The dreaded mortgage application process isn’t so scary if you know what to expect. 

Here is a quick breakdown of a few questions that I address during the initial  phone or office  interview and mortgage application:

1.  Have you spoken with any other loan officers regarding this transaction?

I like to know what a borrower has been going through prior to speaking with me.  If there have been several credit reports pulled by other banks, I don’t want to contribute to possibly lowering their score by pulling another report.  I also ask this question because I want to know why the borrower is talking with other loan officers.  Is it a rate and closing cost thing, or did the previous banks not fulfill a certain need or expectation?  It just makes more sense to find out what people want up front, so that I can focus the rest of my time serving their specific need. 

2.  Will this be a primary residence, second home, or investment property, and how long do you plan on keeping it?

These two questions usually start a conversation about the borrower’s intentions and real estate investment goals.  Buying rates down, ARMs vs. 30 yr. fixed, FHA, conventional, seller paid closing costs…..  There are several mortgage opotions to consider for each individual circumstance.  It is nearly impossible to have a productive discussion about rates, programs, and closing costs until you have clearly articulated your real estate investment goals with your loan officer.  It is absolutely acceptable to ask a loan officer what their rates are, however, be prepared to supply a little more information so that your loan officer can apply the best rate that fits your scenario. 

3.  Total monthly payment and down payment you have budgeted for?

Again, back to the needs and goals of the client.  It is common for a borrower to ask a loan officer what they are approved for.  However, you may be approved for more than you actually want. 

Here are a couple of easy forumulas that you can apply  when calculating a monthly payment, down payment, and total purchase price:

Banks look at a borrower’s Debt to Income ratio (DTI) as a factor for mortgage loan approval.  40% is a safe DTI to pay attention to for figuring out what you might be approved for.  This means that your total monthly minimum payments, including the new mortgage, cannot be above 40% of your total verifiable gross monthly earnings.  Credit score, down payment, and assets are compensating factors that a bank will consider for approval if your DTI is above 40%. 

EX:  Total monthly gross income - $2,000

      %40 DTI = $800 a month in total allowable payments

A good rule of thumb for determining a total mortgage payment is by multiplying $70 for every $10,000 loan amount.  I’ve found that this is a safe calculation which also includes taxes, insurance, and mortgage insurance. 

So, for this scenario, the borrower would be approved for a loan amount of around $114,000.  If this borrower had a $200 a month car payment, then the the loan amount would drop to $85,000. 

$800 a month total @ 40% DTI

- $200 a month car payment, leaving room for a $600 a month mortgage payment. 

$600 divided by 70 = 85

85 x $10,000 = $85,000 total loan amount. 

*Remember, that 40% is just a good starting point.  I’ve had borrowers approved up to a 65% DTI who had great credit, a significant down payment, and plenty of assets in the bank. 

So, why do I ask a client what type of mortgage payment they want?  Simple, if they are approved up to $900,000, but only want a $1500 a month payment with zero down, I’m going to let their agent know to stay around the $200,000 - $230,000 purchase price range. 

4.  Employment, residence history, income, and assets. 

Just remember the number 2.  A bank will need two year’s employment and residence history.  As far as conditions, be prepared to bring provide the most recent two bank statemens, W2s, Tax Returns, and pay stubs. 

If you have all of this stuff prepared ahead of time, the application should be smooth and painless. 

Hold on Dorothy, we aren’t in Kansas anymore. Back when our parents were financing their home, there was basically one choice…the good ole 30 year fixed mortgage with 20% down payment. Wow, have times changed. There is a new breed of mortgages out there, Exotic Mortgages, as they are called by some in the mortgage industry. These loan innovations have made home buying much easier for those willing to take a higher risk in order to purchase the American Dream. These Exotic Mortgages allow the consumer to put little money down and make low monthly payments. These mortgages have poured fuel on one of the hottest and longest housing booms in history.

The Federal Reserve’s push to take away little money down, low interest rates and red hot home prices have now faded. With them went the conditions that made these Exotic Mortgages worth the risk to consumers. One would think, the love affair with these mortgages would have faded away.

But no…..Far from it.

In fact, the Exotic Mortgages have worked their way into the U.S. housing landscape as what some would consider a permanent fixture. These mortgages have proven themselves to be a key lever for many borrowers at the same time they have also become a great danger. Consumers need to consult a mortgage professional with many years of experience to help navigate them thru the Exotic Mortgage matrix to make sure they are entering into the best program for their situation.

Even though the good ole standby 30 year fixed mortgage still seems to be the mortgage of choice by most home buyers, there are still those who seek out the Interest-only loans, Pay Option ARM’s and Hybrid Fixed ARM loans. This rings true in the more expensive areas when the only way to afford a home maybe to utilize one of these programs.

These Exotic Mortgages worked well when double digit home-price gains built equity leaving home owners with cash in their pockets and when low interest rates helped ward off the potential sting of upward rate adjustments. However, these things are no longer true in today’s market. Interest rates are higher then a year ago and home-price gains have cooled, if not, eroded in some areas.

One of the major problems that home buyers face is that household income isn’t increasing at the rapid rate that interest rates are rising. This in turn creates greater hurdles for the home buyer when trying to purchase an affordable home with an affordable payment. Once again, can’t stress enough that the borrower needs to  work with an experienced mortgage professional so that they have someone to guide them on a plan for purchasing the home and later refinancing the home to meet their financial situation.

For some consumers the gamble pays off. Today there seems to be more of an informed, savvy consumer who wishes to be in more control of their finances and instead of tying up available cash flow into their mortgage payment, they would rather invest it elsewhere. Mortgages are not meant to be one-size fits all because typically the consumer is not staying in their particular mortgage for more then a few years. There is more of a risk taking attitude these days b/c most people aren’t worried about paying off their mortgages like back in the good ole days.

Here is a brief look at some of the more popular mortgages, their advantages and their risks.

30 Year Fixed  Interest Only Mortgage - this mortgage allows the borrower to make interest only payments for the first 10 years of the loan. The principal is then repaid over the remaining 20 years. Advantage - rate stays the same and there are initial low payments. Disadvantages - fixed rates typically higher then adjustable rates, payments increase dramatically in the 11th year, borrower isn’t building in equity in the first 10 years unless the house appreciates.

Adjustable rate interest only mortgage - this mortgage is best for those who have a proven track record of managing their finances. Advantages - rates can go down, initial payments are lower, borrower can pay down principal anytime and it resets the next month’s payment. Disadvantages - risk of payment shock if rate goes up and when amortization period begins, not building equity during interest only period (unless house is appreciating), sometimes there are balloon payments at the end of the interest only period, and at the end of the initial fixed rate period the rate can adjust every month.

40 year fixed mortgage - this is for the borrower who is focused on long term value of their property and wants to build equity regardless if the home is appreciating. Advantages - stability of a fixed rate, lower payment then 30 year fixed and a predictable payment each month. Disadvantages - rate a bit higher then the 30 year fixed, build equity at a slower pace and balloon payment after 30 years.

Option ARM - popular product over the past few years b/c it allows several options to repay the mortgage. Advantages - 4 ways to make a payment: interest only, fully amortized 30 year fixed payment, fully amortized 15 year payment or minimum payment for 12 months.  Disadvantages -  when the loan is recast and fully amortized payments are required, there is a substantial increase in payment during year six, there are gradually increasing minimum payments over the first 5 years and it shouldn’t be used to qualify someone who doesn’t qualify for a traditional 30 year fixed mortgage.

The mortgage industry will always evolve as the need for non traditional lending exists. There will always be risk takers as well as traditional borrowers. It is a requirement that a mortgage professional learn each and every program available to the consumer and know exactly when those programs are appropriate for the consumers financial situation. It is our job to advise clients on each program they qualify for based on their current credit, financial situation and long term goals. Consumers need to be leery of those mortgage professionals who push certain mortgage products on them just for the sake of closing the deal. Remember, your mortgage professional isn’t making your payment, you are.