Everything you need to know about home loans in Utah.
Understanding home loans in Utah can be challenging and intimidating, especially for first-time home buyers. However, as a local homeowner and full-time discount real estate agent, I recognize the need for a better mortgage guide than most real estate agent websites offer.
This interview will explain the best loan types, the home loan process, how to lower your interest rate, and why you should avoid cash bank deposits.
After reading this article, you'll know the right questions to ask your loan officer and how to avoid typical mistakes homebuyers make during a home loan process.
This is an interview with an experienced local Loan Officer, Daniel Paris.
What Is A Loan Officer?
A loan officer is a licensed mortgage broker or a licensed mortgage lender that helps you secure financing and get pre-approved to buy a home.
[DiscountAgent.com]
What's the difference between a lender and a broker?
[Daniel]
A mortgage broker like myself is somebody that's going to shop around and find the borrower the best deal. I can shop the rate from twenty to thirty different banks.
A mortgage lender works directly for one bank and has limited loan options available to offer the borrower.
What Is A Loan Officer Looking For In A Buyer?
Mortgage lenders are concerned with the borrower's credit score, income, and debt-to-income (DTI).
Credit Score
Lenders use a credit score to evaluate the likelihood of a borrower repaying a home loan.
A good credit score is typically above 670, and a great credit score is above 760. The higher your credit score, the lower your interest rate.
Payment history, outstanding debt, and credit history contribute to a person's credit score.
Income
Mortgage lenders use income and debt-to-income ratios when determining loan eligibility and affordability for borrowers. Lenders use an individual's income to evaluate their ability to repay the loan and to determine the maximum loan amount they can afford.
Debt-To-Income (DTI)
A borrower's debt-to-income (DTI) ratio is calculated by dividing an individual's monthly debt obligations by their gross income (before tax).
Down Payment Requirements To Buy A Utah Home
Types Of Home Loans
[DiscountAgent.com]
What are the different home loan programs buyers should be familiar with?
[Daniel]
The most common loan types to buy a Utah home are Conventional, FHA, VA, USDA, & Jumbo loans.
Conventional Loans
- Conventional loans are for people buying a primary residence.
- Down payment requirements for conventional loans are between 5-20%.
- Down payments below 20% will require the borrowers to pay private mortgage insurance (PMI) as part of their monthly payment.
- Borrowers must have a minimum credit score 620 to qualify for conventional home loans.
- A credit score of 760 or higher is required to qualify for the best interest rates.
- The conventional loan limit amount is $726,100.
Pro Tip: Conventional 97 is a conventional loan for first-time home buyers that only requires a 3% down payment. Borrowers must have a minimum credit score of 620 to qualify and be purchased as an owner-occupied home.
FHA Loans
- The Federal housing administration (FHA) is a government-insured home loan for owner-occupied properties.
- FHA loans are popular with first-time home buyers, but being a first-time home buyer is not a requirement to qualify.
- The borrowers must have a minimum credit score of 500 credit.
- A 3.5% down payment is required.
Pro Tip: FHA rates are lower than conventional loans, but the buyer will be responsible for a mortgage insurance premium (MIP) for the life of the mortgage.
VA Loans
- VA loans provide lenders some security because they are government-backed loans guaranteed by the Department of Veterans Affairs.
- VA loans are 100% financed, meaning the buyer needs zero money for a down payment.
- VA loans never have monthly mortgage insurance but they do have a funding fee.
Pro Tip: The VA funding fee is paid at closing or can be financed into the loan. The funding fee is between 1.4%-3.6% of the loan amount.
USDA Loans
- The US Department of Agriculture offers guaranteed loans through its USDA Rural Development Loan Program.
- The USDA loan program aims to provide affordable housing options to qualified buyers in rural areas.
- USDA is a zero-down loan program.
- USDA income limits vary by county and household size.
Jumbo Loans
- Jumbo loans are for home loans that exceed $726,100, and we go as high as 5 million dollars.
- The higher the purchase price, the higher your down payment requirements.
- The minimum down payment on a jumbo mortgage is 10%.
- 45% down payments will be required for large multi-million dollar jumbo loans.
What Is Debt-To-Income (DTI)?
[DiscountAgent.com]
You mentioned debt-to-income (DTI) ratios. What is DTI, and why should borrowers care?
[Daniel]
Debt-to-income is the percentage of your gross monthly income required to make your monthly debt payments, such as a mortgage, credit card, car payments, alimony, and child support.
The borrower's debt-to-income (DTI) tells the lender how financially maxed out they are. The borrower should care because their debt-to-income (DTI) percentage determines whether they qualify for a home loan.
A borrower's debt-to-income (DTI) ratio is calculated by dividing an individual's monthly debt obligations by their gross income (before tax).
For example, if your mortgage is $2,000, you have $800 a month for a car loan and $500 a month in credit card debts, and your monthly debt payments are $3,300. ($2,000 + $800 + $500 = $3,300.) If your gross monthly income is $7,500, your debt-to-income ratio is 44%.
($3,300/$7,500 = .44)
- FHA Loans Debt-To-Income (DTI) 55%
- VA Loan Debt-To-Income (DTI) 41%
- USDA Loan Debt-To-Income (DTI) 41%
- Jumbo Loan Debt-To-Income (DTI) 43%
What Is Included In The Mortgage Payment?
Principal, interest, property taxes, mortgage insurance, homeowner's insurance, and homeowner's association (HOA) Fees.
Mortgage Insurance PMI vs. MIP
[DiscountAgent.com]
What is the difference between private mortgage insurance (PMI) and mortgage insurance premium (MIP)?
[Daniel]
So private mortgage insurance (PMI) and mortgage insurance premium (MIP) are both insurance products that the borrower pays for to protect the lender in case of default.
PMI is required for conventional loans with less than a 20% down payment. The homeowner can request their PMI be removed once their loan to value reaches 80/20.
MIP is required for FHA loans and lasts for the life of the loan. The only way to have the mortgage insurance premium (MIP) removed is to refinance to a conventional loan.
VA loans don't have a mortgage insurance premium (MIP).
Home Loan Process
Step 1 - Online Application
Fill out an online application and upload income and asset documents.
Other information buyers may need to complete a mortgage application. Social security number, date of birth, employment status, employer name, income, permanent address, phone number, email, and citizenship.
Step 2 - Check Buyer's Credit
The loan officer must run the buyer's credit through all three credit bureaus, Equifax, Experian, and TransUnion, to determine how well they have managed past debt. The higher the buyer's FICO score, the lower the interest rate.
Step 3 - Automated Approval
Move over human underwriters, automated underwriting is here to save the day! With lightning speed, sophisticated algorithms will approve or decline the applicant's loan.
Step 4 - Pre-Approval Letter
In the mortgage world, the pre-approval letter is your golden ticket to start shopping for your dream home.
Step 5 - Submit Accepted Offer To Bank
The loan officer will submit the fully executed real estate purchase contract (REPC) to the bank for review. The bank will order an appraisal from an appraisal management company (AMC).
Step 6 - Appraisal
While you may have found the perfect home at an excellent price, the appraiser may see it differently. The appraiser's job is to ensure the lender isn't taking excessive risk.
Step 7 - Underwriting
Unlike automated underwriting, now a human will manually underwrite the buyer's loan.
Once the underwriter has reviewed and signed off on documents and all buyer conditions, the buyer receives their final approval.
Often underwriters will have conditions. Some examples would be an explanation of large bank deposits, judgments, and eliminating outstanding debt. Conditions are anything that makes the underwriter comfortable with the buyer's ability to pay their mortgage.
Step 8 - Clear To Close
You can finally relax when you hear your loan officer say you're "Clear to close" in a real estate transaction. No more chasing down paystubs, bank deposits, or proving you have a job. Well, don't quit your job just yet. Your lender will verify your employment before closing on your dream home.
Step 9 - Closing Disclosure (CD)
Your lender must provide you with a closing disclosure (CD) three business days before settlement (sign all closing docs at the title company) for your review.
Pre-Approval Vs. Pre-Qualification
A pre-approval is when Utah mortgage lenders verify the buyer's information by completing an application, checking the borrower's credit, and running an automated approval (Fannie Mae's Desktop Underwriter or Freddie Mac's Loan Prospector).
Sellers should feel comfortable accepting a purchase offer from a pre-approved buyer.
Pre-qualification is a lender's best judgment based on the borrowers' information. The information has not been verified and should not be relied on for a home purchase contract.
Cash Isn't King
We've all heard the saying cash is king. Well, that is not true when getting a home loan. Banks hate your cash deposits. It's weird to think that the US dollar has no value to a lender if you want to use your recent cash deposit as your down payment.
Lenders who see large bank deposits require the borrower to provide a paper trail. You need to be able to document where your funds came from, and you really can't paper trail cash.
[DiscountAgent.com]
What are seasoned funds? How long must a cash deposit be in your bank account to be considered seasoned funds?
[Daniel]
As long as cash deposits don't show on the bank statements in the past 60 days, they are considered seasoned funds. The standard seasoning period is 60 days.
Cash deposits into your bank account less than 60 days won't be considered seasoned funds and will not be available to apply towards the buyer's downpayment.
Conditional Approval Vs. Final Approval
So conditional approval is when the underwriter has reviewed all the documents submitted in the file, but they don't meet all Fannie Mae or Freddie Mac requirements.
For example, the borrower has not provided documentation for large bank deposits.
Final approval is when the underwriter has reviewed all the documents and all loan conditions have been met. At this point, the buyer is clear to close.
The Three C's Of Mortgage Underwriting
Capacity
Lenders want to know if the borrower has the ability to make future mortgage payments. They will look at gross monthly income, debt-to-income ratios, and assets such as 401k.
Credit
The borrower's credit score determines how likely the borrower is to repay the loan. If you did not pay your debts on time in the past, you're unlikely to pay your debts on time in the future.
Collateral
The collateral is the property being purchased. The lender places a lien on the property until the borrower has paid the loan in full.
What Are Discount Points?
Discount points are voluntary upfront fees to buy the mortgage interest rate down. They are pre-paid interest.
What Is A Fixed Rate?
A fixed interest rate will stay the same for the life of the loan. However, that doesn't mean your monthly payment is fixed. Your monthly payment will change in direct proportion to fluctuating property taxes and homeowners insurance costs.
Mortgage Rate Vs. APR
So mortgage rate is the rate of interest you're paying on your home loan.
The annual percentage rate (APR) is the mortgage rate plus all fees and closing costs.
Lenders are legally required to disclose APR on advertisements for interest rates. This is so the client knows how much in fees they're paying to get that rate.
Pro Tip: The APR has nothing to do with how you calculate your payments or pay your loan back.
What Is An Escrow Account?
An escrow account is money to pay your property taxes and homeowner insurance once a year. Your escrows are usually part of your monthly mortgage payment, and your lender pays your property taxes and homeowners insurance.
- FHA and VA loans require an escrow account.
- Conventional loans do not require an escrow account, but I'm not sure why you'd want the responsibility of paying those bills annually.
[DA] The money in the escrow account is the owner's money, right?
[Daniel] Yes. The unused money in the escrow account is returned to the owner when they sell the home.
What Is A Rate Lock?
Mortgage rates are constantly moving up and down. When a home buyer likes a rate, they can guarantee and prevent the stress of not knowing their rate by locking it.
Pro Tip: Rates can be locked for 30 days or as long as 12 months.
[DiscountAgent.com]
How much do rate locks cost?
[Daniel]
Rate locks vary significantly based on the loan amount, the length of the lock, and the rate the borrower selects. If they choose to lock the par rate (rate without discount points or lender credits), there's no extra cost for that lock.
Most locks between 30 and 60 days won't require any upfront fees. Instead, the cost of the lock will be paid at closing or financed into the loan.
For rate locks longer than 90 days, the buyer will probably be required to pay an upfront fee to the lender.
Down Payment Gift Money
[DiscountAgent.com]
Who can gift the down payment to the borrower?
[Daniel]
Relative, a friend of just about anybody can gift them any money for a down payment. A gift letter form is required to be signed.
Pro Tip: A real estate agent can not gift the buyer money for a down payment.
Closing Cost Vs. Pre-Paids
- Pre-paid are escrow accounts for property taxes and homeowners insurance.
- Closing costs include title document and recording fees, title insurance, appraisal, and loan origination fees.
What Is A Closing Disclosure (CD)?
Utah mortgage lenders must provide the borrower with Closing Disclosure at least three business days before closing on the home. The CD details all the closing costs and terms associated with the loan.
Pro Tip: Closing Disclosure (CD) itemizes the mortgage payment, terms of the loan, and any closing costs associated with the loan for the buyer to review.
Do Not Quit Your Job
Do NOT quit your job before closing, even if your new job pays more money. The lender will re-verify employment right before closing.
Do NOT go on a shopping spree before closing on the loan. The lender will pull your credit before closing to ensure your debt-to-income (DTI) ratios meet your loan requirements.
When Are Mortgage Payments Due?
Payments are due on the 1st of the month and late after the 15th. If your monthly payment is past 30 days late, it may negatively impact your credit report.
A typical late fee is 2-3% of the monthly mortgage amount, not the loan amount.
Credit Score Required For The Best Rates?
- The best interest rates on conventional loans require a credit score of 760 or higher.
- For FHA & VA loans, you'll need a credit score of 720 or higher to receive the best available interest rate.
- Jumbo loans have the highest credit score requirements. You'll need a credit score of 800 to enjoy the lowest rates.
What Is An Appraisal Waiver?
[Daniel]
When the loan officer requests approval through an automated underwriting system (computer program) on the property the borrower is purchasing, Fannie Mae or Freddie Mac waives the requirement for an appraisal based on comparable real estate sales.
You can get an appraisal waiver on home refinances and purchases.
Down payment amounts can also influence the appraisal waiver results. The higher the down payment, the lower the risk for the bank, which increases the likelihood of receiving an appraisal waiver.
How Do You Offer Lower Loan Costs?
[DiscountAgent.com]
What are you doing differently from other Utah mortgage lenders that you can offer such low rates?
[Daniel]
Unlike the larger lenders, we don't have a high overhead, and we negotiated our contracts with the banks and set lower yield spread premiums from the banks based on volume.
Other lenders have expensive leases, underwriters, funders, and in-house staff. All these costs add up and get passed on to their clients. They need to make more money on each loan to stay afloat.
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