4. Home Loans: Types of Mortgages

All right. And welcome to this module, Home Loans and Mortgages Explained. At this point, you have found the home that you want to purchase. You already have your pre-approval. Now it’s time to start getting into the nitty gritty of the type of mortgage you’re going to need to be able to get qualified for. So what I’m going to do was cover the nitty gritty of the types of mortgages that are available to you in a little bit more detail. So here is what we’re going to get into. So the first thing I wanna break down is a 4 C’s of lending. We talked about this before, when we were talking about building credit in a previous module and lesson, however, I’m going to really bring this home again. I’m going to talk about FHA loans, how they work, USDA loans, VA loans, provincial loans. We’re going to get into submitting the application.

We’re also going to talk about home loan processing and then lastly loan underwriting. So as we discovered before, a lot of this stuff has to do with the underwriter at the end of the day, and making sure that the underwriter, because they have a job to do so, we’re going to talk about loan underwriting. So let’s talk about the 4 C’s of lending. So the first C is capacity. And what this has to do with, to reiterate is do you have enough income to make your monthly payments? Remember DTI? We want our debt to income ratio to be at least 36% or below in order to qualify for that home. So if we’re looking at trying to maximize our home, we need to understand our DTI and the lower we can have our DTI the better i.e. not, uh, not having unnecessary car payments and student loans more.

So car payments and credit card payments. We want to get stuff paid down. Of course, if you already have an existing car payment, then that’s fine, but don’t go out and try to buy another car before you buy a new home, because it’s going to affect the amount of home that you qualify for. And I’d be, and you’d be, you’re going to be tight that if you had to get a smaller home, because you got a nice car, right? The other thing is, is capital. So do you have enough cash for the down payment? Remember we put together a cash flow control system. And what we’re looking to do is save money. We also want to make sure, in addition to the down payment that we have cash reserves or investment assets. So this is another thing that they’re going to look into. So we want to have our cash reserve separate from our down payment.

And obviously we’re putting that money away for our investments in our retirement. Again, if you are getting qualified for a mortgage and you can save at least 10%, 10% save and invest at least 10 to 10% of your, your net income, then you need to look at getting lower, more, getting a lower mortgage payment or making more income. But in this scenario would be lowering the mortgage payment because you still don’t want to be house broke. The other thing is credit. This goes without saying, have you shown the financial responsibility with your current and past obligations? Our credit score is a three-digit number that reflects our financial behavior, right? So it goes without saying, we want to have the highest credit score possible in order to get approved for the loan then collateral, right? Typically the collateral is the property that you’re financing, but essentially it’s the bank safety net.

If you decide to default on the loan. So you need to understand that the, the loan, the mortgage is the loan, but the property is the collateral. And typically the PMI and that’s something I covered prior in another module is what the bank is doing. That coupled with the ability to foreclose on a home is what they’re doing to ensure that they get their money back. Because again, banks, don’t like to use money, I mean, lose money. So we want to make sure that we have all of these things in place. And in some scenarios, they may want you to put up a little bit more collateral, depending upon the type of lender you’re going to. But generally speaking, the collateral is going to be the property that you’re financing, right? So it’s with the intent of you obviously paying off the mortgage. However, if you default on it, they’re gonna want the mortgage.

They’re gonna want the house. So FHA loans, how do these work? So you can obtain a FHA loan via approved lenders. So when you speak with your loan officer, they will have access to FHA loan was to be able to advise you on how they work. And this program has been around since 1934 to assist with the American dream of home home ownership. So this is the run of the mill traditional mortgage it’s been around for a long time. Then when you obtain a mortgage with an FHA loan, you will be, you will have to pay mandatory mortgage insurance. So this, this is something that comes with the FHA loan. The other thing is the insurance is going to protect the lender from a loss. If you default, like, again, like I said, banks, don’t like to booze money. So this is how FHA loans work. Then we have USDA loans and USDA home loans are issued by qualified lenders and guaranteed by the United States Department of Agricultural and AKA.

Um, I go kosher, AKA the USDA. All right. And these are particular type of favorable for those living in like rural areas or low income areas. So if you’re, if you live on the outskirts, you don’t necessarily live in the city or the income in which you you’re receiving or it, or if you’re in a low income area, I should say, then you would be that you would potentially be a good candidate for a USDA loan. Then they generally offer zero money down lenient eligibility requirements and have really, really competitive interest rates. So this is why you see people moving out to the suburbs and not necessarily living in the city because of, they may find something and they may, Hey, like I like this USDA loan scenario and that’s how those work. Then we have VA loans and this program was created in 1944 by the US government to help returning service members, purchase homes without needing a down payment or excellent credit.

So this was something that’s been around again for a long time, and this is the purpose of it. So if you are military member or you’ve served, you should still have access to use your VA home loan. I want to say it’s up to like 490,000 or something like that. Don’t quote me on that. But this is an, also, this is an awesome opportunity for you to purchase a home. Um, this is really going to be benefit to veterans and any eligible surviving spouses who wanted to become homeowners. So you may have a spouse who was in the military, or you still may be in the military and you can benefit from taking advantage of the VA loan. Uh, the other thing is, is that it guarantees a portion of a home loan and enabling the lender to provide you with more favorable rates. So obviously the, the VA is guaranteeing a portion of a home loan.

So that’s why you can get a really good rate. So if you get a VA loan and it fits within the qualification that you’re looking for, I highly suggest you get to do it. Um, then we have conventional loans. Okay? So these mortgages are not guaranteed or insured by any government agency. All right. Half of all conventional loans are called conforming mortgages because they conform to the guidelines established by Fannie Mae and Freddie Mac. So Fannie Mae and Freddie Mac. Okay. Huge, huge, um, lenders for student loans that on Fannie Mae y’all know Fannie Mae, and then also Freddie Mac. So to our, what we call them formula loans then, um, loans that do not conform to government sponsored enterprises, i.e. government sponsored loans. These are those type of loans. So these don’t have to deal with the, or I’m not gonna say deal with, but they don’t go through any of the things that we’ve already covered, because these loans are conventional loans.

Um, and they follow the guidelines for Freddie and Fannie Mac. All right. So how do we go about stuff? Many of the applications, either you go to the loan officer’s office, or you do it online on their website. My suggestion is save yourself the time. Once you’ve identified that loan officer, you’ve, you feel really good about them nowadays, you can do a zoom call. You can do a Skype call and a lot of the stuff can be done virtually. So my suggestion would be do it online. She has a mortgage loan officer will be able to do everything they need to do and do their, um, process. You want to also before, before you, you move forward with, on, you want to interview, um, every loan officer and you want to interview every, um, um, type of loan that you’re interested in.

So you want your loan officer to advise you, Hey, look, this is how this loan works. This is how this loan works. Hey, you should do this one. And then you’ll be able to get an overview of how this is going to benefit for you. Um, obviously it goes without saying, because you’re applying for credit, you gonna need these things such as your name, your social security number, address, income bank statements, tax returns, all this stuff, because at this point we’ve already found the house and now we’re just trying to get the application done. So this is necessarily a pre-approval. This is saying, Hey, look, I want to go ahead and move forward or pass the pre-approval and get qualified for the actual mortgage and the lender going to do a thorough background check investigation on all of the information as well as your credit.

So again, remember the 4C’s of lending is important, but it’s just not about your credit score at this point. It’s about the content of your credit report. So that’s why it’s so important to have really good content. Additionally, making sure your DTI looks good, making sure you’re paying your bills on time. All of these things are, they’re going to take that into consideration when they’re going through and submitting your application, then we’re going to go over to home loan processing. Okay? Now this is the most significant part of the entire application, because this is when the lender is going to check the validity and authenticity of all of the submitted documents. So that’s why it’s so important that you are prepared before you get to this process. And just, you’re just not trying to get a pre-approval. You don’t want to spill your candy in a lobby unnecessarily, and now they can see all that a Snickers.

That’s a Star Burst. No, I’m not going for that because they’re like, I want a Twix. So you need to be cool. You need to be clear on everything that you’re submitting and don’t have don’t have any consistencies, especially with your bank statement. So if you have a certain source of income, make sure you always have that source of income being deposited, because they’re going to look at your bank statements. And if they see anything irregular, they’re going to question it because again, the underwriter’s job, when you, before it gets to underwriting is to make sure that they, they, they don’t, they don’t lose money. Um, also, um, the next step, once you’re pre-approved, um, because you would already be in pre-approved is appraising the property. So you want to make sure that that’s what they’re going to do. They’re going to go into appraise your property.

They make sure that the home loan that they’re giving you is not too much or too, it’s not over for the amount of property that you’re looking to get. And then after clearing you, the lender is going to want to make sure that the property you want meets the loan requirements. Again, this all goes back to underwriting, and that’s why it’s so important to make sure you work with a competent loan officer. So before they even get to home loan processing, they’re not, you’re not going to get into, you’re not going to just throw some spaghetti on a wall, thinking that something’s just going to work, just because right now, at that point, once you’ve completed the home loan processing, we go to the underwriting process. And this happens the moment you submit the application with all of your documents, um, and this is where your application is going to be until you get your key.

So underwriting literally is going to be the make or break step to determine if you do get, get approved, because if you get approved, then you can get the mortgage, you get the mortgage, then you can pay for the home and then boom, you have the transaction completed. Um, and this is the time you want to make sure all loans are given smart for the bank. So this is why the bank that the underwriters don’t care about you all right, what they care about is making a smart lending transaction and keeping their job so they can feed their families, um, and not make bad loans. And, and, and more specifically the underwriters aren’t going to make bad loans. It’s more so making sure that you fit the criteria. And this is why it’s so important that the loan officer has a deep understanding of the underwriting guidelines prior to submitting the application and you, and you get a deep dive on why, they’re why they’re suggesting, Hey, you need to go with the USDA loan, or you need to go with a conventional loan, or you need to go with the VA loan, okay.

Ask them why. Right? And then say, well, this is the type of property I’m looking at. Can you walk me through the guidelines that say that this type of property is going to be justifiable based off this loan? So that way, you know, and then once all of the conditions of the loan have been satisfied, the underwriter will issue a clear to close, which is the best, best place you want to be in. And this is going to what, this is what you’re going to be able to bring to the closing table. When you have this, you have this clear to close notice. You now can say, Hey, look, I’m ready to move forward with this transaction. Let’s go ahead and sign the deal. Okay? And until you get this notice, you need to be perfect financially. So no new car. I’ve already said this several times, but we’re not going to go get a new car.

Okay. We’re not going to miss any credit card payments. Okay? We’re not going to, we are going to be, I mean, if we’re going to be, um, shirt, button all the way up to the top, we have a tie on we, we, we do everything clean. We we’re, we’re doing everything right financially. We were turning our turn signal on at the light. Okay. We’re stopping at the stop sign. Not the rolling stop financially. The complete stop financially. You get what I’m saying? So we don’t want to do anything to upset the underwriter or not even say I’m a, I don’t want to say upset the underwriter because underwriters are analytical. You don’t want to do anything unnecessarily to spill your candy in the lobby. Again, there is a, there it is. Don’t spill. Don’t, don’t give them a reason to ask any additional questions, give them the information that they asked for, but don’t give them a reason to say, Oh well, so-and-so’s utilization is high.

So we, we, we don’t think we’re going to be able to move forward with them out of home loan that we’re going to do. So we’re going to, we’re going to wait. We thought he was pre-approved for 500,000, but because of so-and-so and so-and-so, and so-and-so we had to adjust the approval. We had to adjust the mortgage to 480,000. Then you’re just like what the heck happened to another 80,000, you know, so just be perfect financially. Okay. Is the home loan process. You have everything you need to know, underwriting and home loans. And I will see you in the next module.