Navigating the physician mortgage process like a pro, 10 tips for a stress-free home loan. You know, nowadays the industry is so regulated, few and far between are the differences. A lot of times lenders have kind of the same options, some niche products here and there, but the process can really be stressful for a lot of people.
All right, so tip one, get started early. Chances are, if you are listening to a webinar like this that’s been recorded, or attending, you are getting started early, at least doing research, but it’s really important to not rely on everything yourself. The internet has some great information out there, has some not-so-great information out there. Same thing, anything you read in a personal finance textbook could be grossly outdated. Sometimes some great advice, sometimes some things that aren’t really relevant. So it’s important to talk with a lender as early as possible, like I say in this slide, even a year or two out. Not to say that you’ll do a formal application, but kick the tires a little bit. Know the guidelines, start to think about some things that you can get in line and start to do.
Because sometimes if you wait, all of a sudden, you’re starting to look at houses. If you find some surprise on your credit or some guideline you weren’t aware of, you may have to kick your whole timeline out down the road. So again, engage as early as possible. That doesn’t mean you’re committing to anybody, but you’re starting a dialogue. As I say in the slide, identifying the basic parameters allows you to plan your savings accordingly, get tips for making sure your credit’s in line by the time you get there, and again, just making sure that there are no what I would call gotchas, any big surprises out there.
Tip two, know how to shop. Like I said, engaging a lender early doesn’t mean you’re committed to working with that lender. Of course, you want to establish a relationship, and a person that knows a lot of history and context might be a great person to be with, but all the time we get calls from people who haven’t identified a property yet, they’re three months out, six months out, a month out, a year out, and they want to drill down really hard on the rate, which that’s important to everybody, but most people, you may not know that you can’t really lock in your rate until you identify a property, and rates can change every day. It’s kind of like the stock market, it depends on a lot of factors, and the bond market.
Lenders will typically set their rates once a day in the morning. If anything’s crazy happening in the market, it can change, but my point is, you want to get an idea of where rate is, of course, but there’s no sense in drilling down that far out, because some lenders will frankly tell you what you want to hear. They’ll give you something low, but they’re not really on the hook for anything. Rates can change. So certainly get an idea of what’s out there. Make sure that your general rate quote is kind of in line with what you feel is competitive. But don’t worry about the nitty gritty, because it doesn’t really matter until you identify a property.
And like I said, once you’re under contract for a home, yeah, speak with your lender, try and get the best rate possible. Check with other lenders or online to make sure you’re getting a fair deal. But no sense in playing hardball, so to speak, way on the front end. So get somebody that you trust, get your basic guidelines and everything lined up, and then really drill down on the terms once you identify a property. No use spinning your wheels too early on that.
Tip three, simplify the loan process. I tell people all the time when they’re pre-qualifying, it can be a really tedious process. You read online, you hear from people that it’s impossible to get a mortgage. Couldn’t be further from the case. It’s pretty document-heavy. You’ve got to verify a lot, which is frankly a good thing. And as long as you know where those requirements are coming from, that’s a lot more palatable, and you can get there. But I tell people it really boils down at the end of the day to three main things, credit, income, and assets. That’s kind of how I pre-qualify people, because that’s really what the three main portions are, and so for the next three tips, we’ll dive into those individually a little bit.
Next, understand your credit. One great tool that’s out there nowadays, or a few different tools, are consumer credit monitoring devices. You know, Credit Karma. Sometimes your credit card will give you a score estimate. But keep in mind that’s good for a gauge, a general parameter, but a lender is going to get a slightly different score in most cases. There are a lot of different credit algorithms out there, and it depends on the type of financing you’re applying for.
So you get a slightly different score if you apply for a card, slightly different score if it’s a credit card or a mortgage, so you’re not going to necessarily get the exact score that a lender’s going to get. Certainly good to use it, again, as a gauge, but I always say, don’t try and pre-qualify yourself. Just because Credit Karma or your Discover Card or whatever else says you’re a 720, you might end up a 740 with a lender, you might end up a 700 with a lender. Typically, it’s close, but again, starting point only. Don’t put too much stock in that.
Second, with credit, it’s really important to use tradelines. There are a lot of products, you don’t have to have a ton of debt or anything, but if you’ve never applied for any sort of financing, you may not have a credit score at all. It’s a blessing in many ways to not have to take out debt and not have a car payment or an installment loan or credit card debt, but just because you don’t need to borrow money doesn’t mean you can’t use a credit card. Put a tank of gas on it here or there, pay it off by the end of the month. Make sure you’re not paying any interest unnecessarily, but using that history of credit is a good thing.
There are some programs that have strict requirements on number of tradelines, and we can use some things to build what I call alternate credit, a power bill, a utility bill, but that in some cases can end up with a higher rate for you or in some cases just limit your guidelines a little bit. So best to get a couple of credit cards. Again, you don’t have to carry interest, but if you don’t have any other debt out there, good idea to get a little bit of a history under your belt. There are also secured credit cards that really don’t have any interest and some other lines of credit that you can do if you don’t have any history in your credit profile.
Third, related to that, it’s really important to consider the usage percentage of your credit cards. A lot of people like to use credit cards for the rewards. I’m one of them. I’m guilty of putting almost everything I can on there, getting the points for it. Nothing wrong with that. But at the end of the day, even if you pay off the balance in full, you’ve got to kind of look out for a high usage rate. Let’s say your credit limit’s $1,000 on that card and you put $900 on it every month. Even if you pay it off in full, your credit report is going to reflect the most recent statement balance. So it looks like you’re using 90% of your available credit, which can sometimes end up knocking your credit score down a little bit.
If possible, keep your usage under 25%. That’s going to be the best. And then up from there, there are little tiers. If he can’t keep it under 25, 50 is better than 75, and 75 is better than 90. So keep that in mind. I always say, nothing wrong with getting the rewards, but pay it off mid-cycle if you know you’re going to be using a high percentage of that, especially if you’re going to be applying for financing on a mortgage or a car within the next couple of months. Good tips there.
Next, income. Income is ultimately what drives how much you can qualify for. Income as it relates to your monthly debts reflects how much you have left over to afford, which makes some sense. We don’t want to put anybody in a tough spot, but really it boils down to a couple of things, and the type of pay is really, really important. I’ve put that there’s an old myth that you need a two-year history of employment. Couldn’t be further from the case. Sometimes we need you to have one pay stub. In a couple of special programs, you can even close before your start date.
In most cases it’s best to have that first pay stub. In some niche programs, again, our doctor loan allows you to start before your pay stub, or before you start rather. And then other loans, depending on the percentage down, in many cases you can close a little bit before your job starts. We look at income, and again this is really, really important, talk with your loan officer, but the general parameters here at least as of this date, there’s a big distinction between guaranteed income and non-guaranteed income.
Basically, guaranteed income, as the slide indicates, salary, hourly with guaranteed hours, things like that, where no matter what happens you’re getting that pay. That you can use almost immediately. Non-guaranteed income is what we need a history of. Somebody self-employed, somebody commission-based, really bonus-heavy, you need more of a history. And so what happens is sometimes people are firmly in one of those two categories, and that’s kind of self-explanatory from that context there.
But sometimes you’re a mix. You got a salary and a little bit of a bonus history or salary plus commissions. In that case, what we typically do is use a two-year average of any non-guaranteed income. So if you’re fully self-employed, we’ll look at a two-year history in most cases. But if you’ve got a mix, if you’re salary plus bonus, let’s say you start out at a salary plus a bonus, we can use your salary immediately, which may be enough to qualify for the loan. You may not have a sufficient history for us to also count commissions and bonuses, but again, you may not need those to qualify. So talk with your loan officer. Every type of pay can be a little bit nuanced. Don’t take this for gospel, but know that some types of pay require a history and some do not. You can use them almost immediately or in some cases before.
Next, assets. Of those three things, remember credit, income, and assets, third piece is the asset piece. You need funds, obviously, for a down payment in most cases. There are a few loans out there that don’t need a down payment, VA loans, if you’re active military or receive VA benefits for past service, or in many cases a spouse of somebody who received benefits. Closing costs, you’re also going to need. And some programs need reserve funds. Not all programs need that, but many do. I mentioned VA as one of the loan types not needing a down payment. We have some niche products. Some rural properties could fall under USDA loans. There’s some income limits there. So again, consult a loan officer, but some rural properties have the 100%.
And then there’s some niche products out of banks. There aren’t as many of those anymore for most. A lot of people say, oh, hometown hero. That stuff is still around here and there, but typically not in a zero down payment fashion. And there are a lot of position ones, like SunTrust now Truist’s doctor loan, that can do 0% down. But in many cases, down payment if you need one, closing costs, prepaids and interim interest, and reserved funds sometimes are needed. I explain reserve funds by saying the bank, it’s their way of saying we don’t want you to own a home and have 10 bucks left to your name, right? Most people would want to have some savings anyway, but many products do mandate a couple of months of reserves.
And the reserves are defined by the actual monthly payment on them. So let’s say your monthly payment is $1,500. Many products require two months reserves, so we want you to have an extra $3,000 in the bank. Again, not all loan programs need that, but some require a little bit there, and retirement can count towards that at a limited basis. So again, consult your loan officer for details, but that’s kind of what you need to think of having.
And then there are fund sources, liquid funds, checking account, savings account, money market, things that are readily documentable and available to you. That obviously counts. Stocks, bonds and retirement, those can count. In a lot of cases, if you’re using them, you’ve got to show proof of liquidation. In other words, you’ve got to sell that stock or bond or borrow against or withdraw from your retirement if that’s the route you’re going. Because unlike cash, that stock price could go up or down every day, depending on what it’s in. So you may need to move that over, or you may not, depending on what else you have out there.
Gifts are acceptable on a lot of loans nowadays. They typically need to come from immediate family. There are a few exceptions to that. There’s something recent that I like to call the roommate rule, where if somebody’s lived with you for the last 12 months and they’re going to continue to live with you, they can potentially give you a gift, even if they’re not immediate family. But that has to be documented in a really specific way. But gifts from somebody can be used.
Loans, a lot of cases, some people have, you could go get an unsecured line of credit or a loan. A lot of physicians have, I think Discover has a great residency loan that helps you deal with those costs. In many cases, funds from something that’s unsecured may not be eligible for underwriting. In other words, let’s say you had $1,000 in checking and $1,000 from a loan, if we can see that that came from a loan, we may not be able to use that for underwriting purposes. So be sure to disclose to your loan officer if any funds in your account recently came from a loan. We’d rather identify that early rather than later.
And then last fund source, hey, the seller. The seller can pay up to certain percentages by loans of your closing costs. Again, there’s some limits in how much they can contribute, but in a lot of cases they can get all the closing costs, prepaids, and interim interest taken care of. With certain programs, you may only need to come up with the down payment. Everything else can be taken care of for you. Or in some cases, for a no down payment program, a lot of veterans can buy a house and get their earnest money back at closing. It’s great. So again, a lot of sources that you can use to leverage that.
Tip seven, moving away from the three aspects of qualifying, be sure to structure for your needs. Everybody’s going to have different needs, depending on where they are in the process. First I’m going to identify costs versus rate. Every lender has what I call base costs. Some call it a processing fee, an underwriting fee. Really, you can expect a lender, including the appraisal, to have anywhere from $1,200 to $1,500 in “fees” that they control, and those are their base fees. For Fair Lending reasons, in a lot of cases they just can’t wave those. They’re there for everybody.
But what they can do then is when you’re actually down, you’ve got your property under contract and you’re negotiating rate, sometimes you can take what’s called a zero origination quote, which means, hey, here’s your rate. There are no additional costs to those base costs. Sometimes it makes sense to pay a little more in fee to get a better rate. In other words, what’s called buy down your rate. Sometimes you’d much rather put a little more up front if it’s going to save you in the long run. And then sometimes it actually makes sense, if you could use a little help, if your savings are thin, you can actually take a slightly higher rate from the lender for no costs from the lender or even to cover some of your other closing costs.
So again, structure based on your needs and how long you’re going to be in the house. Have that discussion with your lender. Sometimes everybody wants to get the best rate and no fees, but sometimes it’s about finding what’s best for you in that moment. And a lot of times you end up with a really big credit for a really marginal increase in costs, and depending on how long you’re going to be there, sometimes the higher rate could be the better deal for you, as counterintuitive as that may sound.
Another kind of thing to consider is the term, fixed, adjustable. What term for fixed? I always say that sometimes the best financial decision is not necessarily what you’ll get to after running five different spreadsheets and crunching the numbers 10 different ways, it’s just what makes you sleep better at night. Some people, an ARM is a great fit. If you’re going to be in the property relatively short term or you’ve got a windfall coming down the line, an ARM can be a perfect fit. That’s an adjustable rate mortgage. Some people just want the security of that 30-year loan, and there’s absolutely nothing wrong with that. Even if you say, hey, I think I’m only going to be in the home five years, a seven-year ARM might be the perfect fit for you, but if it doesn’t sit right with you, there is nothing wrong with a 30-year fixed.
And then a lot of times people try to decide between the 15-year or the 30-year. There’s 20-year options out there. A lot of times that comes down to discipline and flexibility. I don’t do any loans, most loans out there nowadays do not have prepayment penalties. So to maintain flexibility, a lot of people go with that 30-year mortgage and could pay extra every month. But you’re leaving yourself some flexibility. If other needs pop up to redirect funds, you’re not necessarily married to that 15-year payment. So be sure to talk fixed and adjustable, and then terms if you go fixed, what suits your needs and your financial plan the best.
This one’s a little bit of a longer slide. Meant to put this one in there for kind of a checklist for everybody. I’m not going to read line by line, but what you’ll notice is, remember I said credit, income, and assets were the three main portions of a loan. Credit, we’re going to see your credit report, and then we rely on you to provide us documentation for the income and the assets. So things like tax returns, W-2s, pay stubs, a little bit more if you’re self-employed. Asset documents, we most often need just the last two months of statements. Retirement accounts if you’re using those as reserves or you’re withdrawing from them.
And then there are a couple of notes in there about if there are gift funds in your account. And another thing, that asterisk, the last note in assets, is really important. That’s a big pain point for a lot of people when we talk about a stress-free mortgage process. Online banking’s great nowadays. It helps you budget, move money around. The biggest pain point sometimes when when people go through a mortgage is chasing down transfers and check deposits. If you’re somebody that does a lot of transfers or puts in a lot of checks, remember to document those checks. Sometimes that’s unavoidable. You get paid in checks, you want to put the money in your account. Nothing wrong with that.
But anything you can help, minimize transfers back and forth and minimize checks being deposited, and always check with your loan officer. You can think of it as, if somebody’s trying to literally underwrite a moving target, if every time we get an updated statement there’s money moving one account going to another, an underwriter’s got to follow the flow of money. Sometimes that can be frustrating to provide updated statements across a few different accounts. So if you can help it, keep transfers to a minimum, would be a much smoother process.
And then miscellaneous documents. If you already own a home, you’re selling a home, you got to get us some documentation on that. And sometimes for different loans, if you’re getting a doctor loan, you need proof that you’re a doctor. If you’re getting a VA loan, we’ll need a couple of forms from the VA. So some loan-specific forms as well. But this would be a great checklist to keep handy.
Which leads me into my next slide. Well, actually no, maybe it’s the next one. Make it your job. I say this because it’s going to be an arduous process, but only if you’re disorganized and treat it as, oh, I can do this here and there. Get organized. Make it a priority to get with your loan officer and get them what they ask for quickly. With many things, the work on the front end makes for a much smoother process. If you read all your loan officer’s emails thoroughly, get them what you need, it’s going to be a much smoother process for you.
And when in doubt, ask. We want all of our clients, and I’m sure every loan officer wants their clients, to be completely clear on what’s there. So if you’ve got a question, don’t be afraid to call and ask. I’d much rather identify any kind of potential hurdles or calm any anxieties up front. So I put in a different color, “Without exception, the clients that say they had a great loan process were the ones that were organized and followed instructions carefully.” There’s a link here. I apologize, it’s a little bit long, but it’s at washingtonpost.com that’s little tips for how to make the application process go smoother. One of the things it hammers home is what I said up there, get the loan officer what they ask for.
I always remind people, loan officers and underwriters aren’t asking for things because they want more documents to review or there’s something necessarily wrong with your loan, it’s just we’ve got a really firm checklist thanks to our regulations out there, which again, very well-intentioned and good. But sometimes we just don’t have the flexibility to waive something. So again, we’re not looking at it necessarily as a concern when we ask for something additional, we’ve just got to document it appropriately.
I’m going to go back. I want to make sure I didn’t… I thought I had one more slide in here, but I apologize. I think I was just thinking of this one. Start that mortgage folder with this. Basically, get all of these documents, put them in a folder on your desktop, and go over that. That way, when you do find a property, you’re ready to send it to the loan officer and move quickly, like in tip nine.
Tip 10, assemble your team. Getting to closing on time and smoothly is a team effort for sure. You are a big part of that team as a client, but there are other people you need help from. A good realtor can help you far and above their costs, which by the way to a buyer is nothing. Mikki with Healthy-Realty can speak on that. Their expertise is invaluable, and they’re going to coach you the whole way. Lender, again, find somebody you can trust. Make sure that you find that loan that fits your needs.
Insurance, especially in coastal regions, insurance can vary widely on houses. Some houses that have a “sticker price” that’s a little bit higher may actually end up being cheaper than lower priced homes if the insurance is really expensive. I always say, in general, the bigger, the older, and the closer to water your home is, the more expensive it is to insure.
Because remember, insurance is fixing things that go wrong on your house, due to disasters or things failing. Not everyday maintenance, but if you’ve got a hurricane comes through and knocks down your house, it’s going to be more expensive to replace if it’s bigger, so more expensive insurance premiums. And ones closer to water, more likely to have damage due to floods, winds, things like that. And then an older home that has older electrical, older roof might be more likely to get some damage. So again, that’s a factor. If there haven’t been any updates that could be a little bit more expensive to insure. So get an insurance agent who can give you a quote in the process as you’re looking at homes, and that could really help you nail down that budget early and find the right house.
Next, you’re going to need a closing attorney or a title agent, depending on the state. In South Carolina, attorneys are required to close loans that are secured to real estate. That’s any mortgage or equity line. A good closing attorney can give you great advice on things like who to put on title if you’re married, things like that. And again, going to be kind of coaching you through that process as well, along with your realtor and lender.
Down the line, not necessarily for your closing or mortgage, but some people to consider, because it’s obviously relevant, financial advisors. If you’re working with somebody, make sure that your mortgage suits your plan, and run things by them. They’re a great fact checker and person that can keep you on task. And lastly, an accountant. Mortgage interest, again, I’ve got to give a big asterisk, I’m not an accountant, can’t give tax advice, but in many cases, mortgage interest, tax deductible. So figure out with your accountant how that’s going to affect you down the line or, of course, with buying or selling there are decent discounts or gains, potentially, when you sell. So definitely an important role to consider there.
So to summarize, get started early. Engage a lender as early in the process as you can, even if you’re thinking of buying in the next year or two. Two, know how to shop, find a lender you trust. Don’t worry about rate down to the penny on the front, because rate can change every day, so it’s kind of futile to get down to brass tacks there. Certainly, make sure rate is competitive, but you don’t need to iron out your deal on day one. That comes when you identify the home.
Three, simplify the process, as I said. Really boils down to three things, which are our next three bullets, credit, income, and assets. Number seven, structure for your needs. Consider costs and rate and the balance there and what’s best for you, and fixed versus adjustable and different terms. Eight, start a folder with that checklist. Get things ready. That way when you find a home, you’ve done all the work. You’re not all of a sudden thrown into this tornado. You can get the lender 99% of what they need, right when you sign that contract, which is great.
Number nine, make it your job. Focus on that loan process. The more you pay attention on the front end and thoroughly go through that checklist, make sure the lender has what they need, the smoother the process is going to go for you. And 10, assemble your team. You can’t know everything about this process. I don’t know everything a realtor knows. A realtor doesn’t know everything I know, and closing attorneys and so on. So make sure you get a team around you that you can trust.
Mortgage expert Jules Deas with SunTrust now Truist discusses navigation of the mortgage process, and about 10 tips for a stress-free home loan, which is something that I think all of us can benefit from.
SunTrust now Truist is an Equal Housing Lender. SunTrust Mortgage is a tradename of SunTrust now Truist. Loans are made by SunTrust now Truist. ©2019 Truist Financial Corporation. All rights reserved.
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