Our Real Estate Blog
Most homebuyers take out a mortgage when they purchase a house, and there are several different types of mortgages to choose from. Here are some of the more common mortgage options and the benefits of each one.
Conventional 30-Year Fixed Mortgages
Perhaps the standard starting point for a mortgage is the conventional 30-year fixed home loan. This mortgage is underwritten by a private lending institution but conforms to standards set forth by federal programs. The terms of the loan last for 30 years, and the interest rate is fixed so that it doesn’t change throughout this period.
A conventional 30-year fixed mortgage is a good option for many homebuyers. It lets you spread out the cost of a house across three decades, and you know what the interest and payments will be for the full duration of the loan.
Conventional 15-Year Fixed Mortgages
Conventional 15-year fixed mortgages are just like their 30-year counterparts, except these last half as long. Because the duration of these mortgages is half as long, homebuyers end up paying a lot less in interest.
You’ll have to pay more per month if you cram your mortgage into 15 years, but the interest savings are substantial. If you can afford higher monthly payments, this option will end up saving you a lot.
Adjustable-rate mortgages come in various durations, just as fixed-rate mortgages do. The difference between the two is that the interest rate on an adjustable-rate mortgage can adjust. The interest rate is set according to an index, and as the index changes so does the interest rate on the loan. Which index is used and how adjustments are made are detailed in the paperwork of a loan.
Most adjustable-rate mortgages come with lower initial interest rates than fixed-rate mortgages offer, although the rates on adjustable mortgages can end up being much higher. If you can financially manage an increase in your mortgage’s interest rate, this option might be a way to save a little bit of interest (although there is risk involved).
The federal government offers several guaranteed mortgage options for qualifying individuals. Some of the most common ones are VA and FHA guaranteed home loans.
In these programs, the government guarantees a mortgage if the homebuyer fails to make their payments. This reduces the risk to the lender, and many lenders relax their qualification requirements as a result.
If you can’t get a conventional mortgage and qualify for a federally guaranteed program, one of these could help you attain the dream of home ownership.
Preparing to buy a home is a long and stressful process for many. You’ve spent months, or even years, saving for a down payment, planning your future, and building your credit to ensure you get the best possible interest rate on your loan.
Then you find out, when getting preapproved for a mortgage, that your credit score dropped by a few points. So, what gives?
There’s a lot to understand about how credit scores affect mortgages and vice versa. In today’s post, I’m going to attempt to cover everything you need to know about how applying for a mortgage can affect your credit score so you’ll be prepared when it comes time to buy a home.
Prequalification, preapproval, and credit checks
There are a lot of misconceptions about what it means to be preapproved or prequalified for a loan. Some of it is due to the jargon that is used in real estate transactions, and some of it is just a marketing technique on the part of lenders.
So, what does it mean to be prequalified and preapproved?
The short version is that getting prequalified is a quick and easy process to determine whether you’re eligible to lend to and how much you’re likely to receive. It involves a quick review of your finances, and often includes either a self-reported or soft credit inquiry.
A “soft inquiry” is the type of credit check that employers typically use for a background check. It doesn’t affect your credit score, as you are not applying to open a new line of credit. In fact, many lenders’ process for prequalification is a simple online form that doesn’t even require a credit check. We’ll talk more about the difference between soft inquiries and hard inquiries later.
The simplicity of prequalification makes it a simple and easy way to get started. But, it isn’t always accurate in how well it predicts the type of mortgage and loan amount you can receive. That’s where preapproval comes in.
When you get preapproved for a loan you fill out an official application (you often have to pay for these). This will request documentation for your finances and assets, and will ask your approval to run a detailed credit report.
These credit reports are considered “hard inquiries” and are a vital step in getting approved or preapproved for a mortgage. However, they also, at least temporarily, lower your credit score.
Why hard inquiries lower your credit score
When any creditor, be it a bank or credit card company, is determining whether to lend to you, they want to know that you are a safe investment. To determine this, they want to know how frequently you pay your bills on time, how much you owe to other creditors, and how financially stable you are right now.
When you make multiple inquiries in a short period of time, it’s a red flag to lenders that you might be in trouble financially. Thus, hard inquiries will lower your credit score for 1 to 2 months.
Applying to multiple lenders: the silver lining
When borrowers apply for a mortgage, they often shop around and apply to multiple lenders. While it may seem that all of these hard inquiries will add up and drastically lower their credit score, this isn’t the case.
Credit bureaus take into account the source of the inquiries. If they realize that you are applying for mortgages, they will typically recognize this as rate shopping and group these applications together on your credit report, counting them only as a single inquiry. This means your score shouldn’t drop multiple times for multiple mortgage preapprovals that were made within a small time frame.
Now that you know more about how mortgage applications affect your credit score, you can confidently shop around for the best mortgage for you and your family.
Going through the process of applying for a mortgage only for your application to get denied can be a frustrating and confusing time. If you’re hoping to buy your own home in the near future, it’s vital to secure financing or you risk missing out on a home that you may have been depending on getting.
In today’s post, we’re going to talk about what happens when your mortgage application is denied and what you can do to fix the problem as quickly as possible.
Determine the Cause of Denial
If your application is denied, priority number one needs to be to understand what happened. Since lenders are required to provide denied applicants with a letter explaining why they were denied, this just means reading the letter and making sure you understand all of the reasons listed.
There are a few common reasons that an application may be denied. Some of them are simple fixes, while others might require time and effort on your part that may delay your house hunt for a while.
One issue that many mortgage applicants have to handle is when their employer won’t provide proof of income to a mortgage lender. Since income verification is vital to the mortgage application process, it’s important to make sure you can provide all of your income details from the last 2 years to the lender.
Sometimes there are issues with contacting employers, such as when your former place of employment goes out of business. Or, you may be a freelance or contract worker with atypical forms of income verification. Regardless, make sure you are clear with your loan officer regarding your employment history.
Other common causes for denial of an application include problems with your down payment (such as not meeting the required down payment amount) and credit history issues, such as having a lower score than you thought.
Credit score lower than expected
It’s not uncommon for a lender to run a credit check and come up with a score that is lower than you anticipated. Since scores change on a monthly basis, and since there are differences between the scores provided by the three major credit bureaus, you might find that your lender found a score slightly lower than what thought.
If the score is drastically different, however, this could be a sign of two things. First, make sure that you haven’t recently made multiple credit inquiries (such as applying to several lenders who perform credit checks) or by opening new credit cards or loans. These inquiries temporarily lower your credit score.
If you haven’t recently made any inquiries (other than applying for a mortgage with your lender of choice), then it’s a good idea to get a detailed credit report and scrutinize it for errors. Inaccuracies on your credit report can be disputed and resolved and can give your score the boost you need to be competitive on your mortgage application.
Choosing a different lender
While most lenders use similar criteria in determining your borrowing eligibility, there are some differences between lenders.
For example, some lenders might take on more risk by lending to someone with a lower credit score. However, they will also likely require a higher interest rate in exchange for the added risk they’ve acquired.
Now that you know your options for what to do when an application is denied, you’re well-equipped to start tackling the issue and getting back on track to becoming a homeowner.
Getting a new mortgage can be stressful, whether you are getting it for the first time or not. You have to carry out thorough research to avoid going into a mortgage that drains your pocket through high-interest rates. You can get yourself prepared for the lowest interest rate that is suitable for you by taking good care of your credit history. Do you realize that a difference of 1 percent in the interest rate can save a tremendous amount of money on a mortgage running for 30 years?Consider the following when searching for competitive rates:
You should consider loans with discounted initial rates. Be on the lookout for fees and be ready to switch in case the rate goes higher than your budget or plan.
When looking for a low-interest mortgage rate, you should check if a smaller non-banker lender is providing a low-interest mortgage. When you find options, check properly to be sure that there are no additional charges. You must know the final amount before committing.
Variable versus fixed rates:
The difference between a variable and fixed rate is that variable loans usually advertise more flexibility and lower interest rates when compared with the fixed rate. However, the truth is that you can get a fixed-rate mortgage without any possibility of rising rates. Variable rates may tell you the percentage is likely to go down, but it can go up also!
Negotiating a discount:
After you have selected a mortgage company, inquire about their unadvertised discounts that can save you money.
Here are some tips to help you qualify for low-interest mortgage rates:
- Get a loan with low fees. You should know that most mortgages have a separate charge that is different from the repayments and rates. Such fees sometimes are not included in most online loan comparison websites. Contact the company to be sure you have full information about one-time fees like application or origination fee as these may be expensive. Compare with other ongoing fees to be sure it does not cost you more in the long run.
- Should you avoid fees at all costs? You do not always need to avoid fees. To know the amount that a loan will cost you, you should do the calculations and consider the benefits as well as the charges involved. If you discover that a mortgage loan has features that benefit you, it is justifiable to pay a small ongoing fee.
- Save up a healthy down payment. It is worth noting that you are likely to borrow less to cover your home's purchase price if you have a substantial down payment. It is better to save enough funds towards your down payment.
Speak to your financial advisor or planner to know how to be pre-approved for the best mortgage rates before you start your house search.
For those who want to acquire a house, it helps to get your finances in order. That way, you can quickly and effortlessly navigate the homebuying journey without having to worry about how you'll afford your dream house.
There are many quick, easy ways to straighten out your finances before you embark on the homebuying journey, such as:
1. Assess Your Credit Score
Your credit score ultimately can play a major role in your ability to secure a great mortgage. If you understand your credit score, you may be able to find ways to improve it prior to conducting a home search.
It is important to remember that you are entitled to a free copy of your credit report annually from each of the credit reporting agencies (Equifax, Experian and TransUnion). Request a free copy of your credit report today, and you can take the first step to evaluate your credit score.
If you find that your credit score is low, there is no need to worry. You can always pay off outstanding debt to improve your credit score over time.
Also, if you identify any errors on your credit report, you'll want to address these mistakes immediately. In this scenario, you should contact the agency that provided the report to ensure any necessary corrections can be made.
2. Look Closely at Your Monthly Expenses
When it comes to buying a house, it generally helps to have sufficient funds for a down payment. The down payment on a house may fall between 5 and 20 percent of a home's sale price, so you'll want to have enough money available to cover this total for your dream residence.
If you evaluate your monthly expenses, you may be able to find ways to save money for a down payment on a house.
For example, it may be beneficial to cut out cable TV for the time being and use the money that you save toward a home down payment. Or, if your dine out frequently, cooking at home may prove to be a substantial money-saver that could help you speed up the process of saving for a down payment.
3. Get Pre-Approved for a Mortgage
With pre-approval for a mortgage, you can enter the housing market with a budget in hand. Then, you'll be better equipped than ever before to narrow your search to houses that fall within your price range.
To get pre-approved for a mortgage, you'll want to meet with banks and credit unions. These financial institutions can teach you about different mortgage options and help you assess all of the options at your disposal.
Furthermore, don't hesitate to ask banks and credit unions about how different types of mortgages work. This will enable you to gain the insights that you need to make an informed decision about a mortgage based on your financial situation.
If you need extra help as you prepare to pursue a house, you may want to hire a real estate agent as well. In fact, a real estate agent can help you find a high-quality house at a budget-friendly price in no time at all.