Home Mortgage Q&A: Tips and Advice from the Experts

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By Rocio Espinoza, Porch

Buying a home can be challenging for a first-timer. If you are thinking of buying a home, there’s a lot you need to know. When you buy a home, you will need to get a mortgage loan unless you have the cash to buy it outright. A mortgage is a loan that is used to purchase or refinance a house. To help you understand a bit more about the process, we reached out to home loan experts and asked everything you need to know. Read on to about home mortgages.

How are mortgage rates determined?

Who doesn’t want to get the lowest interest rate when buying a home or refinancing a mortgage? While 2021 began with mortgage rates at a record low, the interest rate you ultimately receive is determined by a combination of factors, some of which you can’t control.

What can you control? Your credit score, loan-to-value ratio, and the type of mortgage you use.

Borrowers with a credit score of 740 or above typically secure the lowest mortgage rates. Those borrowers also have more loan products to choose from.

Your loan-to-value ratio (LTV) is very important. The LTV is the amount of the mortgage compared to the value of the home. If you have an LTV above 80% and a low credit score, lenders may charge you a higher rate. You can improve your LTV by making a bigger down payment.

The type, amount, and length of your loan can also impact your interest rate. Lenders may charge more for adjustable-rate mortgages and for loans on condominiums and investment properties because they view them as riskier. Typically, the longer the loan term, the higher the interest rate.

What can’t you control? The economy and mortgage lender operating costs.

Mortgage rates rise and fall every day. When the economy is slowing down, unemployment is rising, and inflation is falling, mortgage rates tend to move lower. If the economy is strong, jobs are growing, and inflation is rising, then rates typically move higher. The stock market and economic data like the pace of home sales and new housing construction can also impact rates.

Mortgage rates also vary by lender because each one has different operating costs and tolerance for risk. When mortgage shopping, it makes sense to get quotes from several lenders because big banks, online lenders, and credit unions each charge different rates and fees.

NerdWallet’s 2019 Home Buyer Report found that borrowers can save over $400 in the first year of a 30-year mortgage by comparing rates before applying. While it may be time-consuming to compare lenders, your wallet will be happy in the long run.

 -Linda Bell at Nerdwallet

How do down payment assistance programs work?

Down payment assistance, commonly referred to as DPA, is financial assistance you can receive from a nonprofit or government entity to help you with your down payment. We encourage both first-time and repeat home buyers to research DPA options before they buy a home.

In general, there are three types of DPA:

  • Grants (never have to be repaid)
  • Deferred forgivable second liens (do not have to be repaid as long as you don’t sell or refinance your home for a specific time, usually between three and five years)
  • Second liens (have to be repaid when you sell or refinance your home)

Mortgage loans that come with DPA often have a slightly higher interest rate than mortgage loans without DPA, which means a slightly higher monthly payment. But many homebuyers find that the benefits of having immediate access to their down payment far outweigh the costs of a slightly higher monthly payment. Plus, the extra money you save on your down payment equals more money for furniture, repairs, and other costs of owning and maintaining your home.

Most DPA providers require you to work with one of their participating lenders and provide a long list of lenders to choose from on their website. The lender can help you determine if DPA is right for you and what type.

To qualify for DPA, you’ll need to meet specific income, credit, and sales price requirements. If you are buying a home in Texas, we encourage you to learn more about our DPA programs here. Homebuyers not located in Texas can find a list of DPA programs in their area using this free tool offered by Down Payment Resource.

-Sarah Ellinor at Texas State Affordable Housing Corporation

What are your top three tips for finding the best mortgage lender?

  • Shop Around. I recommend talking to at least two lenders, but ideally three or four. Ask each of them for a full written quote or an official loan estimate that gives you the full picture based on your specific needs. Having multiple options provides you with more certainty that you are getting a good deal. You might be able to leverage one lender’s quote to negotiate an even better deal with a different lender.
  • Look Beyond The Interest Rate. Many home buyers focus on the interest rate when shopping for a mortgage. However, every mortgage company has different fees, credits, or discount points associated with their interest rates. Be sure to compare each lender’s annual percentage rate (APR) and their total closing costs as well. The APR includes fees and expenses associated with obtaining the loan—in addition to the interest rate—to give you the total cost of the mortgage. Closing costs can include fees for services such as underwriting, processing, appraisal, credit reports, and mortgage insurance.
  • Ask The Right Questions. The service your mortgage lender provides is just as important as the price you pay. Make sure you choose a lender who will guide and advise you throughout the process, like a concierge. If the lender you’re considering is responsive, proactive, and pleasant to work with, that’s a good sign! If a lender you’re evaluating seems annoyed when you ask a question or asks for the same information more than once, those are warning signs that you likely won’t get the kind of service you need. A home is the single biggest purchase you’ll make in your life and perhaps a process you’ll only go through a few times. Finding the right lender with the right service level will make the process smoother and eliminate unnecessary headaches.

-Ryan Dibble at Flyhomes

What is mortgage underwriting?

Mortgage Underwriting is the process by which the lender determines the financial risk of loaning the borrower money.

In the simplest terms, the lender wants to make sure that the borrower can afford the property which they are purchasing. The Underwriters’ job is to ensure that the borrower will not face any significant financial burden or hardship and make the mortgage payments.

Although underwriting is required for any mortgage loan, the process can differ for each lender and each loan type.

For example, government (VA, USDA, and FHA) home loans have stricter underwriting standards because of their low-down-payment. For a mortgage where the borrower makes a significant (20% or more) down payment, the underwriting process may be more straightforward.

Generally speaking, the most complex mortgage underwriting process is for a commercial real estate mortgage. The simplest underwriting process is for vacant land.

While in underwriting, the lender will verify the suitability of the property and the borrower. Among the things that the underwriter verifies for the borrower are the applicant’s identity, gross income, debts, rental or mortgage payment history, banking transactions, borrowers’ current distance from the home, employment history, and source of down-payment. The underwriter will order an appraisal and verify the real estate’s fair market value for the property itself.

If the underwriter is not clear on a specific item, they will ask for something called a loan condition. Loan conditions can range from a letter of explanation from the borrower or further documentation.

Underwriting can take as little as one day or several months. On average, it is a 14-day process for a residential mortgage.

-Philip Georgiades at FedHome Loan Centers

How bad is it to miss a mortgage payment?

Missing a mortgage payment can have a long haul impact on your FICO Score (“Credit Score”) and obtaining homeownership. Your credit history is a vital piece of your FICO score (“Credit Score”), so on the off chance that you fall behind on your home loan, it can drastically affect anything you attempt to do with your credit following that point. Your mortgage company reports your installment history consistently, and each credit agency makes a note of it.

If you are 30 days behind, your credit report may highlight a “Late 30” close to your credit report. On the off chance that you get the credit current, that assignment will vanish on the following statement. However, it will take effort for your score to return to its original level following the missed payment.

Being late with a home loan may appear to be a catastrophe; however, the destruction isn’t as bad much of the time. Mortgage companies have a premium in working with you to amend the deficiency rapidly and will, for the most part, work out an installment plan in case you are experiencing a difficult situation monetarily. It’s significant that you find a way to amend the circumstance, in any case.

-Mark Dean Jr. at Service First Mortgage

What’s included in your monthly mortgage payment?

A simple way to remember what is involved in your Mortgage Payment is a mortgage term called “PITI”. This stands for Principle & Interest, Taxes, and Insurance. Some additional costs can be included in one’s mortgage liabilities but not typically included in the mortgage payment.  Nonetheless, these additional costs are important to understand, as it is calculated in your mortgage liability and can affect your qualification for a mortgage.

Principle & Interest:

When you make a mortgage payment, your mortgagor will detail on your payment statement a portion that goes to principle and interest. The principle is the portion of the funds that will balance your mortgage, while interest is the mortgagor charges to borrow from the original loan. As a borrower, you typically have the option to make an additional Principle payment each time you make your monthly mortgage. Doing this will help eliminate the balance down and save you interest throughout the loan’s life.

Taxes:

Besides, a mortgage lender will calculate your estimated county tax for the subject property. Each state/county may have its own tax percentages, including potential fees associated with county development called mello roos. These fees may be associated with newer development properties and can increase the tax liability for a borrower. Take note of this: Buying your dream home without considering potential mello roos costs can potentially disqualify your eligibility to purchase this dream home. Therefore, it would be a good idea to get in touch with a seasoned lender to determine whether a property you are interested in can meet your eligible tax liabilities to qualify for a loan. And see if you qualify with an additional cost outside the standard tax rate.

Insurances:

Your home insurance and potential mortgage insurance are also calculated into your loan payment.  Home insurance can vary in price from company to company, but the good part is that you can shop for this cost. Therefore, speak with a few brokers or insurance agents to find the best quote for your future home purchase. Mortgage insurance (MI) may be included in your loan if you do not put in a 20% down payment. Depending on the loan you are qualifying for, each has its own different costs associated with mortgage insurance. If you manage to put 20% down or more, you will not have to pay for MI, which can save you a lot throughout the loan’s life. Don’t worry though, if you do not have 20% to put down on a home. If you qualify for a conventional mortgage, it is possible to have your MI removed once your home reaches 80% loan to value (LTV) or less.

Potential Additional Costs:

Lastly, if you are purchasing a Condominium or a Town House / Planned Unit Development (PUD), you will likely have association fees included in the cost of your overall mortgage liabilities. Please know that this is not typically included in your mortgage payment, but each lender must use this cost to determine your eligibility for qualification.

Finally, while there are mortgage calculators online, these tools only provide an estimate and do not substitute for the actual cost associated with your mortgage payment. Therefore, it is advised to get in touch with a seasoned lender that can help you determine the most accurate costs associated with your future home purchase or refinance.

-David Coronado at All Western Mortgage

What is a reverse mortgage and how does it work?

A reverse mortgage is a loan available to senior homeowners -62 years or older- that allows them to convert part of the equity in their homes into cash.

The product was conceived to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction on how reverse mortgage proceeds can be used.

The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.

The borrower is not required to pay back the loan until the home is sold or otherwise vacated.  As long as the borrower lives in the home, they are not required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners insurance, and homeowners association dues (if applicable).

-Robert Jayne at Nationwide Mortgage Bankers Inc

Mortgages don’t have to be complicated. Make sure you work with an experienced real estate agent and loan officer who can walk you through the home buying process from start to finish.


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