There are two frequent questions I receive from would-be buyers and real estate agents: What’s the biggest loan I qualify for, and what’s the interest rate?
Undoubtedly there are a lot of loan officers out there whose sole objective is to sell a loan. Knowledgeable, experienced and honest loan officers understand that the home-buying process begins with the establishment of objectives and development of a comprehensive plan for the buyer.
It would be irresponsible of me to simply obtain a buyer’s financial information and find a lender that will make him the largest loan. Even in this tight credit market, if I look hard enough, I can probably find a lender who will lend almost any amount of money, as long as the borrower is willing to pay the price.
I have been qualifying folks for nearly 20 years, and if I’ve learned one lesson, it’s this: Qualify buyers based upon their individual comfort level, financial position and spending habits. Do not qualify a borrower based on how much any particular lender is willing to lend.
While the traditional qualifying guidelines call for a total house payment not to exceed 33 percent of gross monthly income, it doesn’t apply to everyone. People have different spending habits. One buyer may be supporting his elderly mother and cannot afford to have a third of his income apply toward a house payment. Another buyer may be debt free and naturally frugal, easily able to make a mortgage payment that exceeds 33 percent. There are good loan programs available for both situations.
A good loan officer is able to determine a borrower’s purchase objectives and spending habits and evaluate these things in relation to his financial situation. He will then be able to recommend an appropriate purchase price range and mortgage program.
Now let’s talk about interest rates. Simply quoting the market rate for a 30-year fixed-rate program is irresponsible. In most cases, a loan officer is unable to give an accurate and applicable rate quote without knowing a little bit about the borrower’s situation.
Consider the following:
• The purchase price range will affect the ultimate interest rate. Loan amounts that exceed the conforming loan limit of $417,000 fall into the “jumbo” category, increasing the rate.
• The down payment can affect the rate. The bigger the down payment, the lower the interest rate.
• A borrower’s credit score can affect the rate.
• The settlement date can affect the rate. If the contract calls for a delayed settlement of 90 days, for example, locking in an interest rate for this long will be a little more expensive than a 30-day lock.
• The expected hold period of the house can greatly affect a homeowner’s borrowing costs. An adjustable-rate mortgage (ARM) can be more appropriate than a fixed rate in some cases.
A full consultation with a qualified loan officer before the house hunt will provide a first-time home buyer with a comprehensive plan tailored to fit his particular situation. He can then drive around on Sunday afternoons and look at houses, knowing with reasonable accuracy the financial details should he decide to make an offer.
Reach Henry Savage by e-mail (henrysavage@pmcmortgage.com).
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