Pulling Back The Curtain On Home Lending
Behind The Scenes S1E01 - Pulling Back The Curtain On Home Lending
In this inaugural episode of Behind The Scenes, Aaron Janus sits down with mortgage lender Vaughn Willanger to discuss how the home lending process works, including information about the different types of mortgages, pre-approval for a loan, and much more.
Below is a rough transcript of the video, which consists of a conversation between Seattle Realtor Aaron Janus and Seattle mortgage lender Vaughn Willanger. Vaughn works at Cornerstone Home Lending, NMLS # 409989.
Video Transcript
Aaron Janus:
Vaughn, how are you?
Vaughn Willanger:
Hi Aaron. Nice to see you. Thanks for having me.
Aaron:
How long have we been working together now?
Vaughn:
Better part of 15 years.
Aaron:
Yeah.
Vaughn:
I think you were about 12 when we got started.
Aaron:
Oh, stop. I think I was actually 14 when we started. We've been we've been working together for a while. A lot of deals we've done.
Vaughn:
Yeah for sure, absolutely.
Aaron:
Thank you for being here today. I thought we would just kind of chit-chat a bit about you know, sort of the inside baseball of mortgage lending. Maybe let people know what's happening behind the scene. Sound like a plan?
Vaughn:
Yeah, let's get to it.
Aaron:
Alright. So, Vaughn, many times when I'm out with a buyer or I get a lead or you know some sort of referral from somebody, we'll start talking and they haven't been pre-approved yet. A lot of people want to get out there and start looking at homes, etc, and I always tell them you need to talk to a lender. Why is it important, from your standpoint, for them to be pre-approved first, before they get started?
Vaughn:
Yeah, well, buying a house is not like buying almost anything else. It's not point and click, it's you know, it's not quick and easy, it's a little bit of a process. You know, there are a lot of rules and nuance to the rules - we call them guidelines. So it is super helpful to have an idea of what your credit looks like, what the lender is going to use for your income. We can get a look at your debts or liabilities. So yeah, I know it's it's really important to have that idea. I mean, they can certainly look at houses but I think before they start writing offers or get too serious, you definitely want to talk to a lender to make sure you you can do what you want to do or have an idea of what you want to do.
Aaron:
Great great. So, what is involved in the process, if I say -- if I send a client over to you and they want to get that process started. Give us a little bit of an idea what that process looks like.
Vaughn:
Yeah, and a lot of times it kind of depends on you know, where the client is in the process. If they're really just trying to get a sense of what they might be able to afford or what they'd need to come up with for down payment or some of those things. A lot of times it's just really initial just conversations. If they're a little more serious, then we want to get an application, which we can do over the phone, they can do online. It takes maybe 10-15 minutes. And from that we're going to get credit. And that really is sort of the starting point we can kind of get an idea of what their monthly obligations are, what their [credit] score is, which really is important. It'll drive their rate, and it will sort of determine what programs they may or may not have available to them. And then we'll talk about income, we'll talk about assets, we call them, and the money, where it's coming from. The important thing is I like to try to get some of that documentation up front. I really review it so that when we're sending people out they are really well qualified because a lot of people say "hey, I'm making this much money" and then we get their pay stubs and it might look a little different to a lender where maybe they don't have a history in that type of employment or maybe they don't have a history of making that amount of money or if it's commission, for example, we have to average it. So we want to definitely get our arms around that piece up front so that we can set them up for success right off the bat.
Aaron:
That's great. So, Vaughn, take us through a little, in a little bit more detail when they're making loan application, when the buyer is serious and they want to get out there and look they want to have a pre-approval letter. Take us through that application process - what's necessary for them to produce for you, and just a little bit about that.
Vaughn:
Yeah, so, some of the terminology in [home] lending, I think, gets a little convoluted and the whole idea of the pre-approval is, in my opinion, is a little bit weak. Because a pre-approval technically is someone just applying online and getting this automated decision which unfortunately may or may not translate once they provide documentation to support that. And so, you know, the whole idea of this spaceship mortgage where you just click a button and you're ready to buy a house -- I really I don't like that. I feel like that's very misleading. Maybe there's a few clients that that will actually work for. But in most cases, you're going to apply, then you're going to need to provide some documents to help us determine - to make sure really, your application is correct. So things like, maybe pay stubs, W2's, tax returns. We may need bank statements. And again, what the lenders really want to do is we want to make sure that what you've put on the application is what we can actually document and support. And so, for my clients, and your clients, what I really like to do is go that extra step. We can certainly just do an application and do a pre-approval. I'm happy to do that, but to really, like I said, be solid, be 100% confident when they're making that offer so that when we're presenting that offer and talking with listing agents, and you know sellers and trying to put our clients in the best light we can say, hey, we've really reviewed all this. When we basically, you know, we've done more than a pre-approval. We really have them approved and they're ready to go. We just need a contract and an appraisal at that point. So as far as documentation, it will depend on the borrowers. It depends on their type of employment, how long they've been doing it, and you know, what program ultimately we decide to go with.
Aaron:
Outstanding. Ok, so a client has been pre-approved and we go out and we make an offer, we get that offer signed around, and then we send it over to you. What happens at that point? Walk us through that process a bit.
Vaughn:
Yeah, so again, it kind of depends on where we are. If we've got some other documents already then we just add the contract to the file, we order out the appraisal, we get title and escrow going, and we go through what's called an underwriting process where this invisible person behind the curtain so to speak, who is the actual yes/no decision maker is going to review everything that I've helped the client gather and make their final approval decision based on that. And then once that's approved then we move to loan documents for signing. Those get sent to escrow, and then the client will go in and sign those. This, it sounds a little quicker, I think, when we talk about it. In general, the [mortgage] process we'll take anywhere from I'd say two and a half weeks to maybe 30 days and certainly can take longer, just kind of depending on how quickly people can provide documents. And then you know, other things within the transaction can, you know, cause delays unfortunately, additional inspections and those kinds of things, but generally we try to get it done within a 30-day window.
Aaron:
Vaughn, there are lots of different loan programs, right? There are all of these acronyms we hear: FHA, VA, USDA, all this stuff. Run us through if you would a bit about the different options. The different programs available to buyers.
Vaughn:
Yeah, sure. I think sometimes people can get kind of hung up with those, and at the end of the day all these loans sort of deliver the same thing, right? We're getting generally a 30-year term, you know, you're very similar in rate, the differences are going to be very subtle. So a lot of it with FHA or VA or USDA is going to be really the rules or the guidelines for each of those programs. So, I mean, every borrower is different and every situation is different. I think what I find is that there's no one size fits all. So when I start talking with a client right away, I'm trying to listen to what their goals are and what they're trying to achieve and then also what they're sort of qualifications are to help them sort of decide like hey, these are going to be your best options. So for FHA, it's going to be a little more flexible. USDA is good if you're buying in a more rural area. VA, obviously if you've served in the military, obviously, we appreciate your service, and VA is a great way for veterans to buy with very little down payment, great rates, and no mortgage insurance. But the best thing is to really have a conversation and again, there's no - I don't really care what program someone goes with. I just want to help them get the best [home loan] terms for what their situation is. And yeah, there's a lot of guidelines, and I always call it nuance because it's really all very similar. So conventional versus FHA, for example, a lot of similarities, but there's very few subtle differences to where maybe we would lean towards one program or another. And again what I try to do is help clients compare those options and figure out what's best for them, just by presenting the options.
Aaron:
Okay, great. So you said with FHA that the guidelines were more forgiving. Like, in what sense would it be easier? Where would a client want to do FHA?
Vaughn:
Yeah. FHA is real flexible with the down payment, and the sourcing of the down payment. Also your debt to income ratio - so basically how much money do you make versus how much are you putting out for your house payment and then other payments - FHA will really let you stretch maybe more than any other program. Also with credit, FHA is probably the most forgiving - FHA, VA probably together are the most forgiving as far as credit. So if you've had some blemishes in the past: a bankruptcy, a foreclosure, repossessions, those kinds of things or just late payments in general, those programs are going to be the most forgiving.
Aaron:
Okay, great. Thank you.
Vaughn you've been doing this for a while now, right? How long have you been doing mortgages?
Vaughn:
Just about 18 years.
Aaron:
Wow, that's a long time. So you're a veteran.
Vaughn:
For sure.
Aaron:
You've probably seen some things in those 18 years.
Vaughn:
I like to say I've seen -- I've almost seen it all.
Aaron:
Almost. Alright, so tell us then, without using anybody's names, of course, especially if they're my clients. What are some things that you've seen? What should people be aware to NOT do when they're going through this process?
Vaughn:
So yeah, the best thing to do is to leave your financials as you present them to your lender. So I would say, with regards to credit, don't open any new credit. Don't worry about paying anything off or paying it down less you're working directly with your lender to pay something off or pay it down prior to close or at closing. I also would recommend: don't move your money around because it just creates more documentation for the borrower. So if you've got three accounts that you're going to source, you know, your down payment from, don't start consolidating until you've talked to your lender and they've got it all approved with underwriting.
Aaron:
It's the reason for that because the underwriter wants to see the movement of that money, and then you have to create documentation to explain it?
Vaughn:
Exactly. Yeah, so lenders, were we're sort of nitpicky, unfortunately, and it's just part of the industry. We want to see where all the money is coming from and where it has come from. We call it sourced, we want to see it seasoned, and yeah, the best thing is just to leave things as they are and like I said, if your lender says, okay now you can consolidate or now you can move it. Then it's okay, but the two biggest things I see are credit and specifically opening new credit, which, try to avoid until after your loan is closed.
Aaron:
So, don't go purchase a new car?
Vaughn:
Don't buy a new car during your loan application. And if you do, it's not the end of the world, but again, everything is just more work for the client and so we try to avoid that. We try to make it smooth, we try to make it as easy as possible.
Aaron:
Alright.
Vaughn, at what point should somebody engage a lender?
Vaughn:
Aaron, I think the sooner the better. I think even if you're considering buying a home - the earlier in the process you do it, I think the more beneficial it will be. Again, there's no cost and there's no obligation and we can't give you a mortgage just because you talk to us. And so you know, you don't get the loan until you're ready to buy a house but the key things are we can take a look at credit, we can evaluate income and make sure that we know exactly what you're going to qualify for as far as payment. And then also look at where your down payment is coming from. I've got a lot of clients that need to save that down payment and that's fine. Or maybe they have an option for a gift. The other thing is the credit, and as we look at that maybe we can help clients pay some things off or recommend some things to pay off. I guess I don't technically help them pay things off, but we can recommend some accounts maybe to pay off or pay down to help them qualify for more. Also, we can make recommendations to help improve credit. The better the credit, the better your rates, and better your [loan] terms are going to be. So again, I think the earlier in the process the better because it's just going to really put the client in the best position to get the very best terms, and then make their transaction, once they're ready, as smooth as possible.
Aaron:
Excellent, excellent.
So Vaughn, I've got a lot of buyers, they get started, particularly first time home buyers, and they're not sure whether a single family home, maybe a condominium, or town home. Can you walk us through from the lending standpoint what the differences are between those purchases?
Vaughn:
Yeah for sure. So typically when we do the pre-approval, a lot of times we're just talking about numbers. We're talking about loan amounts. We're talking about monthly payments. So, I generally will ask, you know clients like, you know, where are they looking like just geographically, because the tax rates can be different. Then also I ask them a little bit about what kind of properties they might be looking at because there are some subtle differences. So with condos, for example, you have homeowners dues, or HOA dues, and that will change what you qualify for. So, you know, for example, if you're HOA dues are $400 a month - that might be the difference of $90,000 or so of purchasing power difference between a condominium and a single family home. And of course with other property types, you may have some other considerations with some of the rules or the guidelines for getting approved for those. Condominiums as well, they're a little bit of a different animal where you you're not just buying your particular unit, but you've got to have the complex reviewed as well. And so typically what lenders are looking for is owner occupancy, make sure they have sound financials, those kinds of things.
Aaron:
That's interesting. So one of the things that you mentioned was the homeowners dues. So that amount, you said $400, that counts against their debt to income ratio when they're being approved?
Vaughn:
Exactly. So a lot of times, like I said, we'll give clients a number and, whatever that number may be, and then they'll say, "oh, can I buy this condo for the same purchase price?" and again, no, because of the dues.
Aaron:
Right.
Vaughn:
Same thing if you're in a neighborhood that has an HOA, we have to make sure we account for that.
Aaron:
Okay, so just to tease that out a little bit, if somebody is approved, if you approve a buyer for $500,000, let's say, and then there's $400 in [monthly HOA] dues. $90,000 - that equates to $90,000 in purchase price, right?
Vaughn:
It's a big amount, yeah.
Aaron:
So that means that they could borrow $410,000 versus $500,000?
Vaughn:
Yes. It makes a big difference. And so we try to have that conversation, but you know, sometimes people are saying they want a single family and then they get out and they start looking at condos because maybe they don't like what they're seeing in that price point.
Aaron:
Interesting. Okay, that's good stuff. Thank you.
Vaughn:
You're so welcome.
Aaron:
So Vaughn, I work with a lot of first time home buyers and I've had this conversation over and over again with people where they don't think that they can afford to buy a house. They don't have a big enough down payment, there's a blemish on their credit report. There's a lot of myths out there surrounding that. Talk to us a little bit about that.
Vaughn:
Yeah, so, you know back in the day you used to have to have a 20% down payment, which is - I mean especially with these prices - that's a lot of money. So nowadays, there's a lot of flexible programs both conventional, FHA, VA, USDA, all the acronyms, right? Where you don't need as much, and so depending on the area that you're in you might need as little as 3% down payment and there are, for certain categories of borrowers, programs that will let you do 0% down, where they'll actually give you a grant, essentially, for the down payment. Again, there are restrictions, of course, just like all loans there's rules on that. As far as qualifying: people, I find, can qualify for a little bit more than they think, and I generally like to turn it around on them because I still feel that some lenders will approve borrowers for maybe a [monthly mortgage] payment that is higher than what they will be comfortable with in real life. And so I like to kind of find out, well, what are they looking for? And then what does that translate into for a loan amount and then ultimately a purchase price? But there's lots of flexibility these days with loan programs as far as sourcing the down payment, getting the closing costs covered, and then also as far as qualifying with the the debt to income ratio - basically how much money do I make, versus how much is the payment going to be.
Aaron:
So Vaughn, we've been working together for a long time. One of the things that -- one of the MANY things I enjoy about working with you, is that you're associated with a local lender. Explain a little bit about some of the advantages of working with somebody local.
Vaughn:
Yeah, Aaron, so, you know, obviously we've worked together for a long time. I've gone through some iterations with different companies, and I think a couple things. One is, I think it is important for your lender and your agent to work together as a team for the client's benefit. I think that's first and foremost. And the other thing I think, is is to have an experienced loan officer that can actually review all of your documentation before it ever gets to underwriting and really have a solid pre-approval up front. And then of course with the local lender, what that does is it lets us just move that much faster and be that much more predictable with the process. Whereas some of the big banks, some of the online internet lenders, they just don't have the same accountability as what you and I have here. You've got someone you can talk to live on the phone or meet with face to face and you're going to see that in the results that you're going to get with the process of your loan and that's really something, I think people overlook sometimes when they're shopping for lenders, is they're just looking at numbers, and rates, and fees, and those things, and those are all important, but getting that loan done and having someone standing in your corner to help you get that deal closed is so important.
Aaron:
Absolutely.
Vaughn, thank you so much for your time. I really appreciate it.
Vaughn:
It was my pleasure Aaron, thank you for having me. I appreciate your support.
