Gas prices aren’t the only thing creeping up heading into the second quarter of 2012. Interest rates on home loans are climbing too. And while they’re not going to end up anywhere near the record highs we could see at the gas pump this summer, they are backing off the historic low interest rates we’ve seen over the past several months. Mortgage applications are reflecting those increasing interest rates. According to the Mortgage Bankers Association, home loan applications dropped by nearly three percent during the month of March.
Those stats got you down? Maybe have you thinking the economic recovery is stalling out?
Not so fast…
There’s a strong silver lining. The MBA’s report also points out that the average loan climbed nearly $9,000 from January to February, up to more than $225,000 – suggesting the housing market is rebounding.
What if you’re in the market for a new home? Before visiting your bank, credit union, or mortgage broker to get a loan approval, you’ve got to do your homework. That means knowing which questions to ask before you ever step foot in your broker’s office. After all, as my ninth grade history teacher liked to say, there are no dumb questions, only dumb borrowers who don’t ask questions in the first place… or something like that.
Question #1: What Documents Do I Need?
There was a time, back during the housing boom of the first half of the first decade of the 21st century, when mortgage brokers, banks, and underwriters alike rarely asked for much in the way of documentation. I have friends who obtained loan approvals simply by showing their last two pay stubs, or a signed contract from a new job, and nothing else. Since there are different issues that vary by state at times, you need to make sure that you are speaking with someone in your own state to make sure that you know the proper documents that you’ll need. An Arizona mortgage broker is much more likely to be able to list the exact documentation you will need if you are trying to obtain a mortgage there, so consulting one who is located in Colorado isn’t the best idea in a case like that.
These days, things are way different. Your mortgage broker should be asking to see this, that, and the kitchen sink. In order to qualify for a mortgage, you’ll need to show your lender:
- Proof of income: this includes your last two years’ tax returns, as well as recent pay stubs if you have recently had a job change
- Proof of assets: this includes your bank account information, along with any investments or financial gifts you may use for your down payment
- Credit information: while the underwriters will run a check of your credit report, you may need to provide further documentation if, say, you’ve recently paid off a loan and it hasn’t appeared on your credit report yet
If your mortgage broker or lender isn’t asking for these documents, they’re not properly screening you or your finances. While it may make the loan approval process a little easier, this should be a major warning sign. After all, a lender who doesn’t know what you’re capable of handling financially is more likely to approve you for a mortgage you won’t be able to handle – a recipe for disaster.
Question #2: What Are Your DTI Limits?
“DTI” may be the three most important letters in any home loan application. Short for debt-to-income, your DTI ratio is actually comprised of two numbers. Your “front end” DTI ratio is a comparison of your monthly mortgage payments, including escrow, and your gross monthly income. Your “back end” DTI is a ratio of your total recurring debt – things like your mortgage as well as student, home equity, and vehicle loans – and your gross monthly income.
These two numbers play a huge role in determining whether or not a lender is going to give you the home loan – and the interest rate – you want. However, different financial institutions are looking for different numbers. Some want to see a front end DTI ratio as low as 29 percent, while others will go as high as 33 percent and still approve your loan. Back end ratios vary as well, with lenders looking for numbers between 36 and 41 percent.
You may be tempted to work with a lender that has higher DTI ratios. After all, you’ll be able to get a larger loan with a 33 percent front end DTI ratio than with a 29 percent DTI. You need to crunch your numbers before you visit your mortgage broker, however; it’s important for you to know exactly how much you think you can afford, not how much the bank thinks you can.
Question #3: Are Loan Approval Decisions Made In House?
Have you ever been on an all-inclusive vacation? For one flat fee, you get your hotel accommodations, food and beverages, entertainment, travel, and recreation. No more shelling out $10 at the poolside bar for a beer, or $25 to rent a sea kayak for an hour. It’s simple one-stop-shopping.
In-house loan approval decisions work in a similar fashion. Instead of going to a mortgage broker, who works as a go-between for you and the underwriters, an in-house decision ensures your loan application will be more than just a number. Although not a hard and fast rule, in-house decisions – which are more common at credit unions and small, locally-based banks – typically give borrowers more personalized service. During the application review process, you’re more likely to be able to explain any extenuating circumstances to your lender. This process gives you wiggle room, leaving the possibility for several shades of gray in an industry that’s usually black and white.