Buyers often ask, “Is it hard to get pre-approved for a mortgage in San Diego?”. A simple answer is “No”. But you need to know a few important facts which we explain below.
Finding a home, you love and losing it to another buyer is heartbreaking. San Diego’s housing market often sees multiple offers on desirable homes. What could you do to increase your chances of getting ahead of other buyers for the same home?
First, understand why you need to use an experienced California real estate agent to help you find the home of your dreams. Read our recent blog post titled, Use an Experienced California Real Estate Agent.
Then, get a mortgage pre-approval letter from a San Diego lender. It’s an evaluation by a lender to determine if you qualify for a mortgage and how much. Yet. it doesn’t guarantee a mortgage. Instead, you show your seller a pre-approved mortgage letter along with your offer showing you qualify for that amount. It gives sellers confidence you are a serious buyer.
Pre-Approval Steps for a San Diego Mortgage
San Diego lenders offer pre-approved mortgage letters to buyers. But not every buyer receives one. Let’s explore the steps to get a pre-approved mortgage letter from a lender.
You only need five steps to get a pre-approved mortgage in San Diego. A mortgage pre-approval requires these steps:
- Filling out a loan application;
- Providing supporting documents like tax returns, W2s, recent bank statements, etc.;
- Stating how much of a cash down payment you can provide;
- Allowing your lender to run a credit check; and
- Based on your credit history & score, down payment, and documents, you will learn your mortgage options.
What Factors do Lenders Consider in a Pre-Approval Mortgage Letter?
After receiving the information and documents you provide, your lender looks at these key factors:
- Your income;
- Employment history;
- Loan-to-value (LTV) ratio (dividing the loan amount by the home’s value);
- Debt-to-income ratio (your monthly debts divided by gross income);
- Your credit history (based on your credit report measures your ability to repay debts);
- Credit score (a number between 300-850 estimates your creditworthiness); and
- Assets and liabilities.
Questions Affecting Your San Diego Mortgage Pre-Approval Process
The following 10 questions help your lender to determine what you can afford:
1. What is the Maximum Home Purchase Price You Qualify for?
Let’s face it, you can’t buy a million-dollar home if you can’t afford it. The purpose of getting a pre-approved mortgage letter is to find out what you really can afford to buy.
2. What are Your Monthly Mortgage Payments Based on the Purchase Price?
Your lender can help you to estimate your monthly housing expenses. It’s based on your monthly income and expenses along with funds to cover emergencies (like medical or emergency home repairs).
The maximum purchase price you can afford depends on how much you can pay every month towards the mortgage and your living costs.
3. How Much Will You Pay for Closing Costs?
Knowing how much you need to pay for the escrow closing costs ahead of time helps you to budget.
Too often a buyer finds out just before the closing how many thousands of dollars he or she needs to close the transaction. Extra costs include homeowner’s insurance, escrow fee, and title deed recording fee.
Read our recent blog post explaining the types of buyer’s escrow closing costs. It provides examples for three different San Diego home purchase prices closing settlement statements written by a local escrow company and a lender. It’s titled, How To Understand California Escrow Costs 2021.
4. Is Your Down Payment Coming from You or will a Family Member Contribute?
Coming up with the full down payment on your next home yourself helps with your mortgage pre-approval. But if you come up short ask family members to contribute. Known as “down payment gifts”.
If family members help you to come up with the down payment you need to ask them before applying for the pre-approval. Part of the documents you give your lender to support your application includes a Standard Gift Letter. You and the gift donor state that the funds are a gift and not a loan requiring repayment.
Tip: Too often a son or daughter asks the parents for an extra $10,000 as the closing gets closer. It’s better to ask before committing to a purchase and applying for a mortgage pre-approval without a standard gift letter.
5. What Occurs When You Pay with a Larger or Lower Down Payment?
- Lenders offer lower interest rates – Lenders hate to foreclose on defaulting loans. They reward buyers with higher down payments by offering them lower interest rates. That’s because the risks of default are lower with large down payment buyers.
- Less interest to pay – Larger down payments result in less interest. Depending on the purchase price, lowering your interest rate by one percent saves you thousands of dollars over the life of the mortgage;
- Lower monthly mortgage payments – Borrowing less money means having less to pay back. A lower interest rate means lower monthly payments;
- No Private Mortgage Premiums (PMI) – Paying 20% or more of the purchase price at closing saves you from paying the PMI. This saves you thousands of dollars per year;
- Better odds of beating out multiple offers – When many buyers make offers on the same house a bidding war begins. Sellers do not want buyers incapable of closing on the sale. Buyers with larger down payments look better.
6. What Special Mortgage Programs Exist that You Might Qualify for?
- CalHFA VA Loan Program
A Veterans Affairs (VA) insured mortgage offering a low 30-year fixed interest rate first mortgage;
- CalHFA FHA Loan Program
A Federal Housing Administration (FHA) insured low 30-year fixed interest rate first mortgage;
- CalPLUS FHA Loan Program
Another FHA-insured first mortgage with a little higher 30-year fixed interest rate; and
- CalHFA USDA Program
The U.S. Department of Agriculture (USDA) Guaranteed a low 30-year fixed interest rate first mortgage.
The San Diego Housing Commission (SDHC) provides homeownership grants, deferred loans, and mortgage credits to help lower-income families purchase their first homes. It’s called “The SDHC First-Time Homebuyer Program”.
7. Which is Better for You a 30-Year or 15-Year Fixed Rate or an ARM?
An Adjustable-Rate Mortgage (ARM) gives rates that regularly go up or down. A fixed-rate mortgage interest rate never changes during its time.
According to NerdWallet, “ARMs often appeal to first-time homebuyers”. That’s because they offer a lower introductory rate making it easier for first-time buyers. Good in the beginning, but the rates may rise later on due to the economy.
According to The Balance, a real estate data service, a 30-year fixed rate makes it easier for retiring. While a 15-year fixed-rate pays down your mortgage balance quicker.
8. Can You Lock In the Interest Rate Now or Will it Vary at Closing?
Some lenders allow locking in the interest rate for a fee. Locking in your interest rate gives you security knowing how much you will pay.
9. Is there a Pre-Payment Penalty if You Pay Off the Mortgage Early?
A prepayment penalty charges a fee for paying off the mortgage early.
Nolo claims that “federal laws prohibit some mortgages from having prepayment penalties”. Since 2014, the federal government placed many restrictions on prepayment penalties.
10. How Long is a Pre-Approval Letter Valid for?
What’s Included in a Pre-Approval Mortgage Letter in San Diego?
Pre-approval mortgage letters usually include:
- Maximum purchase price;
- Mortgage amount;
- Loan program;
- Interest rate;
- Down payment; and
- Expiration date.
Now that we answered the question “Is it hard to get pre-approved for a mortgage in San Diego?” let’s sum it up.
Pre-approval mortgage letters determine these important factors about your mortgage qualifications:
- The maximum home purchase price;
- Your maximum monthly payments;
- The down payment;
- Mortgage programs you qualify for;
- The interest rate; and
- Expiration date.
Need Help with Finding a San Diego Mortgage Lender?
SoCal Lifestyle Realty maintains close contact with experienced San Diego area mortgage lenders we recommend to our buyers.
Contact us for all of your home purchase needs including finding the right home for you and your family in the greater San Diego area.
Steven Rich, MBA – Guest Blogger