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3 Key Concepts for First Time Homebuyers: Underwriting, Documentation, & Non-Mortgage Costs

Dec. 10, 2012
Personal Finance
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As part of our first time homeowners series, we sat down with a panel of mortgage bankers and industry professionals to discuss the most common things that trip people up.

1. Underwriting – what does that mean?

Underwriting is the decision making process that mortgage lenders undergo when deciding who to lend money to. They have to answer the question “Are you a good credit risk?”

Scott K. Stucky, COO of DocuTech, a national provider of mortgage compliance software:

“The three things lenders are evaluating are:  

  1. Ability to pay;  
  2. Willingness to pay;  and 
  3. Quality of the collateral”

You ability to pay is determined by your Debt to Income ratio (DTI)  and the stability of your income. There are specific guidelines about how high this ratio can be, depending on the loan program you choose.

Your willingness to pay is determined by your credit score and credit history.

And the quality of the collateral  depends on the appraised value of the home you intend to buy.

2. Documentation – why are they asking for so many pieces of paper?

Jay Dacey, of Metropolitan Financial Mortgage says “First-time homebuyers are often frustrated by requests for documentation. Don’t be. Banks are facing large buyback requests for poorly documented loans issued prior to the financial crisis. These are costly and fresh on the mind. We are in a sense, paying for the sins of the past. Banks will often ask borrowers to account for recent cash deposits in their accounts. 

The increased documentation is meant to prevent two scenarios: Ensuring that the borrower is not incurring additional liabilities to make the down payment, and that there are no interested party contributions.”  

3. Taxes, Mortgage Insurance and Homeowner’s insurance – Why are there so many other costs? 

“Often, people forget to account for taxes, homeowner’s insurance and private mortgage insurance. They are disappointed to discover that their money doesn’t go as far as they’d thought once they account for these additional expenses,” says David Vandewater, a loan officer with Residential Home Funding.

Property taxes and homeowners insurance are part of the costs of owning a home. Folks who pay less than 20% of the home’s value in down payment will face mortgage insurance charges while they work to increase their equity in the home.

Final words of advice?

Michael Mullin of First Priority Financial says, ” There’s a lot of misinformation on the internet. It is often hard to discern between advertising and information. If you are evaluating a mortgage lender, you should look for a few specific things:

  1. Are they giving you specific questions to your answers?
  2. Are they asking you questions about your goals and objectives? Or are they just “order-takers”
  3. Are they responsive to your needs and offering suggestions tailored to your situation? 

Susan McKelvey of Radius Financial adds, “Borrowers should strongly consider working with a local lender who has a vested interest in the community and whose success depends on offering trustworthy, reliable service.”

Adds real estate personality Herman Chan, “Don’t believe everything you see on the Internet – half of it is wrong or outdated. Milllenials want to do all the research on their own online, but the business is still about who you know. Work with a plugged-in, full-time real estate agent.”

Remember: Always shop around when seeking a mortgage lender – even if you are provided with a referral. Get at least three quotes.  A study by Zillow shows that people spend a quarter of the time researching mortgages versus what they spend researching car purchases, despite mortgages being on-average five times larger than car purchases!