The single greatest purchase you’ll ever make is likely going to be your home. The only other purchase or debt that’s comparable is probably your student loans. Buying your first home is a mix of extreme excitement and stress. The single greatest sticking point in buying a home is whether you’re going to be approved for a mortgage. It’s such an important factor that almost all home purchase contracts have a “hold harmless clause” in the contingency, where you fail to be approved for a mortgage in good faith. This means that you’ll have your deposit or good faith money returned.
It’s a common misconception that a “preapproval” is going to guarantee an approved mortgage or a mortgage rate. A preapproval is used primarily as a document to indicate your budget or the amount that you’re able to spend. The actual mortgage will require significantly more information provided to the bank or mortgage broker.
Information that you’ll need to be approved for a mortgage includes, but not limited to:
- W2’s from a current or prior employer
- Paycheck stubs or canceled checks may be used in lieu
- Prior 2 year’s tax returns
- List of debts or liabilities (this will appear in your credit history)
- List of your assets
- Credit report
- Signed sales agreement
- Proof of additional income, if applicable
- Divorce documentation that illustrates that you’re legally divorced and its related separation agreement, if applicable
- Bankruptcy documentation, if applicable
While this may suffice for anyone with a normal job or proof of employment. An entrepreneur is unfortunately stuck in the position where their “self-employment” is considered “unemployed.” Standard loan applications are heavily favored towards individuals with steady employment.
Entrepreneurs have a hard enough time renting an apartment without a “letter from a Certified Public Accountant”stating their reported income is “legitimate.” If renting is this difficult, you can imagine the hurdles you’ll need to run through buying your home.
Typically, an entrepreneur will need to provide monthly bank statements for a minimum of a year and a letter from a CPA stating their tax returns accurately reflect their income. If an entrepreneur has a “paper loss” or negative earned income due to depreciation and other non-cash deductions, then they must be explicitly explained to demonstrate their true earnings. Thus, an entrepreneur is in the unenviable position of trying to report more income to substantiate a loan, while minimizing their tax liabilities. Entrepreneurs will need to brace themselves for these questions that will assuredly come from a lender.
Assuming, you’ve providing everything above it’s possible that a bank or mortgage broker may request additional information to obtain an appropriate mortgage.
Is it better to use a bank or a mortgage broker? A bank is an individual institution that you’re applying with in order to obtain a mortgage. A mortgage broker allows you to apply to multiple lenders simultaneously. But, the information you’ll use for the application is going to be the same for either a bank or a mortgage broker. Effectively, a mortgage broker is able to do more of the legwork instead of you having to apply to each lender individually.
Typically, you’ll find that an effective mortgage broker will respond and turn around your application significantly faster, than a bank due to their large infrastructure. A Senior Executive at Heritage Mortgage Banking Corp. explains that “banks have moved towards focusing their efforts to target high net worth individuals or jumbo loans.” They’re using their lending practices to convince wealthy individuals to switch their banking institutions. Thus, their lending is being used as a conduit for them to increase their retail bank market penetration.
The increasing mortgage interest rate means that large banks are going to provide incentives to affluent home-buyers. But, middle-class home-buyers may be better off looking elsewhere for the most favorable deal. It’s important to spend the time and effort to obtain the most favorable rate possible at the time of your purchase. Refinancing is an option, but it may be a trap that’s giving you a false sense of confidence that you’ll be able to get a better rate any time after you buy your home. Refinancing is often expensive and cost-prohibitive unless you’re able to arbitrate a significant reduction in your interest rate. Do your homework and be a smart homeowner. The last thing anyone wants to be is underwater on your first home purchase.
*The views, articles, postings and other information listed on this website are personal and do not necessarily represent the opinion or the position of Big Valley Mortgage.