Meredith Medvec from Prosperity Home Mortgage, LLC is sharing the ins and outs of qualifying for a mortgage. She answers common questions from first-time home buyers in the Millennial generation.

What is your experience in the mortgage industry?

I am with Prosperity Home Mortgage. They have been around for a while but are newer to Jacksonville.  Prosperity is based out of Chantilly, NC with operations in Raleigh, North Carolina.  I personally have been in the business since 2005.  The last nine years I worked for a very large bank.  I love what I do! I still wouldn’t be in the industry if I didn’t.

How do you know when you are financially ready to buy a home?

Sometimes people ask that about having a baby: when is the right time to have a baby… well, I don’t know if there is a “right” time.  One thing I want to say about purchasing a home is you want to have some longevity of living in the home. I would say you want to be there 2-4 years.  You are going to be investing some of your hard earned money in the form of a down payment and you want to be able to get some equity out of it when you sell.

Moving is not fun either.  You certainly want to stay there a certain amount of time.  I think your job has a lot to do with that.  If you think there is a potential that you could move in 1-2 years, maybe renting is the best option right now.  You need to weigh that in your decision to rent or own.

What do you look for when people apply for a loan – credit score, income, etc.?

When a borrower goes through a basic pre-approval process, we look at income, assets, employment, and credit.  From an income perspective, you aren’t required to have two years at your job.  We have situations where people are coming right out of college.  In a situation like that where the borrower is entering the work force, he or she can provide a transcript or diploma, or an offer letter or first pay stub.  You don’t have to have an established career if you are coming out of school.

If you are already in the workforce, we are going to look at your last two years of employment.  We verify your W-2s and pay stubs.  We look at your assets which is where your downpayment is coming from as.  Then of course, your credit.  We pull a tri-merge credit report from the three big credit agencies – Experian, Equifax, and Transunion.  We will take the median (or middle) score from the three. For example, if you have credit scores of 700, 715, and 730, we take 715.  We don’t do any math – we just take the middle one.  If you and your husband apply together, and your middle credit score is 715 but his is 640, we will use the 640.

If you are married, are you required to have both spouses on the mortgage?

You do not have to have both people on the mortgage.  If you do not put your spouse on the mortgage, then you cannot use your spouse’s credit or income to qualify.

Some students have graduated and cannot pay off their student loan debt.  Because of this, many graduates feel like they cannot buy a house.  How do you factor student loan debt into qualifying individuals for a mortgage?

We use these guidelines to calculate the monthly loan payment. Even if the student loan is deferred and you don’t have a payment right now, you will have a monthly payment during the course of the 30-year mortgage. We use the calculated monthly payment to determine your debt-to-income ratio, and determine if you are in the parameters to qualify for a loan.

Because of student loan debt, most Millennials do not have 20% saved for a downpayment.  What are your options if you do not have a 20% down payment saved?

Most people don’t have 20% to put down for a home; it is not just Millennials.  It is a common problem.  Also sometimes it is not about having the money, it is about utilizing the money you do have and deciding whether you want to put it all down on a house.  There are lots of programs out there where you don’t have to put 20% down.

There are conventional programs (invested through Fannie Mae and Freddie Mac) where you can put 3% down and don’t have to pay any mortgage insurance premiums.  Fannie Mae and Freddie Mac are two entities that provide the conventional loans out there. Then you have Federal Housing Administration (FHA), Veteran Affairs (VA), and U.S. Department of Agriculture (USDA) that provide loans as well.  You as the borrower do not talk to all these entities.  The loan officer’s job is to find the best product that works for the borrower from these entities.

FHA is typically the main resource for first-time homebuyers, since they used to require the lowest down payment (3.5%).  On a FHA loan, there is a monthly mortgage insurance premium (MIP).  With FHA, you have an upfront mortgage premium payment and a monthly insurance premium.  The upfront mortgage premium payment is paid one time and is 1.75% of the loan’s value. It is added into the total loan amount and you pay for it throughout the course of the loan.  The monthly insurance premium is for the life of the loan.  For 30-year fixed your mortgage insurance premium will be about $70 a month per $100,000. For a $200,000 home, you would pay about $140 a month for the mortgage insurance premium.  There is no way to get out of it.  You can’t get an appraisal nor can you pay the loan down to stop paying the monthly premium. That is a downside to an FHA loan. FHA is great for certain credit situations or if you don’t have as much credit. The downpayment though is why historically first-time homebuyers used FHA loans.

On the conventional side, there are quite a few programs that require less than 20% down.  Now there are programs that require only 3% down – with and without a mortgage insurance premium. The mortgage insurance is to protect the lender in case of default from the borrower. We usually see insurance as something to protect ourselves.  Mortgage insurance is not meant to protect you, but rather the lender in case you don’t make your mortgage payments. Because of this, when you don’t have a mortgage insurance premium, you will usually pay a higher interest rate.  The higher interest rate is offsetting the risk to the lender.  On the conventional side, the premium is called Private Mortgage Insurance (PMI). FHA is MIP and conventional is PMI.  It is private because there are separate companies that negotiate premiums like Radian. The buyer does not shop around for the insurance – the lender does.

If you can qualify on the conventional side, you can get rid of the mortgage insurance.  The first way is to pay your loan down to a 20% equity position.  The second way is to refinance if your property increases in value.  You would pay for an appraisal through your lender.  Once the appraisal comes back, the appraisal would need to show you have 20% equity to remove the PMI.

Those are the main differences I wanted to discuss between conventional and FHA.  They are both great programs and fill different needs.  It is helpful to know the ins and outs of the programs to know your options.

How can you estimate closing costs? What closing costs can you expect?

A general rule of thumb is anywhere between 2% – 5% of the purchase price.  If you are buying a $100,000 house, you would estimate between $2,000 – $5,000 of closing cost. The average closing cost, according to a recent survey, is about $3,700.  It truly depends on purchase price though.

Generally, when you apply for a mortgage, the lender will have you pay the credit report fee and the appraisal up front. That averages between $450 – $525 and you can pay with a credit card if needed.  Throughout the process, you typically do not pay any other fees until closing.  They are called closing costs because you pay for them at closing.  Items included in closing costs are tax stamps, title, title insurance, recording fees, prorated taxes, and insurance.

Insurance is one of the biggest things people don’t budget.  When it comes to the homeowner’s insurance, most mortgage providers collect 12 months of insurance at closing.  Because the property taxes are prorated, I think most buyers do not anticipate the cost of 12 months of insurance.

How do you pick the right mortgage provider?

I definitely recommend shopping around.  I would not recommend going with a random “joe” especially if you are purchasing in certain areas. You wouldn’t get shoulder surgery based off one surgeon’s opinion.  Your home is one of your biggest investments.  You can ask your Realtor or others for recommendations.

One way you can compare options is to ask for a loan estimate.  A loan estimate is one or two page document that every lender can supply you and will help you compare the cost associated with getting a loan from that provider.  The loan estimate breaks down all of the fees ahead of time.  It should mirror your closing costs at the end of the transaction.  The industry is very regulated so you should not have a closing disclosure at closing that is double the loan estimate.   There are certain fees that cannot be changed from the loan estimate to the closing disclosure.  Then there are certain fees that are allowed a small variance.  Usually if you know your credit score and a rough estimate for your home shopping budget, the lender can give you a rough estimate without pulling your credit score.  The lender will not be able to give you a pre-approval until they pull your credit however.

An option that Prosperity Mortgage provides as well as other companies are “Lock & Shop” options.  You can lock in your interest rate for 90 days.  That means even if interest rates go up, you will be able to keep your lower rate when you locked it.  Additionally, we can get you pre-qualified ahead of time.  We would qualify you based on a “To Be Determined” (TBD) property.  We use your planned purchase price for the TBD property to work on qualifying you ahead of time.  You would provide us with all your necessary documents.  This option lets you know you are truly pre-qualified rather than just pre-approved.  There is a difference.

Pre-approval means the buyer has given the loan officer their basic information – income, assets, employment, and credit.  The information has not been verified by an underwriter. Because it hasn’t been seen by an underwriter. there are things that could show up on the back end.  It makes you a stronger buyer if you are pre-qualified and you have a commitment letter.  A commitment letter is what you get when the loan has gone through underwriting. Certainly, things can happen such as a buyer loses their job or another scenario but typically pre-qualification is a stronger option than pre-approved.  Additionally, because an underwriter has seen all the documents, it is a faster closing process.

Should you always go for the provider with the lowest interest rate?

A good way to select a lender is by looking at the annual percentage rate (APR).  When a lender quotes you the interest rate, he or she should be quoting you the APR as well. APR should be included on your loan estimate.  If you have a 30-year fixed loan and your interest rate is 5%, but your APR is 5.75%, then you would know you are paying high closing costs.  Your APR should not be significantly higher than your interest rate.  APR is factoring in the closing costs over the course of the 30-year loan.  Prosperity Mortgage has an app with calculators for different types of loans for you to calculate payments.

How would you suggest picking a loan officer?

Above the rates and costs as most of those items will be pretty competitive, I feel the service your loan officer provides is equally important.  One way to know whether a loan officer gives a good level of service is through your real estate agent.  Your agent may have worked with the loan officer on multiple occasions, or may have colleagues who have experience with the officer. That is why I don’t think you should go with a relative or friend.  You should go with who your agent thinks is: professional, communicates in a timely manner, has successfully closed deals before, and has overcome challenges before.  Zillow also has surveys for loan officers that you can read and use when selecting a loan officer. One question they ask is whether the loan closed on time.  Feedback is critical to picking a good loan officer.  There are a lot of great loan officers in the area, but there are quite a few bad ones as well.  Not all loan officers, or real estate agents, are created equal.

If you are buying a fixer-upper, how is the process different?

There are two paths with a fixer upper.  On a typical path, such as FHA, VA, or USDA, you are going to get an appraisal and Wood Destroying Organism (WDO) inspection completed.  If items come back on the reports such as the property needs a new roof, then the items would need to be fixed before a loan could be issued.  That could be a huge issue, but it protects you and the loan provider.

Another option is a renovation loan either through a conventional or FHA program.  There are a lot more homes a buyer could look at if they were willing to do a renovation loan.  It opens a lot more doors to homes that may be in their budget.  The buyer doesn’t even have to do the work; it is completed by a licensed contractor.    A buyer may look at a house and say I am not going to buy it because of this and this issue.  If you did a renovation loan though, you would be able to fix those issues as it is covered in the loan.  The house just has to appraise to the correct value once the repairs are complete.  You will close on the house like normal (subject to an appraisal) and then checks are cut after for the work.  It is a great program. There are a lot of options.