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Getting started in home financing can be a challenge. With so many behind-the-scenes processes, documents, definitions and moving pieces, where do you start?
That’s why we’ve enlisted the help of Shannon Olander, a trusted wealth management mortgage banker at Bremer Bank in Rochester, MN. With over 20 years of experience in the banking industry, Shannon specializes in helping individuals and families finance the home of their dreams. Read on as Shannon answers our most-asked questions on home financing.
Moving to a new community, where do I start the lending process?
The first step is to find a trusted lender. I advise to work with a lender you know or a recommendation from friends or family. Having a positive and trusting relationship with your lender is key. Starting this process with someone you trust to handle these personal, financial and organizational intricacies will set a solid foundation for your lending experience.
Before you go any further in the home search, you’ll need to get pre-approved or prequalified for a home loan. If you find out you are approved for more than expected, this does not mean you should buy at a higher price point. Basic budgeting rule number one indicates to always budget for more than you expect. Some things in life will pop up that aren’t factored into your debt-to-income ratio, like day care or routine travel expenses. You’ll need to make sure these costs are accounted for when purchasing a home.
What is the difference between a pre-approval and pre-qualification?
Great question. A pre-qualification is essentially an approximation – a lender has evaluated your creditworthiness and decided you will most likely be eligible for a loan. A pre-approval is when the lender pulls a credit report and looks at the complete picture of your debt-to-income ratio. It’s an official statement from a lender certifying you are eligible for a specific mortgage amount based on the entirety of your financial information.
While a pre-qualification can be helpful to determine how much a lender is willing to give you, a pre-approval can give you that reliability edge to a seller.
What kinds of things can affect home financing after a pre-approval?
Taking out additional credit and not letting us know! After a successful pre-approval, you shouldn’t do or purchase anything that could affect your credit report or your debt-to-income ratio. That means no new car, furniture, job status, etc. Your income, debt and assets are all factors that could affect your pre-qualification status.
Do you have programs for first-time homebuyers?
Absolutely. From down payment assistant programs, rural housing development, gateway program that covers 100 percent financing and FHA loans, we have access to many programs that could benefit you as a first-time homebuyer.
If you have enough in savings for a 5 percent down payment, it’s generally best to go the conventional financing route. Your lender will be able to evaluate these financing options with you and find a route that will best work for your unique financial situation and needs.
How do you combine credit scores for two people applying for a single home loan?
Good question. We pull reports from three separate credit reporting agencies; take the middle score for each person; then take the lower of these credit scores between you and your co-borrower.
For example, if my three credit scores report 650, 700 and 750, the lender considers the middle score at 700. My husband’s agency scores are 700, 750 and 800, and the lender considers his middle score at 750. Between these, the lender would take the lowest of your two scores, which would end up as 700.
Many lenders set their minimum credit score at 640 or higher to apply for a mortgage.
How do you work with someone who has experienced bankruptcy or other credit issues in the past?
Luckily, recent laws have made it easier for someone with a past short sale or bankruptcy to get preapproved for a home loan. Although a typical lender would like to see at least four years since discharge, there are many different options for moving forward with a home loan, even with past credit issues. Your lender will look at your entire financial picture to determine if it’s possible to move forward with a pre-approval.
To help potential borrowers, we also offer credit counseling to learn more about the types of behaviors that determine your credit score and the role your credit report plays in big financial decisions like home financing.
Does refinancing our loan affect our ability to buy another home in the future?
A refinance does not affect the process of a second move. In fact, current homeowners have a few options when looking to move.
An option many people don’t know about is the bridge loan. For homeowners who have earned high equity in their current home, we can pull equity out and “bridge” it from the old to the new property. Don’t have the means to do a bridge loan? Most banks offer what we call recasting of a loan, where the loan amount starts higher but can be recast to bring the principal reduction down and hence, smaller payments.
Nationally, mortgage rates have been on the rise, up 48 percent since 2011. What are your thoughts on the interest rate increases and what this means for potential buyers?
I’m glad you asked this question. Mortgage interest rates are certainly on the rise, with the average rate for a 30-year fixed mortgage between 4.375 and 4.5 percent. And although they are gradually on the incline, the keyword here is gradually. When I first started in the market, the average rate was just around the 8 percent mark and it was still a great market. Interest rates are not the end-all, be-all of home buying – people will move regardless. And, it’s a good thing rates are gradually inclining and not jumping.
What are potential challenges for borrowers here in Rochester?
Our biggest challenge is one of inventory – there are simply not enough houses on the market to meet demand, and homes on the market are selling extremely quickly. In fact, there are an estimated 40 pre-approval applications in our office right now, waiting to be processed.
Price point is another challenge for potential buyers in Rochester. Since higher price ranges have higher inventory, it makes competition even more fierce for the average or first-time home buyer.
From a lending standpoint, however, this housing shortage is not affecting appraisals, and we are able to work quick on our feet based on client needs.
If you are starting the home buying process or have questions about options for home financing, we’d love to help you get started. Contact us today.