Home Mortgages 101 (First Time Buyers Guide) Part 1

Christian: [0:01] Hello, hello, and welcome to another episode of the Awesome in Seattle podcast. This is your host Christian Nossum of the Awesome Nossum Group and today we are talking a topic that pretty much everyone that has ever thought about buying a house has asked and wondered about, and that is the home mortgage process. So we are going to start from scratch. We are going to end after you own the home and you make your first mortgage payment, and a little bit beyond that. So we're gonna go through the entire mortgage process from before you even really start to the end. Everyone that is ever going to consider buying a house, this is going to be a very, very valuable episode. And because of that, I have a s- very special guest, an expert in the mortgage industry, Mr. Dan Keller, New American Funding.

Dan: [0:43] Hey. This is gonna be fun.

Christian: [0:44] This is gonna be fun.

Dan: [0:45] Back in the old days in the radio studio.

Christian: [0:47] Yeah. Our old Seattle Real Estate radio show- … on AM whatever. KOEL Business Radio. KKOL 1300 AM. There you go. Said that about 400 times. So yeah, Dan and I used to have a radio show. Obviously, we transitioned to a podcast because it is 2023 and people don't listen to AM radio anymore.

Dan: [1:03] Very few.

Christian: [1:04] Very few. Yeah.

Dan: [1:05] Seahawks game maybe.

Christian: [1:06] Yeah, maybe. Yeah. But that's all on FM as well. Mm-hmm. Let's get right into it. Yeah. So right at the beginning when people first reach out to you saying that they want to buy a house, how does that process work? What information do you ask for?

Dan: [1:20] Well, I take a different approach, Christian. I, and I know you know this. We've been working, you know, together for about 12 years or so. And how you and I both got connected about 12 years ago- Mm-hmm is you had a, a blog called Deals in Seattle. Yep. And I had a mortgage blog teaching people how, how, exactly what we're talking today- Exactly … how to get pre-approved, loan programs. And so we take more of an education-based approach to mortgage financing. Yes, at the end of the day, you want to get pre-approved. You want to know your numbers. Uh, but I believe there's a process that you need to go through to understand your numbers. Mm-hmm. And that's called budgeting. So we always start with budget-related questions. So typically, what are you currently paying in rent? You know, ideally, if you could write your perfect budget for your home purchase, what would that look like from a monthly payment standpoint, and then of course, your down payment standpoint. So we really focus on those three things. And then I think something that a lot of mortgage people don't talk about, a lot of real estate agents do, but mortgage people very rarely ask, "What is your timeline?"

Christian: [2:17] Yeah.

Dan: [2:18] Because as you know, Christian, just in the last year, mortgage rates less than a year ago were in the threes. Now we're at the beginning of 2023, and we're coming down from being in the high sevens. Yeah. And so mortgage rates move just like the stock market does day in and day out. Mm-hmm. So part of that budgeting and planning portion of building out your perfect mortgage and buying your first home, you have to consider timeline, and you have to have some education around what the market has been doing, what it's doing now, and where do we think it's going. Mm-hmm. So we start with that.

Christian: [2:47] Yeah. Yeah, and the, the way that we like to do this, and this is not a sales pitch, but this is how we as… I'm a real estate agent, he's a mortgage guy. How we like to do this is first having a strategy session with you. They're, they're totally free. It's 100% free. We can do them in person or online, just over Zoom. It's a half-an-hour one-on-one conversation with us. Yeah. Meaning us, both of us and you. And we go over all of these questions. We go over really what your budget looks like, and we start from there. But I don't really wanna go over that, because that's, generally most people, even lenders, do not do that. Real estate agents definitely do not start there, even though that is the correct place to start. So really, the next question that a lot of people ask, which this is not really the right time to ask it, but they always ask this. Mm-hmm. "When is my interest rate locked in?"

Dan: [3:34] Yeah, that's a really great question, one of the top questions that we do get asked up front. Mm-hmm. You have to understand that mortgage rate locks are tied to two things, a property address and a loan application, which is you- Mm-hmm the person. So- We'll have the loan application done up front, and you'll be pre-approved, and you might wanna lock in your interest rate, but you don't have a prop- you don't have a mutually accepted contract yet. Yeah. So there is no property address. Now, I will say this, because I'm sure there's some real estate agents and mortgage lenders that'll listen to this podcast, and I don't want them going, "Oh, but Dan, what about?" Yeah. There is a program called Lock and Shop. We have that just like o- uh, other lenders do. But you pay a bunch of unnecessary fees to lock in an interest rate, and there is timelines tied to it and deposits tied to it. If you're working with a pro, they can help educate you on the market. You can save money by not using that program. So for the most part, you need a property address, and you need a full mortgage pre-approval in order to lock your rate.

Christian: [4:31] Yeah. So in other words, need to be under contract- Mm-hmm … for a house. Then after that is when you lock in your interest rate. And Dan does a great job of locking in that interest rate at the right time as well. He's paying attention to the market. He is understanding, okay, well, just because you got under contract today does not mean we lock your rate today. If there's big news coming out, the feds meeting or a jobs report or something like that is coming

Dan: [4:55] up- Right now, we're not locking rates today. Yeah. I'm waiting for that number because I know that inflation number, that CPI number, is gonna be down-

Christian: [5:01] Mm-hmm

Dan: [5:01] most likely, and it's gonna positively impact interest rates. So yep- Yeah … stuff like that's very important, Christian.

Christian: [5:07] Yes. Yep. All right, so in that interest rate lock- conversation. What happens if your lock expires during, like you're under contract and somehow that lock expires, what happens?

Dan: [5:18] Great question. So, uh, this is part of the education process up front. So I do have in my mortgage concierge packet- Mm-hmm … that I go over with every pre-approved client, I wanna say it's page 13, but it, it, it's titled Rate Lock, and it gives you about seven or eight bullet points around your rate lock. So if, so you're informed of this up front, if you go under contract, right when we lock your interest rate, we have an option to do a 15-day rate lock, a 30, a 45, a 60, a 90, et cetera- Mm-hmm all the way up to 180 days. So based off of your closing date, which is found on your contract- Yep … we will suggest the lock period necessary for your contract. Now, let's say with new construction, uh, for example, the builder's was delayed on getting windows, which we saw last year, for example- Yep … and we need an extra two weeks. We have to extend the rate lock. Okay? Now, can you cancel that rate lock? You can, but you have to wait another 30 days to re-lock your loan. Mm. So there's some nuances that you have to, yeah, kind of review relative to that. In most cases, with most private mortgage lenders like us- Mm-hmm … direct lenders like us, if you need a couple of days, I can go to our bank and say, "Hey, we need a one or two-day extension." That doesn't happen at the national level with banks and credit unions, I know for a fact, so you're gonna pay for that. But normally, if you have to extend the rate lock, you go back to, in a normal market, if you have to n- renegotiate, maybe ask the seller to help pay for that if it's their fault. We leave that up to you guys. But at some point you're gonna have to n- you're gonna have to negotiate an extension. Yep. In most cases, it falls, it comes out of your pocketbook, the borrower.

Christian: [6:51] Yeah. Yep. All right, so Dan, if two people that are not married want to buy a house together-

Dan: [6:57] Mm-hmm … Speaker: how does that work? Do they both go on the loan? W- uh, do they o- both own the property? Like, how does this work logistically? Yeah. That's a great question. So let's talk about this kind of more from a broad standpoint. Let's go all the way back to 2011 and 2012, early on in my mortgage career. Mm-hmm. President Obama was in the office, and they did a really good job kind of, um, rewriting guidelines to make it more turnkey and clear when it comes to, you know, before you had to designate if you were married or not. Yep. You know, same sex was- Mm-hmm … was kind of an issue back then, right? Yep. In regards to guidelines and are you married? So anyways, President Obama did a great job, neutralized all of that, to the point where I can answer this question super clearly now because this has come up. Yep. In fact, I had a client that, um, came to me about three years ago, had changed genders- Mm and was really worried that he couldn't buy a house at that time.

Christian: [7:49] Mm-hmm. Mm-hmm. Not

Dan: [7:50] a problem.

Christian: [7:50] Yeah.

Dan: [7:51] You have an ID-

Christian: [7:51] Doesn't

Dan: [7:52] matter … and we go from there. Yep. And it doesn't matter. Yep. And actually bought it with a partner. Yep. So here's the thing, does not matter. You can buy a home with your mom, dad, brother, sister, aunt, uncle, friend.

Christian: [7:59] Doesn't matter.

Dan: [8:00] How you write the contract- Mm-hmm … will tell us how the title will be vested. Mm-hmm. Now, let's say borrower one- And you have borrower two or- Mm-hmm … buyer two. Let's say we don't need buyer two to qualify for the loan. Mm-hmm. Then we just use borrower one to qualify for the loan, but both are on the property, and in Washington it would be 50/50, unless you then go to an attorney- Yep after you buy the home and say, "We're gonna, we're gonna write up a partnership agreement. I have 70% ownership, you have 30," and that's good for tax purposes- Yeah … and then obviously if you sell down the road. So.

Christian: [8:32] Yep. And we have an entire podcast episode about this specific- Cool … subject. Yeah. Episode four- 40, No- Not Married But Buying a Home Together. So check that out if you wanna learn a lot more- Yeah … about that specific thing. Yep. All right, so let's pretend now they've s- gone through kind of these very, very initial steps. Mm-hmm. We're in, now in the early steps, but those were, like, pre-early steps. We talk a lot about pre-underwriting in our Beers and Home Buying class. You can always check those out, beersandhomebuying.com (opens in a new tab), that's beersandhomebuying.com (opens in a new tab). Hour-long class, totally free. We have 'em every single month, uh, other than December, and you should totally come to those. But in that class we talk about pre-underwriting a lot. What is the difference between pre-approval, which most people have heard of, let's define that first, and pre-underwriting?

Dan: [9:21] Great question. So pre-approval is kind of the standard in the mortgage industry. So if you, whether it's a bank or credit union or a mortgage broker, they're gonna have you nowadays, like you said, it's 2023, so you're gonna go to a website- Mm-hmm … and they're gonna give you a secure online form. You're gonna fill it out, full name, middle name, last name, address, social security number, date of birth. Enough information for the bank or the lender to run your credit. Yep. Okay? On top of that, there's gonna be a section on employment and assets, and so it's gonna ask you how much you make annually. You're gonna type that in to the best of your knowledge. Uh, as far as assets, you're gonna type that in as the best of your knowledge- Mm-hmm based off of your bank statements and your 401statements, investment statements. The problem with a pre-approval, it's only as good in regards to what you the consumer put onto that application. Yeah.

Christian: [10:12] Whatever you input is what they base it off of.

Dan: [10:14] And they run it through an algorithm, a formula, and they say, "Hey, congratulations, you're approved for a million dollars," or a million dollar, you know, home purchase. So- The dis- the issue that I have with that, and I know real estate agents do too- Mm-hmm … is you're under a legal contract on a home. If something goes wrong, you have this thing called earnest money that's at stake. Yep. And a lot of the times it's a 20, 30, f- 40, 50, $100,000 earnest money deposit up front, and that is a good faith deposit that you're gonna perform, that this loan is going to close. Yep. So what we have done, and you were a big part of this back in 2014, I know in our business you encouraged me to talk to my bank about making our competitors, or, or excuse me, our clients more competitive in the market- Yep … and h- asking if we could have them fully underwritten up front.

Christian: [10:59] Yeah.

Dan: [10:59] And we did. Yep. And ever since 2014, that's been a strategy in my business. Yeah. It's a non-negotiable. So the difference between pre-approval and pre-underwriting is we still have you fill out that online form, which like I said, is the standard. What we do is we take it to another level. We validate and verify everything. So we don't just look at your credit score. Cool, you have a 760 credit score. We look at your report and see if anything's on there that could jump up, like maybe a loan that's in forbearance that's not reporting, right? Mm-hmm. That will hit your debt to income ratio. Okay? Um, we do a verification of employment, so we get a breakdown of your base and your bonuses and/or your overtime so we get a true calculation of your income- Yeah versus a broad gross. And- And

Christian: [11:39] that can change things dramatically- That's the number one … 'cause most people go, that's… Yeah. It's what I was just gonna say. Yeah. That's number one. Most people go, "Yeah, I, I made $100,000 last year." And they're like, "Well, actually no, your base was 70 and then you made 30 in, in bonus or stock vesting- Yeah or whatever." And-

Dan: [11:54] And if it wasn't a two-year consecutive history of that, you only get to use the ba- the base. And so you talk to any realtor or mortgage lender, and the majority of the problems that people have in the mortgage process where deals don't close at all or they close late, it comes down to income and employment typically. Yep. Okay? Not credit or anything like that. So we do a full verification up front. We do a tax return verification up front, and that's basically what the underwriter is eventually going to do to approve your loan, to fully approve your loan. Mm-hmm. We do it up front so that it's only subject to a mutually accepted contract, so an offer accepted on a home, clear title on that home, and then an appraisal on that home, and lastly, like Christian and I just talked about, rate lock. That's it. That's all that's left. Yeah. So big difference.

Christian: [12:38] Big, big difference. And one big, giant positive of being pre-underwritten is you are very confident at that point that you can get the loan. You could potentially, if it's a competitive situation, you could potentially waive your financing contingency. By waiving that, you look to the seller as if you're an all cash offer. Mm-hmm. That's huge. That makes you a much stronger offer in their mind. Yeah. So that's one of the big benefits of doing that. We may be going out, back into a competitive market. We're already trending there. Um, so we'll just have to wait and see how that happens. All right, so now that they have gotten pre-underwritten, um, how long does it actually take to get pre-underwritten? Is it- is this like a, a two, three-week process? Is this like, what?

Dan: [13:22] It's typically a two to three-day process is about it. Yeah. Yeah, it's not that long. It's, it- Well- … depends on the motivation. This is,

Christian: [13:28] this also depends on the bank.

Dan: [13:29] The bank, yeah. The mort- the mortgage person. Yes. Most banks and credit unions don't pre-underwrite you. But in our office, we know it's urgent and it's important, and again, based off of the timeline, right? Mm-hmm. But in most cases, we just push you forward. So 24 to 48 hours after your pre-approval.

Christian: [13:45] Yeah. Yeah. Yeah, and that's, that's a big deal. Um, again, m- one thing that we kinda just glossed over right there with pre-underwriting is most banks and credit unions will not pre-underwrite you. Uh, especially the big banks and credit unions. They just don't have a process for it. Yeah. They don't want to spend the time on that. Um, working with someone that's local and that's smaller is able to do something like that and offer that, which is a huge benefit to you and it doesn't cost you anything more than getting just pre-approved, so it's huge. All right, if you're going to use stocks or retirement accounts or anything like that, when should I start cashing out those in order f- to have those for my down payment, and, uh, what are the tax implications of that, and how do I figure that out?

Dan: [14:26] Yeah, good question. I think most of the tax implications are found on the investment accounts. Mm-hmm. Okay? Oftentimes with buying a home, you can get the fees removed, and sometimes the tax implications. I would say talk to your tax person or your HR department on that. Mm-hmm. I always tell my clients, if you know you're gonna be liquidating funds from an investment account, make sure, one, they're liquid, and then y- understand the terms of withdrawal, and number three, it's not hard to just call your human resources department and say, "Hey, if I'm doing this, how long does it typically take?" Normally, it ta- I would say budget about 7 to 10 days if you have to cash out stocks, stuff like that. Mm-hmm. Um, but I'd start your research on that upfront.

Christian: [15:09] Okay.

Dan: [15:09] Yeah.

Christian: [15:09] So before they make an offer.

Dan: [15:11] For example, if you work for Google and you have to cash out Google stock, sometimes you can only do that during phases of the year. Certain

Christian: [15:18] windows, yep.

Dan: [15:18] Yep, some windows. So just be cautious of that, yeah.

Christian: [15:20] Yeah. Are there other companies that have that same thing, certain windows?

Dan: [15:23] A lot of the tech companies do. Got it. But if it's a 401or an IRA, totally different. Yeah.

Christian: [15:28] Mm. Okay, that's

Dan: [15:29] good to know. A lot more accessible,

Christian: [15:30] yeah. How much is a typical down payment in the Seattle area?

Dan: [15:34] Yeah, that's an easy one. That's a good one. So the average in 2022 was 7%, was- Yeah … the average for first time homebuyers was a 7% down payment. So I like to round down. Budget in the back of your mind 5%, that's pretty average.

Christian: [15:46] Yep.

Dan: [15:46] Yeah.

Christian: [15:47] Yeah. That's huge. Most people, that's the biggest myth in real estate, too. Yeah. Most people- Yeah … we teach this class, again, every single month. Yeah. Every single time we get a raise of hands, how much do you think it is? I'd say 70, 60, 70% of the people in every single class believe it's a 20% down payment. Yep. And this is their biggest takeaway is that you do not need a 20% down payment. In fact, most people have a 5 to- Yep … 7% down payment. Yep. If people are using gift funds, when do they need to get those, and how do they go about transferring, and what are the special rules about gift funds? Yeah.

Dan: [16:20] Where do they come from? Part of that planning upfront, budgeting- Yeah … we talk about that. And so that's a completely different, uh, conversation we have with clients that are getting gift funds. I have a packet that I give them that clearly ex- and a video, kinda like you have a podcast- Yep … that I have you give to the donor and explains the tax implications, the myths, the rumors around that for donors, that they're gonna get hit with taxes, they're gonna get hit with penalties or not. Um, so we walk you through that process as well. Same thing, if you're just transferring money from parent's account to your account, that can happen in 24 hours or less, but we educate you on that process upfront, and I actually ask you to send the video that I've made, watch it, and I actually did that with my CPA. Mm. So it's really good. Cool. You actually have a tax professional walking you through how to do it right. That's huge. And then us, and then I ask you to have the donor watch that as well. Nice.

Christian: [17:08] Smart.