Getting pre-approved for a mortgage should be step one in everyone’s journey to a new home. It sets the parameters of the whole home search. What is the most that can be spent? What is a payment that is comfortable? It allows the search to be narrowed to homes that meet the budget and saves time looking at homes that are just not affordable. Pre-qualification sometimes also provide the pleasant surprise that a more expensive home can be afforded.
There are several mortgage myths that all home buyers should be aware of. These myths sometimes freeze potential buyers in place and stop potential home owners from pursuing a mortgage or thinking that they qualify for a larger one than they do.
Many borrowers believe that if you are buying a home with another person, the lender will consider the highest credit score of the two borrowers. This is not true; most lenders take three credit scores from each borrower (Experian, Trans Union, and Equifax) and use the middle score of the lowest borrower.
For example, if the highest borrower’s three scores are 720, 715, 710 and the lowest borrower’s were 645, 640, 635, the highest borrower’s middle score would be 715 and the lowest borrower’s middle score would be 640. Lenders will use the 640 score.
There are exceptions: like the highest credit score is also with the significantly highest earner. Rates are tied to credit scores and the lower the credit score the lender uses, the higher the mortgage rate. This negatively impacts your ability to buy a home.
Mortgage insurance is a premium placed on home loans to reduce lender risk. This increases the monthly cost of the mortgage. Most times when a borrower puts less than twenty percent down on the home, the lender requires mortgage insurance.
There are other options available that may allow for less than twenty percent down and still avoid the added expense of mortgage insurance (commonly referred to as PMI). Some lenders allow for a second mortgage, sometime referred to as a piggyback or buydown loan. In this case the borrower has the original mortgage of 80 percent and they also have a second mortgage for 10-15 percent.
Another local option is a program offered through The Mortgage Network from Androscoggin Bank, called the Equity Builder that allows for 10 percent down and no mortgage insurance. This is a great option for many borrowers.
Many borrowers don’t believe that who their lender is matters to their real estate agent or to the seller. This couldn’t be further from the truth. Your real estate agent can recommend good local lenders that make the process smooth and will handle issues quickly and proactively.
The Real Estate Settlement Procedures Act prohibits any type of payments or kickbacks between lenders and real estate agents, so you can be assured the recommendation is based on prior experience and the professionalism of the lender.
I personally have two lenders that I do not work with for my clients, due to multiple bad experiences. I also have two sellers that I have worked with that refuse offers from buyers that are using a certain bank. So, the lender does matter. A borrower should seek opinions from several sources before settling on a lender.
Many borrowers assume the rate they are quoted when they first approach a lender is the rate they will get. In truth, rates are tied to the daily trading of mortgage bonds and change daily. The rate the borrower will pay will not be set until it is locked. This is the day that you chose the home you want to buy and then complete the formal application. That rate now follows the borrower and the home. If the deal falls through on that home and the borrower finds another home, the interest rate will have changed again. It is important for the borrower to get updated quotes throughout the home search. Changes in interest rates change the affordability of homes.
Adjustable rate mortgages got a bad rap in the last housing meltdown. Many borrowers are reluctant to use them. They prefer the safety of knowing their mortgage payment is fixed for the next 30 years. Adjustable rate mortgages should be given more consideration if a borrower’s time line of owning the home is between 5-10 years.
For example, if the borrower knows they plan to be in the house for five years and then sell, they can get a five-year adjustable rate mortgage. Adjustable rate mortgages are running approximately .875 percent lower today that 30 year fixed mortgages. On $200,000 borrowed, the borrower would save $146 per month in interest. That is a big savings if a buyer knows they are only going to be in a home for 5-10 years.
This should help clear up some mortgage myths. Remember, start your home buying journey by getting pre-qualified by a lender and then find a qualified real estate buyer’s agent to work with. This should assure a pleasant and rewarding home buying experience.
Rick is a realtor, real estate author, and long-time Windham resident. You can reach Rick with all of your real estate questions and needs at firstname.lastname@example.org