Looking to purchase a home in Los Angeles and not pay all cash? The way to get started is to go through the pre-qualification and pre-approval process with a lending specialist. We are happy to provide a list of trusted contacts in the LA area that you may want to consider. Contact us >
Pre-Qualification versus Pre-Approval
- Pre-Qualification is how much money a bank will lend you based on your income, assets, and debts. Pre-Qualification is typically done over the phone with a lending specialist. This is the first step to get started in the buying process. The lending specialist will do a minimal credit review over the phone which means discussing your credit background. When you begin the Pre-Approval process the lending specialist will actually check your credit but during Pre-Qualification they will simply gather basic information regarding your financial and credit situation.
- Pre-Approval is a more formal process and includes completing a loan application on-line and providing documentation regarding income and assets. During the Pre-Approval process the lending specialist will ask for authorization to check credit in order to analyze debt ratios. Pre-Approval is typically done when you start looking for houses with a real estate agent or prior to writing an offer.
What Factors Affect What I Can Afford?
There are three factors that affect how much you can afford when you decide you would like to buy a home:
- The down payment: do you have enough liquid cash to make a down payment?
- Your ability to qualify for a loan: as mentioned earlier this is determined during the Pre- Qualification & Pre-Approval Process
- The associated closing costs on your home.
Understanding Loan Types
When you begin investigating mortgages, you’re faced with a lot of pesky jargon and acronyms you probably haven’t dealt with before now. But don’t get discouraged! We’ll explain your options and help you understand the benefits and tradeoffs of picking one over another.
30s, 15s and 10-years, oh my! Why does term matter?
One of the first decisions you need to make about your mortgage is how long you want the loan to last - this is called the term. A longer term will offer you lower, more affordable monthly payments but you will end up paying more in interest over time and your home equity will be slower to build.
7/1, 5/1, 3/1: Why are we talking about ARMs?
Another big decision you’ll have to make is whether your loan will have a fixed rate or variable rate. Variable rate mortgages are also known as Adjustable Rate Mortgages or ARMs. Despite their name, ARMs start out with a fixed interest rate for a set period of time - indicated by the first number. The second number refers to how many years are between rate adjustment periods.
For example, a 5/1 ARM will have a constant interest rate for the first 5 years of the loan and will then adjust to market rates at the end of the 5th year, continuing to adjust annually thereafter.
The loan term of an ARM is 30 years, but these mortgages are rarely held for the full term before the home is sold. An ARM will typically offer you lower initial interest rates - and therefore lower monthly payments - at the outset of your loan; they tend to be best for home-buyers planning to own a home for a short period of time before selling.
Before shopping for a home, you should consider the different mortgage loan programs available so that you can choose the one that best fits your particular situation. A fixed-rate mortgage will have the same payment for the entire life of the loan; however, you may need more income to qualify, as the mortgage rate is usually higher. Another disadvantage of a fixed-rate loan is that you will need to refinance the mortgage if you ever want to benefit from lower interest rates that might become available. On the other hand, you may find it easier to qualify for an adjustable rate, which offers a lower initial interest rate. While this may mean a lower monthly payment at first, if the interest rate increases, so will your monthly payment. If interest rates increase significantly over the term of the loan, you could end up facing a monthly payment far more than you can afford.
Conforming or jumbo: Which one is better?
A conforming mortgage is the most common type of mortgage and is the right solution for most people, though it may not be suitable for many in high cost areas such as LA. It’s called conforming because it must “conform” to certain standards established by government-backed mortgage securitizers Fannie Mae and Freddie Mac. In 2017, a conforming loan must not exceed $424,000 in traditional markets or $625,500 in high-cost markets and the down payment is set at 20% or more of the total home value (we’ll talk about options for low down payment options next). In Los Angeles County, the limits are $636,150 for a one-unit property and $814,500 for a two-unit property.
Jumbo mortgages come into play in housing markets where property values are particularly high and a conforming mortgage is not large enough to cover the total loan amount. Qualifying for a jumbo loan usually requires lower debt-to-income ratios, higher credit scores, larger down payments and higher emergency saving funds than qualifying for a conforming loan.
Low down payment options: What if I don’t have 20% for a down payment?
There are a number of options for homebuyers to purchase a house without having 20% for a down payment. There are a few programs that allow borrowers to get a mortgage with as little as a 3.0% down payment on the home, going as low as 0.5% down in certain cases. There are also specialty programs - like those through the Department of Veteran Affairs (VA) and Department of Agriculture (USDA) - which offer mortgages with as little as zero down for specific groups such as veterans or those in rural areas.
How Much is My Down Payment?
Most loans today require a down payment between 3% to 20%. Contrary to what many people think, there are still loans that have lower down payment requirements depending on the type and terms of the loan. Keep in mind, if you are able to come up with 20-25% down you will eliminate mortgage insurance.