Top 10 Common Mortgage Myths When Applying for a Mortgage
You may find that lenders have different interest rates, minimum credit score requirements, different minimum down payment options, debt-to-income caps, and pre-approval process. It is not uncommon when applying for a mortgage to get denied by one lender and get approved with another. Mortgage companies can have an overlay, which is an internal mortgage guideline on top of set guidelines.
Choosing a Lender
You may notice that every lender is different and there are so many options. This will leave a lot of people with the question, “What mortgage is right for me?”
Interest Rates Reflect All Mortgage Costs
When shopping for interest rates, they can either cost, have no cost or credit, or credit you. They fluctuate throughout the day and the rate is not final until the interest rate is locked. There are other costs that a lender may charge like points, origination fees, processing fees, application fees, or other types of fees.
When comparing rates, you should always understand the other costs that are associated with the loan. Some lenders even offer no lender closing costs, but that depends on the loan programs.
When comparing rates makes sure to compare the fees associated with the loan and the actual rate. Getting caught up on just the rate does not mean you are getting a better deal – you could be paying for the rate in other places, such as paying for an underwriting fee, origination fee, processing fee, application fee, or other fees.
Third Party Fees
There are other fees and loan costs, which some examples include an appraisal, credit report, title, recording fees, transfer taxes, setting up escrow.. etc. An appraisal fee is set by the appraisal management company, which can vary based on geographic location, type of loan, type of property, and other factors.
Title fees, recording fees, and transfer taxes vary by county.
Being Pre-Approved for a Purchase Price Means I Qualify
A mortgage payment is made up of principal, interest, taxes, insurance, and home owner’s association dues (PITIA). A mortgage payment can be significantly higher just because taxes and insurance.
What some people do not realize is often taxes and insurance can be a big factor when calculating a total mortgage payment.
The Advertised Interest Rate is the Rate I Will Get
A lot of mortgage companies advertise rates that are available, but often do not always make sense to a borrower. When choosing a rate, a Loan Originator can help you understand the pros and cons of each rate. The interest rates will either have a credit, cost zero, or cost depending on pricing that day. Be aware of people who quote rates without taking their time to price the loan out.
Factors that could affect the interest rates are the type of loan, FICO score, loan purpose, appraised value, loan-to-value, location, number of units, term, amortization type, product type, document type, waiving escrows, debt-to-income, underwriting type, compensation type (lender paid or borrower paid), or other factors.
When asking for a rate, a borrower should understand that the pricing is at that second if a Loan Originator priced the loan out correctly – the rate is not final until the loan is locked and the loan funds. Rates have different lock terms and some examples include, 15, 30, 45, 60 days etc..
It is important to be proactive on your loan when your interest rate is locked so it does not expire. Interest rate locks can be extended – often at a cost, which vary by lender.
Down Payment: I Need 20% to Buy a Home
FHA loans require a minimum down payment of 3.5% equal or greater than 580 FICO. For borrowers under 580 credit score, the minimum down payment is 10%. Grants are available for FHA loans. The grants are 2%, 3%, 4%, and even 5% of the purchase price or total loan amount depending on the loan program. Some grants do not require repayment.
USDA and VA loans require no down payment.
Debt-to-Income: All Mortgage Companies Have the Same Debt-to-Income Caps
Some mortgage companies set debt-to-income caps, but we go off of AUS findings. Some lenders do not follow FHA, USDA, and VA guidelines when the loan is manually underwritten. For example, some lenders will say that there is a 43% debt to income cap, 50% debt to income cap, or other caps.
The maximum debt-to-income that a borrower can go up to varies based on the loan program and Automated Underwriting System (AUS). AUS analyzes credit, capacity, and collateral to determine eligibility findings of each case scenario.
Pre-Approval: I Qualify for a Mortgage Because I Have a Pre-Approval
The pre-approval process can vary by lender. Some lenders may even charge an application fee. Borrowers should work with an experienced Loan Originator who will walk them through the pre-approval process.
Loan Originators should run AUS to see what the borrower’s findings are (approve/eligible, refer/eligible, refer with caution.. etc).
Steps for a Pre-Approval Should Include:
Step 1: Asking and reviewing proper documentation.
Step 2: Running AUS.
Step 3: Reviewing AUS findings.
Step 4: Writing a pre-approval.
Renting is Cheaper than Buying
There are pros and cons when it comes to buying versus continuing to pay rent. In most cases, rent is usually higher than buying a home when it comes to the quality of the home or apartment. When renting versus buying, a potential home buyer should ask themselves the following questions:
Are you comparing apples to apples?
Compare a mortgage payment to the apartment or house you live in now. Is the overall quality better to buy or rent. It is important to factor in taxes, insurance, and upkeep on owning a home or apartment. In most case, home values increase over time and there is a bigger gap from what you owe versus how much the home is worth.
Are you throwing away money on rent?
Some people will say, pay yourself rather than your landlord. By paying down a mortgage, there will be equity in a home rather than going in your landlord’s pocket. A lot of people get rich from real estate investing, but it is always about buying right.
How long do you plan on staying where you live?
If you plan to live where you buy for a long period of time, studies show that it is cheaper to buy versus rent. The first step is to understand how much you qualify for and compare costs of renting versus buying in the area you live in.
It is Too Late to Refinance
What a lot of borrowers concentrate on is the interest rate and not the savings. Lowering a mortgage payment by refinancing can happen for many reasons: your credit score has changed, the market changing, or your principal balance is lower than the original balance that you are paying on.
Your annual percentage rate on a home loan versus a credit card or other debt obligations is usually significantly lower. Debt obligations can be overcome by cashing out on a home that has equity.
30 Year Mortgages are the Best Option
- A 30 year mortgage has a lower monthly payment, which can free up cash flow for a borrower.
- A borrower can make extra principal payments to a loan in order to pay off a loan quicker or can make the minimum payment for a 30 year fixed loan.
- The principal and interest payment will remain the same throughout the life of the loan.
- Taxes and insurance are the only portion of the payment that can increase or decrease.
- Can qualify for more of a home when debt-to-income is an issue.
- They are easier to qualify for.
- Borrowers will pay more interest over the life of the loan when choosing a longer term.
- Usually the interest rate is higher than a shorter term.
- More difficult to build equity in a home because the principal balance is paid over a longer period of time.
Paying off Your Mortgage Faster is Always Better
The concept of a borrower paying of a mortgage quicker and loosing monthly cash flow can have negative impacts when having reserves set aside for unexpected future emergencies that require cash. It can be beneficial to have money set aside versus paying a home loan off as quickly as possible.