting the house ready for market). The market is currently a very strong seller’s market, which means offers contingent on the sale of another property are not as strong.
Buying a Home in a Seller’s Market
We work with our clients to devise a plan for getting approved for the next purchase without having to sell their current home, or strategies for interim financing to utilize your current equity towards the purchase of a new home. In addition to this, with all the constraints this process has, we as your lender will be flexible to meet timeline demands, concurrent closings and can assist in getting contingent offers accepted.
Planning early is never too early and we can help devise a specific strategy for you to make the transition.
When I talk about documenting assets with new borrowers, I often get questions like: “why do I need to document funds for closing” or “why do I need to show where this deposit into my account came from?” It is required of borrowers to source all deposits into documented asset accounts over a certain amount or cumulative amount, depending on the loan program guidelines.
How long do I need to document assets?
Generally, we only document the last 60 days’ period of the asset statements (last two months’ bank statements). Deposits not only need to be explained, but they need to be sourced as well.
What kinds of deposits should I document?
For example, if I see a deposit into a bank account for $1,200 it is required that we have a copy of the check and proof of the source. If the funds came from a relative, it is considered gift funds and must be eligible under loan program guidelines. If it is from the sale of an asset, it is required to provide a bill of sale and copy of the check. If the funds are wired in, the source needs to be documented (letter from the company explaining why they sent funds).
Many times funds wired to an account show where they are coming from (IRS, company payroll, etc) and then we don’t need any further documentation. Sometimes the deposit can be “backed out” of the statement ending balance if the source cannot be documented (cash, for example, cannot be traced/sourced), other times that asset account can be deemed ineligible as a source for closing funds.
Bottom Line: use caution
Bottom line, if you plan to purchase a home, be careful about the money going into your account for 2 months leading up to the underwriting. Mortgage investors have strict guidelines in regards to documenting funds for closing as this is an area where fraud has frequently occurred in the past.
Fannie Mae and Freddie Mac have recently reintroduced the 3% down payment conventional programs. Many benefits are available for home buyers with these programs including reduced rates, reduced mortgage insurance and, of course, a lower down payment!
Some differences between Fannie Mae and Freddie Mac are as follows:
Fannie Mae 3% Down Payment:
- Purchase or rate/term refinancing only
- Homebuyer education is required
- At least one buyer must be a first time homebuyer
- Single family, primary residence only
- Down payment assistance loans allowed (must be a Community Second)
Freddie Mac Home Possible 3% Down Payment:
- 680 minimum credit score
- Homebuyer education is required
- None of the buyers are required to be first time buyers
Watch our informative overview video here:
Home builders have had a tough go the last 5 years. Part of the issue now is finding the labor source to do the construction. Many small home builders tell us that their laborers are all in North Dakota working on the oil pipeline. The other difficulty is in available land for development. You would think that we have plenty of places to build new houses, but consider the infrastructure needed for a new housing development in the suburbs. It takes time and resources to create a space for a home to be built, and up until 18 months ago we had very little demand for new homes.
Most of the new construction you might be seeing around the Minneapolis/St. Paul urban areas is well in excess of $300,000 as available land is scarce inside the 494/694 loop, and the costs of removing the previous structure drive the final price up. Demand in this market is also strong, which pushes prices up as well.
If you are looking for an affordable new construction home, are you willing to expand your geographic area beyond the metro? Many new construction homes closer to $200,000 are available if geographic areas further from downtown Minneapolis/St. Paul are an option.
