Magilla explains the 15 home loan facts your realtor wants you to know

Realtors and loan processors complain constantly about the struggles they have when interacting with new home buyers. Realtors lament the bad decisions borrowers make that kill their ability to get approved for a loan. Some seem like common sense, but other things might not be so clear on how one item is even connected with another. I constantly remind these realtors and loan processors that “customers do not go to customer school. They do not live in this world every day like you do. Educate first and when they don’t listen…then cry.” Here are 15 things that make your realtor grumpy.

1. Start Saving For A Down Payment

There are so many different programs for so many different types of scenarios to allow for lower down payments on homes. However, the more down you have, the more buying power you get. It minimally affects how much house you can buy, but it does affect your interest rate and monthly payment. Many first-time home buyer programs allow for 3.5% down. It is strongly recommended you save up for 20% down. That is the magical cut off for Mortgage Insurance.

Mortgage Insurance is a dastardly thing that only benefits the bank and not the borrower. It is not insurance for you. It is insurance for the bank because the equity in the house is not in the preferred 80% loan to value (LTV) and it protects them if you default. Anything under a 20% down payment required, by every bank, to include mortgage insurance. This has a strong effect on your monthly payment.

How does it affect it? By adding to your mortgage payment every month for the length of the loan. Even when your LTV drops below 80%, you are still paying it unless you refinance your house. Although it takes you longer to save for the 20% down payment, you will save hundreds a month on your mortgage and you are not throwing money into a black hole to protect a bank.

What about 0% down home loans? That is possible but answer one question, are you a veteran? No? Then do not expect it…at all. The likelihood of getting it is closer to nil than a hint of feasible.

2. Check Your Credit Score

Know your credit score. Do not go to sites like credit karma or other sites that give you an idea of what it might be. That is not your real credit score. Those exist to show you what is on your credit but the number it gives you is NOT your FICO score, it is their own formula. You are allowed a free FICO score once a year. Use it to find out where you are and if you have bad things on your credit you have a couple options. One, pay off your debts and get your debt to income (DTI) below 35% and/or second, pay a credit restoration company to clear delinquencies off your report.

3. Veterans Should Take Advantage

Veterans have special programs that help them get into homes a lot easier. They should, they served their country and deserve that perk. The veteran program is one of the ONLY ways to be allowed a 0% down payment option on buying a home. This comes with a caveat though. You can only use it once. It is a one and done and if you purchase a second home, that perk has been used and requirements are the same as everyone else.

Recently, I ran across a guy who used that perk and was still active duty military. A high-ranking marine and once he purchased his home, he was transferred across the United States. He rented out his home but wanted to buy a second one where he was now stationed. That perk was used and he did not have the down payment to purchase one so he was stuck. If you are a veteran, thank you for your service, but be sure that when you use that program, you will not get new orders that will put you in a tough spot.

4. Life Is Hard For The Self Employed

Self-employment is a fantastic option that many people wish they had. You work when you want, play when you want, pay yourself, and not work for ‘the Man’. When it comes to buying a house, it adds a new level of complexity and more documentation than a regular employee working for a random company. If you are self-employed and have been for years and your tax returns reflect your income your life will not be so difficult. If you report less on your taxes or write off a large amount of your expenses to help you at tax time, it will haunt you during your home purchase because it will show your income does not support the purchase of a house. You can counter this by putting in a larger down payment. More skin in the game helps convince lenders to approve the purchase.

If you do not have tax returns and want to use stated income or bank statements to support your income, prepare for a long, uphill battle in getting approvals and expect the rate to be significantly higher compared to a salaried employee. It is still possible but the hoops to jump through will be many.

5. Know Your Limit

If you are a first-time home buyer, do not expect a mansion in Beverly Hills unless you are a highly qualified borrower. Just like your first car, banks want to give you a reasonable limit on what you can buy without overspending and without putting them at excessive risk on someone with no history on a purchase so large. Think of it like a parent giving a child a toy car. Then once the child takes care of the car, they get a more expensive remote-control car and they work their way up to the bigger and better. Realtors want you to get in as big a house as possible because the more you spend, the bigger your commission so take what they say with a grain of salt.

Know what items you really, really want (open living space or pool in the backyard etc.) and then try and find it but do not overspend to get it. If you cannot find what you want within your budget, then wait for the house of your dreams. This helps twofold. One, you will eventually find what you want and it will be better than the one the realtor tried to shove you in. Two, as you wait to find that perfect house, you are still saving for a bigger down payment. Time is on your side. The bigger down means the easier it is to find the house you really want. Patience pays off when it comes to preventing your financial over extension. There is no swag in a foreclosure if you shoe horn your way into an unaffordable house payment.

6. Income

This section could have been included in the above Know your limit, but it is important enough to dig a little deeper into. One, your income is one of the main factors on how much of a house you can afford and whether you are over extending yourself. In areas like Northern California, where housing is way more expensive than most of the country, it is easy to forget that regardless of the housing market, you are still limited by your income. Realistic expectations are important. The general rule of thumb is whatever your GROSS annual income is, multiply by four and that is the amount of house you can afford assuming the rest of the numbers like DTI and such line up. That means, if you make $60,000/year with 20% down payment, the max house you can reasonably afford is $300,000.

That does not buy you much in San Francisco but it is what it is. If you want to buy a more expensive house then find more income, or put more money down. You can weep and gnash at the teeth about how you deserve more but a bank does not care how much you think you are entitled to. They look at the numbers because they are the ones taking the risk. Harsh, I know. The point is, to set realistic expectations. Too many times I see a first-time home buyer who wants to put 3.5% down and makes $60,000/year trying to buy a $500,000-$600,000 house and that is shake-my-head frustrating. That is, until I remember first-time home buyers have no idea what to expect or what is realistic. The realtors might be complaining about the ignorance of borrowers but it is partly their fault for swelling people’s ego and giving hope on how much house the FHA buyer can get into as part of their sales technique to maximize their commission. When I was home shopping for my first home, I asked for how much I could afford and they came back with $400,000. Looking at my monthly payments and my income, realistically, I could reasonably afford $250,000 at the time. Therefore, self-educating is important, I was one day away from having an offer accepted and locking myself into a bad situation before I learned the truth.

7. Utilize A Calculator

This one seems like a no brainer but a lot of people do not realize there is a calculator that will help you find out what your payments would be. You can search for an affordability calculator, or if you are looking for monthly payments, you can use the Magilla calculator. This will help you to know your limit.

8. Track The Market

Home finding can take some time. Along with the process of buying the home. Throughout this time, you should be tracking where the interest rates are. You can also see what they were for the last 12-18 months to see the patterns. Interest rates vary throughout the year and are affected by what is going on in the economy so being aware of the market is important for predicting swings. You do not have to worry if the shift is by 0.5% interest or not. When you are below 6% interest, a half a percent does not change your monthly payments much.

9. Understand Your Options

Learn about the different rate types. Do not only go by what a lender tells you. Each bank or lending institution has different strengths and weaknesses. This leads to bias on certain loan types. Google all the different terms and do your research. Does that sound like a lot of work? Well, you are trying to buy something that will cost you hundreds of thousands of dollars and it will affect your entire way of life, so maybe a little research would be a good thing. Learn what fixed rates are, adjustable rates, what different terms mean, etc. This lack of knowledge is partly what caused the housing market collapse. No one understood what a balloon payment was. When it hit, it was too late to stop it. Learn independently and when you find what one works best for you, find the lender who has a strength in the loan type you want (see next section).

10. Compare Your Options

Banks and lenders all have different strengths. Some are more competitive on Adjustable Rate Mortgages (ARMs) while others are stronger at Jumbo loans or First Time Home Buyer (FHA) loans. Some lenders are traditionally stronger at one loan type but have hit their portfolio numbers for the quarter so are less competitive until the next quarter. Makes you want to throw your hands up and scream in frustration, doesn’t it? That is why Magilla Loans exists. It is an aggregator that allows real lenders (nothing is auto generated) to submit real proposals of what they offer today. It is built for those ready to buy a home find the right lender.

11. Get Your Documentation Ready

You will need two to three years tax returns, pay stubs for the last two to three months, any veteran paperwork if applicable. This is the grindy part of purchasing a house. The back and forth with the lender can take some time and with time deadlines and escrow, you want to be ready to go.

12. Clean Your Plate

The above leads me to this. Once you are in contact with a lender, make sure you are the one waiting on them. The longest part of the process and the loudest complaints are when lenders are sitting around waiting for the borrower to get their documentation together and fill out the application. I understand it is a lot of work to pull everything together but people have lost houses they truly loved because they dragged their feet and did not get their docs in on time. They blamed the lender for not moving fast enough but ultimately it was their fault for taking so long. If the lender requires further documentation, do it immediately, don’t wait around for when you think you will have time. You are only shooting yourself in the foot if you do.

13. Pre-qualification

Go this route to expedite the final purchase. It takes the stress off you, the realtor, and the lenders when all the rush for documentation is done before you find the house you love. It will also protect you emotionally. You are less likely to become attached to a house if it does not fall into the amount you pre-qualified for. You do not want to fall in love with a house only to find out 85% of the way through you cannot afford it.

14. Job Stability

Do. Not. Lose. Your. Job. Do not change your job, do not do anything that might affect your income in your job (unless that means more income). Job stability is very important because lenders do interviews with your job. They will want to verify you work where you say you work and earn what you say you earn. If you suddenly make $10,000 less per year that means roughly $40,000 right off the amount you can afford in a house. That is not good. Once you have closed, you can do what you want, but until it happens, be chill and sit tight while processing.

15. Stop Buying Stuff

While processing the closure of the home you are purchasing, do not go out and buy a car or put anything on your credit cards. If you are living off your credit cards, you probably should not be buying a house. Whatever your balances on all the items on your credit are, do not add to it. Feel free to pay off more of the debt but do not, I repeat, DO NOT put anything on credit, not even a new mattress because bugs ate your current one. This is vital to the success of your home purchase. If you do, not only will it delay the closing of the home, but it will more likely kill the deal altogether.

Follow the above points and your realtor, your loan processor, and myself will thank you in our dreams and you fill find a paved path to a new home waiting for you. The easier you make your team’s job, the harder they will work on getting you a better deal and into the house you fall in love with.