Talking To a Mortgage Lender is Scary - Here's What to Expect
"The first step to buying property is to make sure your finances are in order."
We've all heard this a lot, but WHAT DOES THIS VAGUE SENTENCE MEAN? You never truly know where you are in relation to your mortgage purchase power until you talk to a lender. I've been the on the buyer side of seven transactions and I don't know exactly where I am until I talk to my lender. The lending process is nuanced and complicated.
There are many different types of mortgage lenders and many different types of mortgages. This can be VERY confusing. For the purposes of this article, I'm going to stick to mortgages and lenders for a primary residence (meaning you'll live there!). There are MANY other types of loans for property, but these are the most common ways to buy a home you plan to live in.
Most common types of lenders:
Bank of America
Differs from city to city
University Federal Credit Union
Greater Texas Credit Union
In all of these scenarios, you'll talk to a loan originator first. This is what you see in movies and TV shows when people dress up and go into the bank to make a good impression, HOWEVER, you rarely actually see the person approving you for a mortgage and you definitely can't win them over by wearing a blazer.
The loan originator will ask to see behind the curtain of your financial life. They'll have you fill out an application outlining your finances. It will feel invasive and you will feel like they're judging you. Always remember that they've seen the spectrum of financial health and their purpose is purely to make sure your numbers are reasonable and that you are a good investment for them.
You'll need to pull your bank statements, your w2s, your paystubs, your tax returns. I've compiled a pretty good list of docs below.
Once they have every single financial document you've ever produced, they will send the numbers and documents to underwriting. These are the people who will give you a budget limit. They will look at your debt, your income and your credit score. Your monthly debt, including your new mortgage payment can't be above 50% of your monthly income. All of these factors determine your price maximum and your interest rate. The interest rate is also dependent on the federal interest rate, so you don't have ALL the control over this part of your loan.
Banks and mortgage companies will have different fees and different interest rates, but it differs SO much, that really the best way is to shop around and ask for all the fees up front. Usually the loan origination fee is no more than 1%, but there are many other sneaky fees they tack on, so be weary. Honestly, they are usually pretty arbitrary and seemingly meaningless. Just ask for a fee sheet up front. Luckily, the range of fees I've seen isn't huge, so you aren't in too much danger, but it's good to be an informed consumer. Fees differ form state to state, as some states require you to have a real estate attorney, which will likely add fees. These fees are part of what people are referring to when they say "closing costs". This is always somewhat of a mystery to buyers, but ask your agent! Ideally, they'll be able to decode the lender fee sheet.
In short, the best way to pick a mortgage provider is to shop around. Luckily, your credit allows you to shop around for two weeks without multiple hits on your credit. Before you talk to a lender, compile a good list of docs so you'll be prepared to talk to multiple lenders to ensure you're getting the best rate for your situation.
If you're a unique case, you'll need to provide additional documentation, but here are the standard docs you'll need to submit to your mortgage provider prior to obtaining a preapproval.
Document Prep List
Most recent paystubs (2 months)
Most recent bank statements from ALL accounts (2 months)
Retirement account statements
Investment account statements
Tax returns for prior two years
W2s for prior two years
Any and all debt account statements (car, credit cards, etc)
Photo of your drivers license
Mortgage account statements if you own any property