Step # 6 of the home buying process (Underwriting) could potentially be a big challenge for first time buyers as you navigate the road to homeownership.
During this critical step, a mortgage loan underwriter reviews the documents you have provided as you take the steps to own your home.
In Step # 1 of the home buying process, you spoke to a licensed loan originator to complete a rent versus buy analysis. You have determined that buying a home is a good fit for you and your family.
You moved ahead by taking Step # 2 of the home buying process and completing the loan application.
Moving on to Step # 3 of the home buying process you were pre-qualified by providing bank statements, pay stubs, tax returns and W2’s.
You know how much home you can qualify for and have moved to Step # 4 of the home buying process – the home search.
Now that you have completed Step # 5 to the home buying process you will give the ratified sales contract to your loan officer.
The Home Buying Process Step 6 – What To Expect In Underwriting
By this time you may have discovered that the road to homeownership can be windy and sometimes bumpy.
A good loan officer will have taken the time to carefully review your documentation, speak with his processor, and underwriter about potential concerns.
After doing his due diligence the bumps in the road will be visible to your loan officer and he/she will successfully guide you to the finish line.
Drama Free Path To Buying A Home
I do not like drama.
When I choose to work with a client one of the first things I share in our initial discussion is I am not like the T.V. station TNT…I don’t like drama.
My objective is to ensure that you have a smooth home buying process.
When your loan is in underwriting you can expect to be asked for more supporting documentation.
The underwriter’s job is to make sure you meet the guidelines for the loan program being used to buy your home.
Common loan types like Conventional, FHA, USDA, and USDA have standard guidelines that must be met by everyone seeking to qualify.
It is the underwriter’s duty to ensure that the borrower (you) meets the Ability To Repay (ATR) requirements stated in the relative loan program guidelines.
The underwriter will look at your Debt to Income Ration (DTI) to determine your ability to repay the loan.
Your DTI reflects how much of your income (before tax) is used to pay the debt.
This debt includes your new mortgage payment as well as any other debt listed on your credit report.
Car loans, credit cards, student loans…
These common loan programs have varying Debt To Income ratio requirements ranging from 38% – 56%.
Home Buying Process – Debt To Income Ratio
Here is an example…
Let’s assume as a W2 employee you make $5k a month.
Your monthly liabilities (debt) totals $500. Leaving you with $4500 month in qualifying income.
FHA Loans and Homeownership
50% of your income is $2,250. This will fit in the FHA loan parameters.
FHA Loans allow borrowers to have DTI above 50%, a 3.5% minimum downpayment, and allows borrowers with less than perfect credit to qualify.
Note: Expect your total mortgage payment Principal Interest Taxes Insurance (P.I.T.I) to range between $2,000 monthly ($350k) and $2,250 ($400k).
It is possible that you may need a co-borrower to help make the DTI requirement.
The underwriter must verify all borrower’s qualifying information in this step of the home buying process….
Employment, assets in the bank or retirement accounts, credit history, tax returns, W2s, and identification.
Together these make up the foundation of the underwriting process.
The underwriter will often require more documentation from each of these categories listed above.
Once your home has been appraised the underwriter reviews the appraisal for any errors.
These could include a mistake in the value, address, county, and even room count.
Buying A Home – The Appraisal
The purpose of the appraisal is to ensure that the property being purchased is valued at or greater than the money being borrowed / lent.
Here is an example…
You are purchasing a home for $400k using an FHA loan which requires 3.5% down.
$400k x 3.5% ($14k).
An appraisal is done and the property is valued at $390k based on recent comparable home sales in that area.
What to expect next…
The property has appraised for $10k less than the sales price. There are two possibilities.
- You pay the difference
You are responsible for the difference in the event the sales price cannot be lowered.
$400k – 390k = $10k
Minimum downpayment ($14k) + ($10k) difference = $24k minimum downpayment.
2. Lower the sales price
The good news is that in most cases the seller will work with you to get the deal done.
Your agent will re-negotiate the sales price in an effort to lower the purchase price to match the appraised value.
Home Appraises For More Than Sales Price
What happens when the property is valued at more than the purchase price (assume $410k).
CONGRATULATIONS you have instant equity.
Equity is a critical part to accumulating wealth through real estate.
As you continue to make payments your loan balance goes down.
Over time your property appreciates in value due to demand for housing.
The combined forces or principal reduction and appreciation is your ticket to lasting wealth with real estate.
First Time Buyer Loan Programs In Virginia And Maryland
If you are purchasing your first home it is a good idea to explore the benefits of putting as little money down as possible.
Your first time buyer status opens up doors to programs specifically designed to help you purchase your first home.
These benefits minimize the money you need available by providing grant money to cover a portion of your down payment.
In Virginia, I utilize the VHDA LOAN Program. This amazing program gives my first time buyer’s up to 2% towards downpayment for conventional loans.
First time buyers using the grant money for an FHA loan will receive 2.5% of the 3.5%
The biggest overall benefit to consider when lowering the amount towards downpayment as a first time home buyer is you will have more money in savings in the event life happens. Because it does and it will.
There are times when it is helpful to have a larger downpayment.
+ purchasing 2nd home requires 5% downpayment versus 3 as first time buyer.
+ Eliminating mortgage insurance requires 20% or more downpayment.
These are just 3 of the most popular reasons to put more than 3% down.
The Home Buying Process – Clear To Close
By this point, you have had a title search, home inspection, survey, pest treatment, and radon inspection.
These documents will be provided to the underwriter for review as well.
Start to finish, most lenders can underwrite a file in 7-14 days depending on volume.
During this 2 week period, you need to be prepared to be very responsive to your loan officer and his/her team members.
They are in place to support you and make sure you close the transaction by the date in your contract.
Once all conditions have been met your file will be marked Clear To Close.
These are 3 words that will have significant meaning to you once you have complete the underwriting step of the home buying process.
Final Step Towards Homeownership.
Congratulations you are almost there!
👉Want to see how much you may qualify for? 👈
Let’s get started with my hassle-free pre-qualification process today.
Have additional questions and want answers? CLICK HERE to find a time on my calendar that works for you.
🔷Home Loans In Virginia And Maryland🔷
Rod Ferrier is a licensed loan originator in Virginia and Maryland.
A U.S. Navy Veteran, father of four, he began his career as a loan officer in 2002.
He specializes in assisting his clients to navigate the home buying process towards homeownership.
His clients include Veterans, first time home buyers, families looking to purchase a bigger home, as well as empty-nesters seeking to downsize.
Rod’s background in financial planning provides his clients with the opportunity to benefit from the wealth created by strategically purchasing the right home.