Preparing to Finance a Home

THE FINANCING FLOWCHART

The Prep

  1. How do I get pre-qualified ?
  2. What do I need to apply for a mortgage loan?
  3. What are my loan options?

The Hunt

  1. Create a list of suitable properties to tour with your agent
  2. Select a home
  3. Agent prepares offer Letter and pitches it to the Seller
  4. Offer is negotiated. Accepted or countered

Escrow

  1. Entering Escrow
  2. Title Reports, Assessments, and Appraisals
  3. Disclosures, Inspections Contingencies
  4. Loan is approved and financing is obtained
  5. Purchase complete
    (Let the celebrations begin!)

The Prequalification Process

Before selecting a home, it is beneficial to have your financial dashboard organized in advance to prevent any slow downs in the buying process. Typically, before beginning any negotiations, the seller and/or lender will request to see certain financial documents in order to show that you’re serious about purchasing a property. 
Rest assured, your Ballou Real Estate Group agent can guide you through this process. The most important document to have prepared before you begin the house hunting journey is your preapproval letter.

What is a “pre-approval letter”?

Pre-approval letters typically contain the following:

A pre-approval letter is an official document sent from a bank which indicates that you are prequalified for a loan and financially capable to afford buying a home. Simply put, a pre-approval letter verifies your credit and income and provides an estimate of how much money a lender is willing to loan you for the purpose of buying your home. A pre-approval letter is not the same as applying for a loan.
A pre-approval letter provides buying leverage and quantifies your buying power. It shows sellers that you have done your due-diligence as a soon-to-be homeowner and you already know what your financing options are.
  • Borrower
  • Lender
  • Loan amount/purchase price
  • Interest rate
  • Term (life of mortgage)
  • Type of property (single-family, condo, etc.)

Supporting Documents Explained:

To verify your financial readiness to purchase a home, you will be asked to provide documentation to support your financial dashboard. These are the documents typically requested while preparing for a mortgage loan are as follows:
  • A recent credit report showing the buyer’s FICO score and a summary of the borrower’s credit history
  • A loan application (known as a Fannie Mae 1003) is filled out and put into a loan file
  • Photo identification (e.g. driver’s license, passport, etc.)
  • 2 years of Tax Returns (W-2s, 1099, etc.)
  • Recent pay stubs (30-60 days)
  • Recent bank statements (2 months)
  • A summary of current assets (your accountant can typically provide this information if you do not have it readily available)

Loan Options 101

During the pre-qualification process, your lender will clarify the types of financing available and what you would be qualified for with each type of loan. Before calculating the loan amount, a general breakdown of your anticipated monthly payments will be calculated. 

When determining the amount of monthly payment you will be expected to make, the following factors will be taken into consideration: Principal, Taxes, Interest, Insurance, and possibly Mortgage Insurance, if applicable. There are several loans to choose from to accommodate your monthly budget. Your lender will help guide you through the process. The 5 main categories of loans for homebuyers are:

  1. Conventional Mortgage Loan
  2. Adjustable Rate Mortgages
  3. Fixed Rate Mortgages
  4. Government Insured Mortgages
  5. Jumbo Mortgages

Pitfalls to Avoid During the Loan Process

In the months leading up to buying a home, there are certain steps a buyer can take to keep their financial dashboard squeaky clean. It is essential to remain vigilant of expenditures and anticipated big purchases to avoid any derogatory marks on your credit report that may affect your debt-to-income ratio.

DO NOT:

  • Buy or lease a new car.
    New payments may negatively impact your ability to obtain a loan.
  • Run a credit report on yourself or your spouse.
    All new inquiries on your credit report would need to be explained in writing.
  • Make plans to consolidate any loans or bills during the house hunting process.
  • Make any major purchases, such as appliances, furniture, or luxurious non-necessities.
    Large purchases could potentially increase your debt and reduce your chance of getting approved for the most optimal loan.
  • Move your financial assets around.
    It is important to maintain transparency for ease of disclosure into any credit factors your lender may want you to clarify upon.
  • Lose track of any important supporting documents
    That a lender may ask to see, such as Tax Returns, Accountant’s Summary of Assets, Divorce Decrees, etc.
  • Make plans to consolidate any loans or bills during the house hunting process.
  • Change employers
    Consistency is key in showing your lender that you have the means to afford your mortgage.

Financial Factors for Loan Approval

Keeping your financial dashboard tidy will help lenders get clear insight into your financial situation. Lenders will be taking a look at the following categories:

Factors to consider before drafting the Offer Letter:

Credit Report

A credit score is a mathematical calculation of your overall credit rating. Good payment history is crucial. Any derogatory credit notations should
have a valid explanation.

Job Stability

Consistency is key when applying for a loan. Lenders like to see ideally the same job with the same company for a long time. However, of course life throws curveballs. Changes in employment made for advancement purposes are
acceptable. Attending school in preparation for your vocation is meritable on your employment
path.

Money talks - Down Payment, Closing Costs, and Cash Reserves

The typical cash amount expected to be paid towards the down payment from your own funding/savings account is 3% of the purchase price. For funds to be considered valid, they must be verified as having been yours for no less than
3 months. The remainder of the down payment, closing costs and 2-3 months of reserves may also come from your own funding/savings account. Or, they may be gifted by a relative who provides a letter and bank statement showing
ability and proof of funds.

Loan Qualification Process Examples

SINGLE FAMILY HOME EXAMPLE

INCOME

$ 300,000

ASSETS + 12 MONTHS RESERVES

$450,000

OTHER DEBT

$ 800 / MO

CREDIT/ FICO SCORE

720

TOP RATIO

31.3%

BOTTOM BEBT RATIO

34,5%

Using these figures, proposed monthly housing expenses would be:*

Purchase Price

$ 300,000

Loan Amount

$ 1,200,000 (80% LTV)

Down Payment.

$ 300,000

30-Year Fixed Payment @6%

$ 7,194.61

Insurance Monthly.

$ 166,67

Property Taxes Monthly.

$ 1,562.50

Total Monthly PITI.

$ 8,923.78

Total Debt Service.

$ 9,723.78

Top Ratio = 35.69%

Bottom Ratio: 38.89%

condo or townhome example

INCOME

$ 120,000

ASSETS + 12 MONTHS RESERVES

$ 50,000

OTHER DEBT

$ 800 / MO

CREDIT/ FICO SCORE

680

TOP RATIO

40.9%

BOTTOM BEBT RATIO

48,9%

Using these figures, proposed monthly housing expenses would be:*

Purchase Price

$ 650,000

Loan Amount

$ 585,000 (90% LTV)

Down Payment.

$ 650,000($25,000 Buyer / $40,000 Gift)

30-Year Fixed Payment @6%

$ 3,507.37

Insurance Monthly.

$ 450.00

Property Taxes Monthly.

$ 677,08

pmi

$ 150.00

Total Monthly PITI.

$ 4,634.45

Total Debt Service.

$ 5,434.45

Top Ratio = 46.34%

Bottom Ratio: 54.34%

P.I.T.I

  • Principal
  • Interest
  • Taxes
  • Insurance

insurance

  • Homeowner’s Insurance
  • Mortgage Insurance
  • Homeowner Dues

PROPERTY TAX FORMULA

Purchase Price
X
Tax Rate (1.25%)
=
Annual Property Taxes

Annual Propery Taxes 12 Month
=
Monthly Tax Rate

HOMEOWNER’S INSURANCE FORMULA

Loan Amount
X
.15%
=
Annual HO Insurance

Annual HO Insurance 12 Month
=
Monthly Rate

eXp Realty of Northern California, Inc.

CA DRE# 02030062

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Calculator Disclaimer

Use our mortgage calculator as a learning tool, but keep in mind that real rates and monthly payments can vary based on market conditions and factors like location and loan details. The estimates provided are based on your input and might not cover additional fees, such as taxes and insurance, which could increase your actual payment. Note that Ballou Real Estate Group does not provide loans, and this tool does not constitute a lending offer.