Mortgage 411 Center

As a mortgage professional who actively networks online, I have the opportunity to read many mortgage and real estate related blogs and websites.   The one thing that I noticed is that although there is a lot of information out there, it can sometimes be difficult for the average consumer to understand.  While other mortgage professionals will understand terms like LTV, PITI, PMI and FICO we often take for granted that the consumer will understand them as well. 

This is not only a problem online, but it also occurs in speaking with customers on a day to day basis.  Out of habit, mortgage loan officers tend to  rely on mortgage speak , forgetting that the customer probably has no idea what the loan officer is saying.   Here are some typical examples:

• If you purchase this home, your PITI will be $1254.76 per month.
• You will have to pay PMI on your loan since your LTV is higher than 80%.
• Because of your FICO, your interest rate is going to be 6.5%.

Allow me to translate.

PITI stands for Principal Interest Taxes and Insurance.  It is basically the amount that you will pay to the mortgage company each month.  Most online mortgage calculators where you plug in the loan amount and interest rate will only give you the amount of Principal and Interest (PI).  But the PITI is the true cost of the loan.

PMI stands for Private Mortgage Insurance.  You will have to pay this if your LTV (that’s loan to value) is greater than 80%.  For example if you are buying a $100,000 house  with a downpayment of $10,000 you would have a loan amount of $90,000 while your home is worth $100,000.  The ratio of your loan to value is $90,000/$100,000 or 90%.  PMI protects the lender in case you go into default.  It is not to be confused with homeowners insurance which you are also required to pay but which protects the homeowner in the event something were to happen to the house.

FICO stands for Fair Issac Corporation which developed the most widely used credit score.   Your lender may refer to your credit score as a FICO score, even if he uses a slightly different model.   Generally, the higher your FICO score the lower your interest rate and vice versa.

To learn more about some common mortgage terms and their meaning please view our mortgage glossary.  Before you know it, you’ll be talking like a loan officer too or at least you’ll be able to understand the mortgage process a little better.

It’s no secret. Buying a home is not as easy as it used to be. Gone are the days when you could NOT have perfect credit, NOT document your income, NOT put any money down and still get a loan. As a result, real estate agents are starting to notice that what would have once been a slam-dunk deal is now falling through because the buyer cannot get approved for the loan. Being educating about the mortgage pre-approval process can help minimize the effects of losing deals and this means both happier buyers and sellers.

First, let’s clear things up. I’ve noticed some comments about lost deals recently that have left me a little bit confused. One agent commented that he recently lost a deal because his buyers were “prequalified for a certain amount” and they put an offer on a home at the high end of the buyers’ price range. The deal never closed in the end because based on his income, the buyer couldn’t get a mortgage for the higher amount. Other agents comment that they will not even show a client a home unless they have a “pre-qualification letter” from the mortgage company. Still others wonder, “What good is having a buyer pre-approved if the mortgage company decides in the end that the buyer is not really qualified?” The confusion here? It seems that the terms “pre-approved” and “pre-qualified” are often use inter-changeably, when in fact they are different.

Here’s how a pre-qualification works:

Mortgage Company: What is your yearly income?

Buyer: About $125,000

Mortgage Company: And how is your credit?

Buyer: Great!

Mortgage Company: And how much money do you currently have in the bank?

Buyer: About $25,000

Mortgage Company: In that case, you are prequalified for a loan in the amount of $400,000 at our best interest rate.

Now here’s how the pre-approval process works. Same questions as above but in this case the mortgage company will actually verify the information by:

•· Ordering a credit report to see whether the buyer’s credit is actually “great” or if they actually have a lower credit score that would put them in a higher interest loan or worse, credit problems that would prevent them from getting a loan at all.

•· Verifying the income with copies of the buyer’s paystubs and W2’s so we can be prove that the buyer’s income is actually $125,000 and that this is not just the figure he hopes to make if he works a lot of overtime, gets that large commission or bonus check, or works “under the table”.

•· Verifying assets with copies of bank or other account statements so we can prove that the buyer really has these assets and didn’t just make a large deposit because he took a loan elsewhere or got a large cash advance from his credit cards.

Once all the information is verified, the loan is put through computerized or “desktop underwriting” and the pre-approval letter can be issued to the buyer. The buyer and the agent can then use this information to look for a home. Some buyers like to find their home first and then get a preapproval, but this can lead to disappointment if the buyer finds that he cannot really qualify for the home of his dreams.

Does this mean the pre-approved loan is 100% guaranteed? Well, no. The loan will still be subject to an appraisal, and will still have to go through regular underwriting as the desktop underlying is only preliminary. The underwriters will check once again that the information that was provided by the buyer is correct and legitimate, so if the buyer submitted recent paystubs for his job but “forgot” to mention he just quit his job the loan is NOT going to be approved. Also, if the buyer has some credit problems or is a non-conventional borrower, he may be preapproved for a loan program that the lender decides that, due to stricter guidelines, they no longer want to offer and the deal may never make it to closing. This is unfortunate and cannot really be avoided but fortunately is also rare.

Is the process of prequalification or preapproval worthless? Of course not. The prequalification process may be useful if a buyer wants to begin a preliminary home search online or wants to get an idea of what they can afford because they are thinking about buying a home. However, the best chance you have at making sure you have a qualified buyer is to have a pre-approved buyer and not one that is just pre-qualified. The pre-approval means that not only is the buyer serious he is also able to get a loan. And for anyone involved in the transaction of buying and selling a home, that is not worthless at all!

Written by Michelle Chamberlain of Above All Financial Services, a Delaware County Mortgage Broker. To apply for a Pennsylvania Mortgage loan or to learn more visit www.aboveallmortgage.com.