I have noticed a trend among my discussions that I need to address. I am not sure where the miss information is originating from, but what I do know is it is causing confusion for my borrowers, that I want to bring clarity to.
It is a MYTH, based on the way I do business, that all you need is one generic pre-approval at a max dollar amount after which you can offer and purchase any home you want at or below the approval amount you have been given!
This is a MYTH, and not in your best interest!
Honestly, if that was all it took for the approval process I would consider my job incredibly boring and super cookie cutter. What I love about my job as a Mortgage Advisor is working with my borrowers to make sure their approval is the best approval for their financial situation. I do not believe a generic approval is best. That is like saying, well Honda Civics are good and reliable so it is the only car that the car salesmen is going to sell and suggest. If the customer has X amount of money to spend, then the only option the customer would have is to purchase the Honda Civic. This route of course is the easiest route, but I do not believe it is the best route.
The TRUTH, in my opinion, is that you the borrower be given a property specific pre-approval. The reason this is my recommendation is because of the following:
1. Each property has its own characteristics. For example: if you are hoping to spend $2,000 a month on your mortgage there are many combinations of expenses that can add up to the $2,000. Do you remember when you had to do combinations in math class? For the variable A and B there was only 2 combinations AB and BA. If you were trying to get two combinations of four variables the options open up to 17 combinations AB, AC, AD, AE, BC, BE, BD, CE, CD, BA, CA, DA, EA, CB, EB, DB, EC. Why am I pointing this out? I want you to understand that $2,000 is made up of at a minimum 2 variables, but with the potential to have 7+ variables. The variables may include- Principal Payment, Interest Payment (Interest Rate), Homeowners Insurance, Property Taxes, Homeowners Association, Mortgage Insurance and/or secondary financing fee and with each variable they change based on the property. As you can see, the more variables the more combinations there will be, which in turn means the more volatility to what your estimated monthly payment will be.
2. In addition to all the variables that can alter the generic pre-approval, a good Listing Agent is going to want a Purchase Agreement to be submitted with a Property Specific Pre-Approval. They are aware of these variables and they want to be sure that the Purchase Agreement that is being submitted is vetted and fully backed by strong finances.
3. My third reason for making sure you have a pre-approval that is property specific is to protect your emotions and expectations. If you as the buyer assume you can afford and be approved for a $250,000 home regardless of the property variables then you could be setting yourself up for an emotional rollercoaster. I recommend my borrowers send me the top properties they are interested in so I can run the numbers to confirm they can be approved for the property. I will also provide an estimated monthly payment and how they will need to structure their offer in order to be awarded an approval. The borrowers then have the ability to discuss this with their Real Estate Advisor prior to falling in love with the property.
With the current state of the Housing Market in Minnesota and the COVID-19 regulations I believe it is in the best interest of all parties that you, the borrower, receive a thumbs up for approval on each and every property you are interested in submitting an offer on. This will show you are committed to the process and respect everyones time by not viewing a home you realistically can not submit a competitive offer on.
If you have questions on the Pre-Approval process please do not hesitate to reach out!
The last time I have been in a restaurant without restrictions to prevent the spread of COVID-19 was March 14th. That is just under three months. In my opinion, three months is a good marker for how an event has had an economic influence. I believe over the last three months we have had the chance to see what COVID-19 has done to the banking/lending systems, our consumer pockets and the housing market.
BANKING & LENDING SYSTEM
COVID-19 has had a ripple effect on the lending system. What was once a file that could be approved under pre-COVID conditions, now may not be a file that can be approved. As you can imagine, with 2.8 million Minnesota's filing for unemployment and 20.4 nationally that caused the banking systems to re-evaluate their guidelines as to who would be approved and who would not be approved. To be approved for a loan, Mortgage Advisor, like myself look at the borrower’s ability to repay the loan the borrower is asking to receive. I review the borrowers credit scores, employment history present and past, their cash reserves, other assets and liabilities and any other pertinent information I am given to help me evaluate their overall ability to manage new credit. Then I utilize this information and strategically determine which lending product their creditworthiness would complement their needs and wants best. Due to such a dramatic economic variable like COVID-19 the federal government re-evaluated their regulations. Minimum credit scores were raised, minimum cash reserves on certain products were increased and there were several products that were suspended or completely eliminated as a result. With all of these regulation changes going into effect they had an immediate impact on who could and would be approved for a home loan. As a Mortgage Advisor in the first few days and weeks of COVID I was grateful to have the margin to simply digest all the new changes. No files were canceled and I also was able to celebrate the borrowers I had who were headed toward closing that their finances were strong enough to endure the regulation changes.
Where am I at now, at the start of June 2020, as a Mortgage Advisor? I am encouraged. Yes, I see that unemployment is still at a staggering and unfortunate high which is really sad for anyone who is out of work. I truly do feel for you and pray that your place of work would reopen in a safe and timely manner. However, I am thankful that the lending regulations have come back in just a bit. It is my belief that homeownership is an achievement. I believe that homeownership should be recognized through hard work financially and professionally. Having the regulations tightened up a bit awards consumers who have done the hard work.
COVID-19's economic impact resulted in historical highs of Americans filing for unemployment due to losing their jobs which in turn allowed these same people to collect unemployment and, even some, an extra pandemic relief unemployment cash deposit (the CARES act). I heard it said many times over the past 3 months that Americans were making more on their unemployment than they were making at their jobs, which was preventing them from wanting to go back to work. Although I can understand that temptation, it is not what I understand the program to be for. All though the unemployment from an income perspective has been a blessing it has caused an impact to many individuals and families who were planning on purchasing a new home. As a Mortgage Advisor our regulations outline that our borrower’s income needs to be the same at time of approval as it is at time of closing. With this guideline in place anyone who has lost their job or been laid off or furloughed would need to wait until their compensation is back to their pre-COVID compensation before they would be allowed to close on a new loan. This for sure is discouraging to borrowers who had a 2020 summer plan to sell and buy or purchase a first time property or maybe an additionally property, now they may need to wait.
HOUSING MARKET (The following information is supplied by Spencer Hutton a licensed Real Estate Advisor with Engel and Volkers MN)
It's still a little "yet to be determined" as to what kind of affect COVID-19 is going to have on the housing market. Early on during the "Stay at Home" orders we for sure saw the number of showings drop off dramatically. However, at the sub $500,000 price point we were still seeing multiple offers and still seeing homes sell rather quickly. It seemed that COVID-19 really just took tire kickers out of the market, and just increased the quality of the showings. Some people had deals fall apart due to job losses, however, many of these deals came back together with other buyers. As the weeks have gone on, number of showings have increased and actually passed the trend of last year a couple of weeks ago. We are back to seeing numerous showings, multiple offers and sellers getting significantly over asking price (at the sub $750k range). As of right now, the housing market in the Minneapolis Metro area seems to have kept on rolling as if not much has changed. There is Low Supply and High Demand, no shortage of buyers ready to pull the trigger on their next house.
With that said, I still believe the housing market will feel some effects of the shutdowns at some point here. As relief acts start to dry up and companies potentially make more layoffs after their Paycheck Protection Loans dry up it is possible, we could start to see a swing in the market. We could see some sellers come on the market who need to sell their home due to job loss, we could see less buyer's able to be in the market place due to stricter lending practices, which may not have been in place for their file prior to COVID-19 (and job losses themselves). So, I think it is possible that come late fall and through the Winter in Minnesota we could start to see a swing in the market. It could be a delayed repercussion from COVID-19.
On the other side of the equation, there may be a silver lining as to the timing of this event that may help our housing market service this due to supply and demand factors. COVID-19 is happening at a time period where we have the two largest generations in the history of humankind (Millennial and Boomer) fighting for houses at the same time. The Boomers are at a place in life where the economic factors aren't going to hit them quite as hard, at the same time Millennials are at a time where they have been at peak earning age as well as Millennials have shown a propensity to pay off debt and save (thanks you 2008!). As a result we have a lot of Millennials in the position to purchase an entry level, starter home for their growing families at the same time that you have Boomers wanting to downsize into a more entry level home that requires less maintenance and frees up capital to travel or invest in hobbies.
Because of all of these factors, despite a global pandemic and the resulting potential economic impacts, we have a large demand of buyer's fighting for the same low supply of houses. So, although it's likely we will see some balancing in the market, it's still possible that we could continue to have a market that rolls on despite the economic factors that have hit the economy as a whole. We'll know more in the coming months, but there are reasons to be cautiously optimistic that the housing market will weather the season fairly well. Although, as I always say, I personally am still planning for the worst while hoping for the best.
WHAT DOES THIS MEAN
It is hard to know for sure what this all means, but I can confidently say that my approach to finances has not changed even during a Pandemic. I will always say that it is critical to be a wise steward of your household’s finances. My Dad always told me, Amber plan for a rainy day because some day it will start raining! Well it is raining and the rain looks a lot like a Pandemic. My encouragement to you is to continue to do the right next thing. Pay your bills on time, spends less than you make monthly, make a budget and track your spending, do not take out debt if you can avoid it, and be responsible to your family and your employer as you continue to better yourself and our overall society.
Once upon a time you decided you wanted to purchase a home...
Your finances are a story, a story that you get to be the author and main character of. You get a choice in the setting, the antagonist, the characters, the adversity and even the outcome. All good stories have these characteristics and how cool that you get to be the author of yours! I understand you may not consider yourself an author, or that this might be a unique approach for you to view your finances, but I believe it is the mindset you need to have if you hope to have a story worth telling. A story worth telling! Have you thought about the story you are telling right now as it relates to your finances. Is the current story about a lack of control and a character that is drowning in quicksand that has attacks coming in every direction leaving the main character weaponless and hopeless? Wow that would be such a sad story, I wonder how it is going to end? Is the main character going to rise up and get out of the quicksand? Whose going to be the rescuer? The lottery, or maybe a huge tax refund or a new job? What happens next? Is this the story line for your finance story?
THE MAIN CHARACTER, YOU
A main character is the focus – the story's about them. That is you. You are the focus of the finance story. You do not get to look around and point a finger at someone else. You do not get to run from this role now that you are an adult. You have to embody this title. So now that we have that squared away, what does the main character have to do to make sure they are a strong lead character for this story?
THE SETTING AND PLOT LINE
Now that you have accepted the title of lead character it is time to outline the setting and the plot line. When you choose your setting be sure it is one you are excited about. Make sure it is one that brings joy to you. The setting is the place you will experience your finances. Your setting will be the place you earn an income. It will also be a place where you expense your income. It will include a lifestyle and spending habits that you will need to be able to support. Your story needs to make sense. There are many reasons for this, but one major reason is for others to be able to understand. A confusing setting that is not consistent to our human nature will leave your audience guessing and ultimately you will lose your credibility. Be sure to be clear with your setting and your plot line. Let me give you two examples:
Jennifer is 30 years old and is so excited to purchase her first home. She has lived in the small town of Bubble Gum for the last 2 years. She moved to Bubble Gum after she graduated with her Masters Degree in Communications. Jennifer has been working ever since her days on the farm feeding the baby kitties with her little sisters bottled milk. She remembers making 1 quarter per week from her father. Jennifer began earning 1099 income while she was studying in both High school and College as a Soccer Coach for the local community center. She started claiming that income on her tax returns each year leading up to her full-time job 2 years ago. While she was working full-time she also continued to coach the soccer team which was paid seasonally. Jennifer was really good at keeping all her documents for both jobs.
Jennifer is 30 years old and is so excited to purchase her first home. Her peers around her are all purchasing and or getting married, so she feels it is a good time to get her first home and stop paying someone else's mortgage in rent. Over the last 4 years Jennifer has been unsure of what she has wanted to do for a career. She studied abroad for 1.5 years, worked at a local coffee shop, babysat for the church part time and even did seasonal work for the local holiday boutique. She has also done some consulting work as a web-designer, but nothing full-time. Jennifer has received a job offer to work full-time as a secretary at a local dentist office. She is thinking about taking it because it is guaranteed 40 hours and will still allow her to do much of the other jobs she is inspired by.
Scenario 1 and 2 are the same person, but completely different settings and plot lines. Scenario 1 is predictable and fairly consistent. Scenario 2 is the opposite. I am not sure what Jennifer is going to do next. It is a bit of a mystery what is going to happen next. Let me be clear, there is not a correct scenario for Jennifer, however if the goal is to have a story that is easy to follow and understand, scenario 1 would be the story to aspire to replicate.
WHY DOES THE STORY MATTER?
Beyond just being the lead character and having a story that is captivating to tell, read and witness. You are also preparing a story that outsiders can understand. There will be times that you do not have the ability to tell your financial story from start to finish. When this happens having a story that is easy to read and understand is critical to allow your setting to tell. Your setting will be tracked with the proper documentation. When the setting is written down and tracked the audience is not left to wonder what happens next.
I encourage you, examine your current role in your financial story. If it is not one you would aspire to witness, read or replicate. I encourage you to start taking baby steps to create a story that is both easy to understand from the audiences view point as well as from a trail of documents. This is your story, make it easy for others to understand!
IS THE SPRING MARKET EVEN A THING
When Spencer started Real Estate 7 years ago, I honestly did not believe there was a 'Spring Market'. I was kinda a brat about it. I would say things like, "why can't the market be more balanced? or do you really need to use the term Spring Market all the time? Is it really a thing?" Fast forward 7.5 years and here I am smirking behind my computer as I am writing a blog post with the exact phrase I did not believe existed. Wow, I have really been humbled. Alright, so the truth is, in Minnesota there is a Spring Market and right now, as of April 2019 it is getting hot. So what does that mean for you as a consumer or spectator? I am going to give you a look into my perspective as a lender and how I feel you can have a step up against your competitors as you look to purchase your dream home and it all starts with the power of Cash.
HAVE YOUR CASH READY: Down Payment
The Down Payment on a home are the funds that you as the borrower need to bring to the table to purchase your home. There are options as low as 3% down, which is for example 3% of 200k (home sale price) = $6,000. This $6,000 needs to be real money. It can be a gift from a blood relative, but it has to be sourced back to a bank account at time of approval. It is critical you have these funds available prior to meeting with a Loan Officer or Real Estate Agent if you are serious about buying within the coming weeks to months. The reason being...Spring Market! Houses are not lasting long on the market if they are priced correctly. We are seeing homes receiving multiple offers within the first 0-5 days on the market. You need to be ready!
The reason it is critical to have the funds available is because without the proof of the funds a good Loan Officer will not provide you with a pre approval letter to make an offer on a home. When a listing agent (agent who has listed the home you are looking to make an offer on) reviews your offer, they want to be sure your offer is accompanied with a pre approval letter that proves you can actually purchase the home.
MORE CASH AND MORE APPROVAL POWER: Margin
I would highly recommend having more than your down payment as available cash. Buying a home is not a small transaction. It is not like buying a car, or planning for a vacation. There are many variables that effect your power to purchase the home. The more available cash you have and margin to have more lended to you, the more influence you have in the negotiations. Let me explain:
When being pre approved for a loan it is common practice for a Loan Officer to pre approve you for the max you can purchase. For example: your Debt to Income allows you to purchase a home up to $300,000 with the seller paying 3% in closing cost. This would be $X,XXX per month as a mortgage payment. This is with an interest rate of X.XX%. This is an example of how a Loan Officer will present your pre approval. I have chosen to pre approve my borrowers a bit differently. I request that they determine how much they can afford in a monthly payment. I will then pre approve them for that value and provide them with a home value number. Most of the time, this amount is significantly below what their max approval is. Here is why I take this approach, we have margin. Having margin in all areas of life is healthy, but especially when trying to purchase a home.
Example #1 (being pre approved for your max)
You receive a pre approval for $300,000 with seller's paying 3% in closing cost. This is your max amount. You will not be able to lend more than $300k. You sit down at your coffee table and pull up your MLS portal and start searching homes. You favorite 5 homes and send them to your Realtor. All of them are $295-$305k purchase price. I can already tell you, in this market. Shopping this way is likely going to result in several offers being written and you experiencing a whirlwind of emotions as you fall in love with each and every home you write an offer on.
The reason this is going to happen is because homes are currently selling for their listing price and some even higher than their listing price maar.stats.10kresearch.com/docs/hso/x/report?src=map. When there are multiple offers in on your dream house and you can only offer the list price, you are tapped out. Unless you have more cash you you bring to the table, you will have squeezed all your buying power out simply by trying to buy at the top of your budget.
Example #2 (being approved through me):
You call me and tell me how much you can afford per month in a house payment. I will then pre approve you and provide you with your buying power with that budget value. You will pass this amount on to your Realtor and he/she will set you up with a MLS portal for you to start browsing homes. You begin to favorite homes that are between $295K-$305K because this equates to the budgeted amount you feel comfortable paying. You submit an offer and your agent comes back and says, "there are multiple offers, is this your highest and best offer?" Your response, "no, but let me check with Amber first!" We recalculate your monthly payment with a $310k offer price, because we have margin. You submit your offer and you win, because you had margin to go higher and you were not shopping at your maxed amount.
It sounds simple to me, but not all Borrowers, Lenders, Realtors or Consumers want to shop this way because their is pride in knowing their max pre approval amount, which you can still know, but do not shop this way. I believe it is more important that you find a home you can afford, than a home that leaves you house poor because you thought you could afford the home because you were approved for it. These are two different things! Do not be fooled by these two amounts and the buying power each has.
As a Mortgage Loan Officer I find myself starting the teaching portion of my meetings by educating borrowers on the difference between what they can afford and what they are/could be preapproved for.
WHAT CAN YOU AFFORD?
Knowing what you can afford is knowing your comfort number. Ask yourself, what are you currently paying and what amount of money do you have extra per month that you can increase your housing payment by? Sometimes this answer is, $700 currently and we are saving $300 monthly to be applied to our housing. Other times the answer is, $1000, but we are not saving anything per month. Knowing what you can afford is critical. Unlike other areas of life, your housing payment is not one you want to inflate or push yourself on. If you do not feel comfortable, I do not recommend stretching yourself. Comfort in your housing payment is essential when exploring future mortgage payments.
HOW TO DETERMINE WHAT YOU CAN AFFORD
Start with knowing what you currently pay in housing. Write this number down. From there, review what you are currently expending for fixed and variable expenses. A fixed expense is one that does not usually change, and one that is required to maintain your current, ideal lifestyle. A variable expense is one that can change, be canceled or adjusted at your discretion. Arrive at a total monthly expense number (TME).
Next, calculate your total income per month. It is best to calculate ONLY on your guaranteed income. If you have variable income calculate off your average or lowest months income. If you have a side hustle, do not include this amount unless you have an average that has stayed consistent for 6-12 months. Both, what you can afford and what you are preapproved for will be calculated on the conservative side of your income, so be honest with yourself when doing this calculation. It will not help you in anyway to believe or inflate what your income is just to make yourself feel better.
Once you know your income minus your TME. The amount you have left over is the amount you have to either save, invest or re-prioritize (SIRP). I am not going to suggest you take this value and leverage it as a direct amount to apply to your housing, but it helps you understand what cash you have available to work with. From there, you determine how much of your SIRP are you willing to tie up in a larger fixed expense.
In addition to determining your SIRP. It is also critical to determine if your current housing payment plus your chosen SIRP increase is 20-25% of your total income. You can determine this by taking your total housing payment + SIRP/Total Income=.00%.
Knowing what you can afford before you start house hunting or meeting with a Realtor and Loan Officer is a step that puts you in the drivers seat of your financial destiny.
Have you thought about or are you currently thinking about buying a home? Being married to Real Estate Agent and being a Mortgage Originator myself, we have a few recommendations as to what are great next steps. What most people do not realize is, there is work you can do before going out to look at homes.
CREDIT SCORE CHECK
Have you recently checked your credit score? You can receive a free credit report, one from each credit reporting agency: Equifax, Experian and TransUnion, per year. According to Experian a credit score between 800-850 means you have exceptional credit, 740-799 very good, 670-739 good, 580-669 fair, and 300-579 very poor. Knowing where you are with your credit will help you gauge how realistic obtaining lending could actually be.
DETERMINE WHAT YOU ARE COMFORTABLE SPENDING
Do you know how much you could afford in a monthly payment? Do you currently Rent? If you do, do you plan to expense the same value toward a mortgage, or do you plan to increase or decrease. Knowing the amount you desire to spend is helpful when working with a Loan Officer. When I am working on a pre-approval for a borrower, it is important for me to know what they are comfortable spending.
DO YOU HAVE CASH
Do you have liquid cash? I am not talking about investments, I am talking about cash you can access today. As part of the pre-approval process, I ask all my borrowers for a statement that verifies they have the funds needed for the earnest money and the down payment.
"What I can preapprove you for is different than what you can afford."