Frequently Asked Questions on Loans

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When you’re pre-qualified, you’ve given your mortgage lender all the basic info they need to help you determine what loan program and what amount you may prequalify for. When you are pre-approved, your lender will have collected the necessary documents and verified your information to move the loan forward to underwriting and approval!

• Tax Returns & W-2 Forms (1099s) from the most recent 2 years
• 1 Month of Most Recent Pay Stubs
• 2 Most Recent Bank/Asset Statements i.e. Investments, Savings and/or Retirement Account Statements
• Valid Photo ID/SS Card

• Don’t start shopping for a new home until you’ve been prequalified.
• Don’t pack or ship any important documents, such as tax returns, bank statements, paystubs, and W-2s.

Prequalifying for your home loan before you begin shopping for a house can save you hours of unneeded stress and heartache. When you know how much house you can afford in advance, you can meet with your realtor, well-informed and ready to make an educated buy. In eyes of a seller, a pre-qualified home buyer also appears more motivated (especially in this market).

Likewise, holding on to your paystubs, bank statements, and tax returns can make a speedy prequalification even speedier. To further grease the wheels and keep your loan process moving, make all your bill payments on time. It also helps to have a paper trail of any large deposits you make, as well as to notify Roy directly if you plan to use a down payment gift from your family.

• Don’t suddenly pay off all your debts.
• Don’t apply for new credit cards.

Prequalification can be easy, but it’s after you get preapproved and the loan process progresses that your lender is required to pull a refreshed credit report before closing to check for any new debt. 

So, any major changes in your finances could delay your loan closing – or even result in a denial despite an earlier approval.

• Apply for a new credit card, auto loan, or other types of credit.
• Co-sign a loan with someone.
• Change jobs, become self-employed, or quit your job.
• Skip payments on existing credit accounts, utility bills, or loans.
• Charge up your existing credit on big-ticket items, like furnishings for a new house.

If you think any of these don’ts are musts, talk to Roy before you take action. He can help you figure out what to do so that your mortgage loan is the least negatively affected.

• Income Ratio: Your total monthly housing expense divided by your pre-tax monthly income.
• Debt Ratio: Your total monthly housing expense plus any recurring debts, i.e., car payments, monthly minimum credit card payments, and other loan payments, divided by your monthly income.
• Standard loan underwriting guidelines suggest a max 28 percent income ratio and 36 percent debt ratio, which may vary based on personal finances, loan program, and down payment.

While not taking on any debt and paying for everything with cash seems like a logical choice if you feel you can’t afford your lifestyle, no credit also means bad credit in the eyes of a lender. There’s bound to be a time when you can’t buy something with cash, like buying a house (in most cases). So, we recommend opening at least three credit card accounts and making occasional purchases.

To manage your debt and maintain healthy credit, keep credit card balances to less than 30 percent of your credit limit. Also, don’t close long-term credit lines, even if they’re not being used. Your longest-standing credit card account might be a huge contributor to your credit score health — and the mortgage rate you qualify for.

• Cash reserves: The extra funds available to you after your loan closes.
• These funds reflect your ability to make monthly mortgage payments, and different loan programs may have different cash reserve requirements.

To estimate your ability to pay your monthly mortgage, we recommend setting aside about 28 percent of your monthly income. This number factors into your debt-to-income ratio, mentioned above.

For many people, any number between 25 and 32 percent of your income is manageable. But, relying on a higher percentage of your monthly income could put you at risk if you have a big financial change, like rising insurance costs or loss of employment.

• This insurance helps protect a lender if a borrower forecloses on their property.
• Borrowers pay for the mortgage insurance, allowing lenders to grant loans they might not have otherwise.
• Mortgage insurance may be required on some loans when a down payment is less than 20 percent.

Mortgage interest, insurance paid, and property taxes are normally tax deductible for your principal residence. Buying a house is an investment, but the tax deductions may be large enough to lower your tax bill “substantially.” 

Interest/insurance payments on a Residential mortgage (as well as mortgage interest/insurance on a second home) may be fully deductible.

Likewise, selling one home and buying another means you might be able to protect the profits on the sale of your home, as long as it was used as a principal residence for any two of the last five years.

You could protect up to $500,000 in Tax-Free Profit when filing federal taxes jointly or $250,000 when filing single. This added bonus of tax‐sheltering the profits on the sale of your home may be available to you once every two years. Homeowners who take advantage of these deductions could save hundreds of dollars in annual taxes.

• Also called discount points, mortgage points work as a one-time fee you can opt to pay if you’d like to get a lower interest rate.
• One mortgage point equals one percent of your total loan amount and may drop your interest rate one-eighth to one-quarter percent lower.