The DIY trend has infiltrated pretty much everything here in Alpharetta. With answers to questions just a few keystrokes away, most any question can be answered in a matter of moments. Yet as the more complex the question becomes, the less likely the quality of the online “answer” will be found. It’s easy to find out what the weather might be over the next few days but not so much as it relates to technical and financial information. That’s where your loan officer’s experience comes into play.
Consider a couple who are thinking about buying their first home. The curiosity gets the best of them so they both sit down one evening and start their own research. They log onto a couple of sites and they are told the best loan term is the shortest one because it saves so much on interest. So they decide to go ahead and enter in their income information to begin the process. But what they don’t do is enter the correct figures. They enter the amount that’s on the bottom of their pay check stubs that shows how much money was deposited into their bank account. They enter their net income. However, lenders use gross monthly income when qualifying. Next, the site asks about monthly debt besides their rent. They include their car payments, but they also include other debt lenders ignore such as entertainment, insurance, and utilities.
Because they discover the shorter term loan is their best option, they select a 15 year fixed rate. After entering all their income and debt information they’re told they qualify for a loan amount of $110,000. The house they wanted to buy is listed at $200,000 and there was no way they could come up with the amount needed in this scenario. Dejected, they resign to renting for another year or so and hope their employee reviews reward them with more income needed to qualify. And they never spoke with a loan officer.
Had they called me, I would have told them that while a shorter term loan saves interest it also raises their monthly payments. So much so that their debt ratios would be too high to qualify for that $200,000 home. The next mistake was not using the proper income. By using the correct income when prequalifying combined with a 30 year loan term and ignoring debt that lenders don’t count, they could have bought the home they wanted.
There are lots of things you can do online but trying to prequalify yourself shouldn’t be one of them.