In order to understand how and why the market changes mortgage interest rates, it is important to understand the mortgage market and what a mortgage really is.When you understand this, you’ll know why your mortgage is as much about your house as it is about the security–aka the financial product–it will become. Most of us imagine that when we get a home loan for $200,000 that the bank actually takes $200,000 out of their deposits to make the loan. That’s just simply not the case. The bank has to have $10% of the loan amount in their deposits in order to create your loan. Your promise to pay the mortgage note allows them to essentially create the remaining $180,000 to make your loan. This is how banks expand money and stimulate the economy.
Once the bank has created your loan they will likely put it together with hundreds or thousands of other loans and then sell the loans as securities. They become an investment product and groups of investors buy these loans in order to receive the interest that you are paying. This is good for the banks because they can create your $200,000 loan while only using $20,000 of their deposits and then when they sell your loan as a mortgage backed security to investors for the full $200,000 they have $200,000 available to make more loans.
Understanding this helps to see that mortgage rates are driven by the economy and inflation.
The economy and inflation are the two biggest factors that impact mortgage interest rates. When interest rates are low it is because there is a need for growth. These low interest rates encourage businesses to borrow money and expand. This usually results in more jobs and an increase in personal wealth. As personal wealth increases then people borrow money for houses. We are in this stage right now and because of these low rates the housing market is beginning to boom again.
Often times, a large stimulation to the economy caused by making money easy and cheap to borrow results in inflation or a weakening of the dollar. This happens because when banks make loans they actually increase the money that is in the economy. If this is done out of proportion with the actual supply and demand for goods and services, which it often is, then inflation is the result and it costs more money to buy consumer goods.
When investors see this happen they will sell their mortgage backed securities because they are worth less. For example, if due to inflation a dollar is now worth eighty cents then your investment is actually worth less. In our example, your $200,000 investment would only be worth $160,000. This leads to a decreased demand in mortgage backed securities and therefore the banks raise interest rates to make those securities more valuable to potential investors. Those higher interest rates decrease borrowing and that typically will hurt businesses and people’s ability to make their mortgage payments.
Essentially, when the economy is not doing well we can borrow money to improve it. Without proper regulations, however, increased borrowing and lending only leads to an eventual fallout because inflation will eventually make interest rates too high for a healthy economy.
It is a good time to borrow money. It is available and interest rates, though they are beginning to climb, are still low. We can learn from the most recent financial crash and choose mortgages that are affordable with an understanding of how the market is likely to shift in the future. While you can’t always rely on policy to protect your investment, you can strive to be as informed as possible about the lending process and market conditions.
When you look out over the Inner Harbor from Federal Hill, you’ll see that many of the buildings downtown are adorned with big bank logos. Large mortgage brokerages fill the top floors of some of these buildings, but does using a brokerage headquartered in a beautiful, branded building get you a better mortgage? Or perhaps do the banks in those big buildings get access to loans and lower rates than smaller brokerages would? Nope! Those big offices exist to house more staff and executives, a cost which those banks often bake in to your mortgage rates. After all, banks with big overhead have to cover those costs somewhere. You guessed it – they come in the form of jacked up interest rates and a mountain of fluff fees that are completely unnecessary. Even other online mortgage options pack on the fees to cushion theimortgage-origination-fee-marylandr corporations. Why wouldn’t you leverage technology, shift the way you look at home loans and get with the times? That’s what we did, and you’ll see the difference in your rates.
That bigger staff big brokers have often comes in the form of processors and paper pushers. It is true, there is a fair amount of paperwork gathering, organizing, verifying, and submitting that comes with getting a mortgage, but you definitely don’t need a small army of processors to do it. Our app does that. This means that we use our hours wisely, strategizing and calculating a better mortgage solution for you at a fraction of big broker costs.
More than other industries, banks are especially guilty of employing excessively expensive staff. This is caused in part by the antiquated business model that many of these companies deploy.
At LoanVerify we staff the best and brightest analytical minds that will evaluate your situation to find you the best mortgage possible.
There is no high-level LoanVerify executive pushing people to perform and yield the best premium (aka commission check) on a loan. Most bigwigs at other brokerages exist to push production and manage complicated processes. The LoanVerify App manages our processes. Our performance standards revolve around our well-trained team closing great loans on time every time.
The terms of your loan will affect your interest rate. Typically, the longer that you stay in a home the higher your rate will be. This is because the bank is going to carry the debt for a longer period of time and those funds will not be available for the bank to create new loans. There is also a risk that interest rates will rise and the banks will not yield as much of a return on their money as they could have had they lent it at a higher rate. Additionally, longer terms allow more time to default or have a financial issue that leads to you not paying. The good news is that the rate are not drastically higher for longer term mortgages but depending on your financial situation and life circumstances, a short term mortgage may be your best bet.
When qualifying for a conventional loan, these two numbers will work together to dictate what your mortgage rate will be based on guidelines set forth by Fannie Mae and Freddie Mac. (link to the chart or show it). The reason that your down payment and credit score will affect your interest rate is due to the risk associated with those factors. If someone has a lower credit score and a lower down paymen,t the bank believes that they are less likely to repay their mortgage without disturbances than someone with a higher credit score and down payment. Much of this has to do with the secondary market for mortgages. If your loan is riskier to invest in then someone will want a higher return for doing so, hence the higher interest rate.
FHA loans have far less fluctuation when it comes to rates as they relate to down payments and credit scores, though there is some disparity for some situations. With an FHA loan you will pay mortgage insurance payments. If you put less than 20% down on a conventional loan then you will also pay a monthly insurance. A LoanVerify mortgage consultant is here to help you navigate your situation and options to support you in making an empowered mortgage decision that is best for your life.
At LoanVerify we staff the best and brightest analytical minds that will evaluate your situation to find you the best mortgage possible.
There is no high-level LoanVerify executive pushing people to perform and yield the best premium (aka commission check) on a loan. Most bigwigs at other brokerages exist to push production and manage complicated processes. The LoanVerify App manages our processes. Our performance standards revolve around our well-trained team closing great loans on time every time.
Lenders can make money in three different ways: origination fees, closing costs and rate mark ups or yield spread. Your lender needs to be paid for the services that they provide. What you pay your lender and where that money comes from will make a difference in your loan for the long run. For example, if you are not keeping your home for a long time you may want to pay your lender by raising your rate slightly so that you don’t have to pay out of pocket at closing time. This would only make sense if the amount you would pay in added interest is less than what you would have paid your lender. Every situation is unique and has its own solution but the important lesson here is not to overpay your loan officer!
While a loan officer or mortgage broker cannot alter the rate that is dictated by the market (name of this), they certainly can change the rate that you actually pay. This is why you can look on 5 different websites right now and find a different rate on each one of them. Loan officers and brokers make money by selling you an interest rate that is higher than what is being offering by the bank that will actually be lending the money to you.
No. You can absolutely get the rate that is being offered by the banks with Loan Verify, nothing added to the top. Loan officers and brokers do need to get paid for obtaining a home loan for you. If you don’t want to increase your rate then you can pay an origination fee or buy down your rate.
This is why Loan Verify’s mission is to empower better mortgage decisions through radical transparency and applicable, digestible education. It is your mortgage and there is a decision out there that is the best for you financially, you just need the truth and a little info to get there. You may want to lower your rate even further if it makes sense for your long-term picture.
In short, closing costs are the costs incurred by the homebuyer when buying your home. A combination of necessary and negotiable fees, a buyer usually pays about 2-5% of the total loan amount at closing. While some factors that dictate your closing costs can’t be negotiated and depend on how much money you are borrowing, be sure to know the ones that can be negotiated.
Certain closing costs, like title fees and transfer tax, are pre-determined by tax rates or by the title company. Other costs are put in place by the loan officer and the realtor as part of the money that they will make from your transaction.
While lenders and realtors do need to make money for the work that they do, many of the fees are in place to either increase profits, pay for processing that can be automated with technology or fund a hierarchy of executives and their fancy offices.
It is a good idea to get an estimate of closing costs early on so that you know everything that you are being charged by your lender. At LoanVerify we disclose all fees up front – no surprises. Here are some fees to keep an eye out for:
Application Fee – Processing Fee – Underwriting Fee – Loan Lock Fee – Other Admin Fees
An origination fee is the most common way for a loan officer to charge you for their services – evaluating, processing and approving your loan. Typically you will be charged .5-1% of the total loan amount. Many times these are charged in conjunction with a processing fee, which is another fee charged for the origination of the loan.
This is not the only way that a loan officer can be paid but it is the most common one. When a loan office is paid this way and only this way it means that your rate is not being raised to pay them and they are not adding a bunch of extra fees to your closing costs. This is how Loan Verify works – we only charge a single low fee to get you your mortgage and we let you decide how you pay it.
It is up to you if an origination fee is right for you and your loan officer should be completely up front with you about all of your fees and how your mortgage is being made.
Income and careers change. It is a good thing. Knowing this, it is a good idea to make long term choices, like buying a home, with that in mind. Mortgages are a financial tool so doing a bit of strategizing on the front end can pay off big in the long run.
If you are just graduating college and beginning your career, we can expect your income to raise in the next five years. You may be in a graduate program with a guaranteed or very likely raise when you complete it. Perhaps you are about to get married and become a two income household. Knowing where your income will be going you can make a better, empowered mortgage decision that is right for you. Income and career changes are strong indicators or how long you will stay in your home. With this information you can calculate what loan program is actually best for you.
An example of where this information is important is in deciding whether or not you want to buy down your mortgage rate via discount points. (turn this visual with big numbers and icons) If you are getting a $200,000 loan @ 4% interest and you know that you will only be in the house for 5 years you can compare how much it costs to buy the rate down to what you will actually save in that period of time. In this case we will say that 1% of your loan amount or $2,000 would buy you a 1/4 of a percent, bringing your interest rate to 3.75% There is a $30 monthly different. Over the course of 60 months or 5 years that is $1800. In this case it would not make sense to buy your rate down. You might actually want to consider having your loan officer raising your rate slightly rather than paying an origination fee. This is why we look at your income trajectory.
Income goes down or expenses go up for many predictable reasons. Having a child, changing careers, retiring, going back to school or going on extended leave will all affect income. While there are potential changes we can’t foresee, we can consider what we do know when we are choosing a mortgage, both the type and the amount. There is nothing less enjoyable than being house poor so plan for the twists and turns that you life has coming.
Unfortunately, I do not have this answer for you and maybe you don’t have the answer either but it is worth a few moments of thought when you are considering your mortgage and buying a home. What does your mortgage have to do with it? Everything! There are many loan options out there and knowing how long you will be in a home is an important factor in making the right choice. You can need more space for many reasons. At the end of the day you don’t want to lose money buying a house and knowing the important details of your housing situation will help you find the right solution that will keep you out of the red!
Is your nest growing, shrinking or under construction? Are you hopeful on having a relationship and co-habitating in the next few years? While you can’t plan whether someone will want to marry you in the next five years you can consider where you want your life to go and how that might affect your housing situation in the near future so that you can choose the right mortgage for your situation today and tomorrow. We know that things can always come up that you don’t plan for but we want to help you plan for what you can.
For example, let’s say that you know that you want to get married in the next five years. This means that you need to consider if you would lose money if you sold the house in five years or if you would be willing to be a landlord if you didn’t sell the house (and what loan would be best for that potential future scenario). You won’t know for certain what the market will do in the next five years but you can make a rough calculation based on closing costs (for both buying and selling) that you will put into the home, your down payment, what the home might be worth based on average yearly market growth and what you will save by renting and taking tax deductions for your mortgage interest. We are here to help with this.
We are not suggesting you to not buy a house if your kids are in high school and heading off to college in the next few years. What we are suggesting is that you explore what this might mean before you shop a mortgage or a house for that matter. Sure, you may want to keep their room exactly as it was when they left for eternity but you might also want to cut your housing overhead to free up college (or travel) funds. If a RTW trip or cross-country motorhome adventure are on your list of things to do when the kids go to college you will want to be certain that you are prepared to have that experience without losing your assets.
Once again we are dabbling in the realm of the somewhat unpredictable but it is wise to ponder your potential when choosing your mortgage. While some jobs move people unexpectedly, other times we either know about or aspire to work in a different location. If you know that corporate headquarters are in Austin and you have your eye set on the CFO position then why wouldn’t you get a mortgage that makes sure you still come out in the black when that dream job becomes yours? Rate, terms, and down payment can be strategized to meet your needs today and when you potentially move. We can find you a mortgage that is great for you either way. There is nothing worse than realizing you got your dream job to only learn that you are going to lose 10K selling your house because of the loan you chose.
You have spent your whole life in the East and while you are not quite ready to make the leap, the mountainous, wide open and wild West is calling for you. Just as we described above, take this into account when choosing your mortgage. Don’t just hope that it all works out or that your will be able to quell your desire to explore a new place. You don’t have to commit to the move today but prepare for it. Wouldn’t it be nice to be able to choose what you want without a financial repercussion? At LoanVerify we believe that your mortgage is a big part of your life, so why wouldn’t you evaluate your life as it is and as you want it to be when choosing one?
Most banks do not want your mortgage payment to be more than 28% of your net income and your total debts should not exceed 43% of your gross income. These are the requirements set forth by Fannie Mae and Freddie Mac. There are exceptions to this rule and at LoanVerify our goal is to find the loan that is right for you, starting with the loan amount.
Banks will look at your tax returns to see income and job history. This tells them how much your income has changed over the last two years and if you have been in the same line of work, which gives them an idea of the stability of your income that they are qualifying you for your loan with.
Depending on the loan program that you choose you will put 3% or more of the purchase price down. You can get your down payment by:
borrowing it from your 401k or IRA
a gift from a friend or family member
a loan from a friend or family member
equity in an existing property
Your down payment needs to be seasoned when your loan is being approved. This means that when you apply for your loan you should have 60 days of bank statements that show your down payment in your account.
Along with your down payment a bank offering you a conventional loan might want to see that you have enough money to pay anywhere from 0-12 mortgage statements. Down payment and credit score are the biggest factors in deciding if you need reserves and how much. FHA loans do not have this requirement.
Along with wanting your mortgage payment to be no more than 28% of your monthly net income, the bank also wants to verify that you can afford that much. Your bank statements as well as your minimum payments for your revolving debt will need to coincide with your application regarding how much you spend each month on things that are not your rent or mortgage payment. Most banks will not allow more than 43% of your gross income to go to your mortgage, credit cards, car payments, student loans and other debts, like child support and alimony.
It is important that you are honest about all of your debts because the bank will find out about all of them when your credit report is pulled. Anything that is on your credit report or a court order will be discovered by the bank when they are underwriting your loan. These numbers are important because the bank needs to meet guidelines when they create loans and debt-to-income is one of the most important of those guidelines.
The majority of realtor fees are paid by the seller, who commits to a commission amount for a realtor who brings a buyer. Sometimes a buyer’s real estate agent will charge other fees. This is normal but be sure to ask about these fees early on and understand what they are for. You can and should negotiate your closing costs.
Loan officers can get paid in many ways and some of them will show up as closing costs like:
Origination Fee (normal)
Loan Lock Fee
Credit Report Fee
It is important to find out about these costs before you begin the loan process as they can significantly impact how good the loan that your getting actually is for your financially. All of these fees are set by the individual lender and so they are negotiable. LoanVerify believes in radical transparency (make tooltip with definition layout for the term) and does not charge additional bank fees.
This is where you savvy will pay off and you will negotiate the best mortgage for you. Closing costs are typically between 2-5% of the purchase price of the home though can vary based on fees, the time of the month that you are closing and the amount of money that you are borrowing. If you are buying a $200,000 house there is a significant monetary difference between 2% and 5%. Do you want to pay $4,000 or $10,000 to close on your house? Remember that both FHA and conventional loans allow for the seller to pay a portion of or all of your closings costs. This is one of the key places where your mortgage becomes a strategic and intentional part of the home buying process that will pay off in the long run.
Here is an example of closing costs on a $200,000 house with negotiable items in yellow. There are two totals, one reflecting all costs negotiated and one reflecting none of them being negotiated:
This is an important decision when it comes to buying your home. Sometimes balancing the down payment and the reserves you may be required to have in your account plus your closing costs is a bit much. This is a place where you can get assistance. The amount depends on the seller and the type of loan that you have. It is good to understand the type of loan that you want before shopping for a house so you know if you need to find a seller who is willing to contribute money towards your closing costs.
Home buyers rarely buy homes with 20% down. FHA loans are insured by the Federal Housing Administration and have less stringent guidelines for qualifying. The minimum down payment required, at just 3.5% of the total purchase price, for an FHA loan is one of the many reasons that it is popular option. An FHA loan allows a seller to contribute up to 6% of the purchase price for closing costs. The one downside to FHA loans is the mortgage insurance that you have to pay monthly to provide extra insurance on your loan because of your very low down payment. The plus side is that FHA loan usually have better rates for people with less than stellar credit and less than 10% to put down on your home. Conventional loans also require mortgage insurance when a borrower puts less than 10% down making FHA a cheaper alternative for many.
The amount that can be contributed for a conventional loan depends on how much money you put down. If you put down 25% of the home value then you can receive up to 9% seller contributions for closing costs. This could help with buying down your rate or any number of things that can make closing costs higher than usual, like closing early in the month and having nearly an entire prorated month of the mortgage payment added into your closing costs. If you borrow between 75-90% of the home value then you can receive 6% and if you borrow more than 90% LTV then you can receive up to 3%
The Federal Housing Administration or the FHA provides insurance to lenders for creating loans that don’t meet their typical lending standards, such as credit score and down payment requirements. This insurance protects the lender in the event that you default on your mortgage payments. FHA loans can be made by FHA approved lenders and those lenders can offer different rates.
One of the most appealing aspect of an FHA loan is the reduced down payment required. If a buyer has a credit score of 580 or greater, they only need 3.5% down to buy a home and that down payment does not have to come from your savings – a friend or family member can help you out or you can apply for a grant.
While FHA loans offer lower down payments and lower interest rates they also come with mortgage insurance. This mortgage insurance is paid as a lump sum when you close on your home and as a monthly payment that is part of your annual mortgage insurance premium.
The lump sum becomes a part of your closing costs and is 1.75% of the appraised value of your home. The good news about FHA loans is that the seller can pay up to 6% of your closing costs, an important point to consider when strategizing if and how to buy a home.
The annual premium is .60% of your loan amount if you owe more than 95% of the value of your home and .55% if you owe more than 90% but less than 95%. This is broken up into 12 monthly payments each year. While you are on the hook for mortgage insurance for at least 11 years, once that time has passed and you owe less than 90% of the home value you will no longer have to pay mortgage insurance.
If you put less than 20% down with a conventional loan then you will also have mortgage insurance. By visiting our LoanVerify app and answering 7 questions, we can get you a few quotes and guide you in an evaluation of which loan is best for your financial future and lifestyle.
FHA loans allow people to buy a home who would otherwise not be able to by insuring their loan. If your credit score is 580 or higher then you will only be required to put down 3.5%. If your credit score is below that you will likely only need to put down 10%. While your down payment and credit score will affect your rates, FHA loans typically offer lower rates than conventional mortgages for those with less than stellar credit and lower than average down payments.
The limits for the debt to income ratio of a borrower are more lax with an FHA insured loan as well. Your front end ratio can be 31-40%. This is the percentage of your net income that your mortgage, including HOA, principal, interests, taxes and insurance, consists of. Your back end ratio can be 43-50%. The back-end-ratio consists of your mortgage payment and all of your other debt, like credit cards, car payments, child support, and student loans.
One of the most unique features of an FHA loan is the ability to borrow more than the current appraised value of the home. If you wish to make improvements to the home you are buying or just want to find an all out fixer upper, an FHA loan may be your answer. You can get a loan for the future value of the home after the repairs are made. This is yet another way that your mortgage can be a financial tool.
All FHA loan in Maryland allow for a seller to contribute up to 6% of the total loan amount to your closing costs. Whereas a conventional loan will only allow up to 3% seller concessions when you are borrowing more than 90% of the loan amount, FHA allows 6% no matter what your down payment is.
Closing costs are often times a bit higher when choosing an FHA loan. This is due to the 1.75% of the loan amount that is due as a lump payment for mortgage insurance. You may also choose to purchase discount points, which is money paid ahead of time to lower your interest rate for the life of your loan. The good news is that since the seller can pay up to 6% of your closing costs and LoanVerify does not charge you a bunch of fluff fees you will likely still be able to find a way to avoid paying any closing costs at all if necessary.
A conventional mortgage is a loan that is not backed or insured by the government. FHA, VA, USDA and other government programs exist to assist borrowers who would not otherwise qualify in buying a home. They include features such as reduced down payment, lower credit score requirements and more flexibility in debt-to-income ratios.
Since conventional loans are a bit harder to qualify for, they sometimes offer better interest rates and they do not require mortgage insurance payments for those who put 20% of the purchase price or more down. Conventional loans can be either conforming or non-conforming.
People often times confuse conforming and conventional. Only about 1/2 of conventional loans are conforming. A conforming loan is one that meets the guidelines for loan amount and qualifications that are set forth by Fannie Mae and Freddie Mac. Fannie and Freddie are government sponsored agencies (GSEs) that buy conforming loans from banks before they are packaged and sold to investors as mortgage backed securities and bonds. If a loan is not conforming then a bank cannot count on Fannie or Freddie to buy it from them. Since a vast majority of mortgages are intended to be sold to Fannie Mae and Freddie Mac, most basks follow the guidelines put forth by them.
Conventional loans might offer better interest rates and terms for those who have a good credit score and are putting down a large down payment. The rate of a conventional loan is determined by both the market rates and your risk-based fee or LLPA index. These are adjustments to your interest rate that are made based on your qualifications for the loan. This is done to make the loan more sellable on the secondary market. If you have a lower credit score or higher than normal LTV then your loan is riskier. Just like with most investments, if you are going to take more of a risk then you get more of a reward. Someone investing in a mortgage that does not meet the standardized guidelines will require more incentive to invest and that comes in the form of a higher interest rate.
Conventional loans offer various terms. You can choose 10, 15 and 30 year fixed mortgages and you can choose a fixed or adjustable rate. Deciding which terms are right for you will weigh many factors, including aspects of your lifestyle, career trajectory and more.
You can get a conventional loan with a credit score below 680 but having a credit score of 680 or greater does not make it the best option for you. Fannie Mae and Freddie Mac, who will be buying your mortgage from the bank after it is closed, has an LLPA or Low Level Pricing Adjustment index. This is an adjustment that is made to your loan based on your credit score and Loan-to-Value ratio or LTV.
If you have a credit score of 660 then your interest rate will raise by 2.25% if you did not put more than 15% down when buying the house. This might make it better to go with an FHA loan since they don’t make these same rate adjustments. Your LoanVerify app will provide you with multiple quotes that will assist you in exploring these options (link to question about income trajectory) and which one is best for you.
Your down payment can come from your own savings account or as a gift from a friend or family member. Conventional loans are now available with as little as 3% down but any conventional mortgage with greater than an 80% LTV is going to require private mortgage insurance. These rates will vary depending on your credit score and down payment amount. It is not always obvious whether a conventional loan or FHA loan will be most beneficial for your current situation or your future. LoanVerify is here to help you strategize the best mortgage decisino for your life.
Like any mortgage, conventional loans have limits for your debt-to-income ratios. This limit is typically 43% of your net income but there are exceptions that can be made if you have a very high credit score, lots of savings or make a large down payment.
Your back-end DTI (debt-to-income) ratio is the percentage of your net income (take home pay) that goes to your monthly bills. This includes your mortgage, car payment, student loans, credit cards and other monthly expenses.
PMI or private mortgage insurance is a fee that is added to your monthly mortgage payment when you borrow more than 80% of the value of your home. The amount of mortgage insurance that you pay will vary based on your down payment and your credit score. There are several mortgage insurance companies so be certain that your loan officer finds the right one for your credit score/down payment scenario. You can also compare the costs associated with an FHA loan to find the mortgage that is right for you.
The amount that you will be able to borrow will be determined by your income and expenses as well as the Maryland loan limits for FHA and Conventional Loans. (link to wherever we put a table) If you are borrowing more than the amount listed below then your loan will be considered a jumbo, non-conforming loan. This means that your bank will not be able to sell the loan to Fannie Mae or Freddie Mac and will likely have different guidelines. Loans that are not sold as securities are called portfolio loans and their guidelines will vary by bank.
Insert table of loan amounts
Seller concessions are available for conventional loans. If you are putting 25% or more down on your home the seller can contribute 9% of your closing costs. Down payments between 24% and 10% qualify for 6% seller concessions and if you put less than 10% down then you can receive 3% from the seller.
Seller concession can be helpful in reducing the additional out of pocket costs (closing costs) when buying a home. This is why strategizing your home loan should be the first step in the home buying process. If you know that you want a certain amount of seller concessions then you can negotiate them in your purchase. It is also helpful in deciding between an FHA and conventional loan since an FHA loan will allow greater seller concessions with low down payments.
Your closing costs will be determined by many things, such as the fees that your realtor, loan officer and title agency charge, discount points to buy down your interest rate and how close to the end of the month you are closing. The good news is that since the seller can pay up to 9% of your closing costs (depending on your down payment) and LoanVerify does not charge you a bunch of fluff fees you will likely still be able to find a way to avoid paying any closing costs at all if necessary.
When you get a mortgage you are pledging your property as collateral for the loan or debt on your home. It is because of this that many of the processes involved in originating your mortgage and closing on your home take place.
The biggest investment that a bank is making is in you. Yes, the property is collateral and the bank can take your property if you don’t pay, but the bank is not in the business of owning real estate – this is not favorable for them. The most important part of the transaction is your likelihood of paying your mortgage payments. That is why we collect your bank statements, tax returns, pay stubs, etc. Your revolving debt, monthly expenses, job history and credit history tell a story about how likely you are to pay your mortgage. Banks have developed guidelines that tell them if and how much to lend to a person based on their financial picture.
As loan officers, we are slated with compiling your financial information and confirming that you meet the guidelines that the bank has set and to lobby exceptions or extenuating circumstances. We verify that you do in fact qualify and ensure that the bank gets all of the proof that they need.
This is very important for the banks because when they are selling your mortgage as a security this will determine how much investors are willing to pay. This is to say that the value of your home is a piece of the equation and a part of their lending guidelines but they are not the only part.
You don’t actually own your home until your mortgage is paid off. You will have a mortgage note, which is your promise to pay for the house according to the terms you agreed on.
You will also have the title for the property and this will go into your name as soon as you close escrow but the bank will have a lien on the property. Liens are the reason that you need a title company to be a part of the real estate transaction. The title company’s job is to ensure that the previous owner has no other liens that need to be satisfied in order to transfer clean title to you. When you buy your house the new mortgage company will put a lien on your title. This would prevent you from transferring title without paying off your mortgage.
Most of us think of the housing market in terms of homes. This is the narrative that we hear about and engage in but the housing market is driven far more by the economy than it is by houses themselves. The housing market is a reflection of the economy and more specifically the health and appetite for the bonds and securities created by those mortgage.
When a bank creates a loan for you two important things happen. The first is that the money supply in the economy grows. When a bank makes a loan for you they only need 10% of the loan amount in their reserves. Your promise to pay the note with the collateral of your home allows the bank to essentially create the remaining loan amount on their books as money they have to lend. Basically your mortgage gives them permission to add the other 90% of your loan amount to their reserves.
Once that money has been expanded or created then the bank sells the mortgage to Fannie Mae or Freddie Mac, government sponsored agencies. Let’s say that your mortgage was $200,000. The bank only needed $20,000 to make your mortgage but when they sell it to Fannie or Freddie they now have $200,000, which means that they can now make 10 more loans just like yours from that original $20,000 they had in reserves. That is why mortgages can be very profitable for banks and their profit is not as linear as the interest you are paying on your loan. It is because of this expanding of money that the appetite for these mortgages really drives the housing market.
Continuing with the theme from above, Fannie Mae and Freddie Mac play a big role in assisting the banks to expand money and create more mortgages. Fannie and Freddie buy conventional mortgages from the banks so long as those mortgages meet their guidelines. They then package them together with loans of a similar quality and rating and sell them to investors. This is why the guidelines are so important and why most banks want to stick to them – they want to be certain that they can sell those loans and make more. The guidelines ensure that Fannie and Freddie have a sellable and valuable product to offer to the investors. A very similar process happens with FHA loans that are sold to HUD to be packaged and made available to investors.
Once the mortgages become bonds and securities and are sold to investment groups, they become a financial product that offers good returns with traditionally low risk. When lots of mortgages are being made the economy is growing. The homebuyers are gaining assets, the banks are expanding money and making more loans and there are more financial products to be invested in.
As we saw in 2008, there is a balance as to how quickly this economic growth can happen. When we expand money through making mortgages it is adding more money to the economy but if the GDP, job markets and other drivers have not grown equally then we start to see inflation and the value of the dollar goes down.
Along with making the mortgage bonds a good investment, guidelines and regulations are present to ensure that we are only growing our money supply and economy in congruence with the actual growth that is taking place in the economy. In the lead up to the most recent economic crash we saw that loans were available to just about anyone with no money down.
You can look at money being lent as a reflection of the financial status of your population. If we are making lots of loans it is also because people are doing well enough financially to afford them. When people are doing well it makes sense to expand the money supply. This was not the case in the early 2000s and this caused a great deal of inflation. As the dollar becomes worth less, so does the mortgage backed security that people invested in. People start to sell their mortgage backed securities or require a higher interest rate to invest in them. Banks raise interest rates to compensate and then the borrowing of money slows. The economy slows along with it and in the case of the 2008 crash, the slowing of the economy prevented many people from being able to pay for mortgages that they probably should not have been given to begin with.
One of the first benefits of buying a home is usually a reduction in your monthly payment. A healthy real estate market typically results in this so you will likely pay less money each month than if you continued to rent. The difference between what you would spend on rent and what you spend on your mortgage payment is a return on your investment. Let’s look at an example:
You put $20,000 down on a home. Your mortgage payment is $1500 but rent for the same house would be $1800. You are saving $300/month or $3600/year. Just the savings in rent will give you an 18% ROI or return on investment for your first year and that is not including your tax deductions for interest paid! In rent savings alone your $20,000 investment will pay off in just over five and a half years. This is a part of how your mortgage becomes a financial tool and why it is a good idea to think about these very things before getting a mortgage.
In the example above we discussed your return on your investment from usually reduced monthly payment when you buy, but something else happens when you buy a house. You get to leverage your money. Let’s say you put 10% down on a $200,000 house. That means that your investment is $20,000. If home values in your area increase by 4% this year then you make 4% on the total value of your home, the $200,000, not the $20,000 you put in. If you put 10% down and your home goes up 4% in value then you actually have a 40% ROI for the money that you actually put in. Mortgages are the only place where you can expand and leverage your own money in this way. If you invest in $10,000 in stocks then you will only make money on that $10,000 in stocks but if you put that same $10,000 into a $100,000 home then you stand to profit on the whole $100,000, even though you have not put that much money in.
This is why some people choose not to pay their home off as quickly as possible – they can leverage their money. If someone is paying less for their mortgage than rent and they are making money on the entire value of their home, why would they pay it off more rapidly? In some cases that might be the best choice but for those with plenty of time to make money and make mortgage payments they might want to save up to buy their first investment property and to leverage their money again. Of course this comes with other responsibilities and risks but those who wish to can make money towards their life and retirement through investing in real estate.
Tax deductions are another great benefits to owning a home in many cases. The interest that you pay on your home becomes a deduction from your taxable income. This means that you will need to itemize your deductions. You will see a benefit if the interest that you pay and other itemized deductions exceed the normal standardized deductions. This situation varies for each person and you should speak to a tax professional to find out exactly how your mortgage interest may save you on your taxes.
There are many other tax saving strategies related to buying an investment property or using your home as an office. Depreciation and improvement and repair costs can be taken as deductions for these types of properties. Again, you will need to speak to a tax professional to discover what tax strategies can make your real estate investments more valuable for you.
You income will play a role in determining if you qualify to buy a house. Each loan programs, whether an FHA or conventional, will have guidelines about how much of your gross and net income can be taken up by your mortgage payments.
When getting a mortgage you will need to have a back-end DTI (debt-to-income ratio) that is below 43% of your gross income. This means that your car payment, student loans, credit cards, child support/alimony, and mortgage payment cannot exceed that 43%. The bank will verify your revolving debt by checking your credit report and other sources – they will find out about it. There are circumstances when these payments can account for up to 50% of your net income, such as having a very high credit score or a very large amount of savings. Each person’s situation is unique and it is not always advisable to borrow as much as you possibly can. You will want to consider changes to income, location and size of your household before choosing your mortgage type and amount.
Banks will usually want to see two years of job history in the same field in order to qualify for your loan. Some banks just want two years of consistent employment but a borrower who has been employed by the same company or in the same type of work will have an easier time qualifying and potentially receive a better interest rate.
It is a bit more complicated to show income for those who are self-employed, especially if they don’t take regular paychecks or deduct a lot of their business revenue on their tax returns. The requirements have recently loosened so that you only need the following:
Business cash flow. If you can show that your business regularly has the cash flow to support the income that you are claiming and you can both show that you have access to that account and a financial interest in the business then you can qualify without a regular paycheck.
One year of tax returns. The requirements for self-employed people is now 1 year of tax returns instead of two. This is helpful for those who just recently became self-employed or whose business has just began growing and providing steady income.
People with a salaried job don’t have to prove their self-employment income if they don’t need it to qualify for a house. Moonilighters, who do things like drive an Uber at night or teach yoga on the weekend, no longer have to prove their secondary income if it is not needed to qualify.
Credit is an interesting and complicated topic. What is bad credit? While we don’t have a concrete answer to that question we can tell you that there are many loan program available and you probably have a good enough credit score to buy a house. Now, your credit score may affect your rate or your required down payment but you can likely qualify. Since a mortgage is a long term commitment you may want to look into credit repair and see if there is anything that you can do to improve your score and perhaps your interest rate.
Your credit score will play a big role in choosing your mortgage loan program. Most conventional loans will require a credit score of 620 or higher and depending on your credit score and down payment, your interest rate will be adjusted accordingly. In some cases it may be better for someone with a 620 credit score to opt for an FHA loan. For example, if you are only putting 5% down and your credit score is a 620, your rate will be increases by 3.75% to cover the risk associated with your mortgage. These are Fannie Mae’s guidelines. (link to “What is a mortgage?”)
The moral of the story is that there is a loan for just about every credit score and while we know that FHA is your only option when you are below 620 and we know that people with a 720 above are usually better off with a conventional loan, there is a lot of grey area and it is best to explore which option is best for you with a professional, like a LoanVerify Mortgage Maven.
This answer has two parts. One regarding down payment and one regarding reserves. We will start with the down payment. Both FHA and conventional loans will require that your down payment is sourced and seasoned.
This means that it will need to be clear where the down payment came from (with documentation) and that it has been in your account for at least 60 days. The bank will know this by reviewing your last two month’s bank statements. These bank statements will also show any irregular deposits and the overall balance between what goes into your account monthly and what goes out. This means that leading up to buying a home it would be wise to not make any deposits that are not easy to document and to consider the ratios between your spending and deposits.
The second part has to do with your reserves. FHA loans do not necessarily require any reserves and conventional mortgages can require anywhere from 0-12 months of reserves, depending on your credit score and down payment. A LoanVerify Mortgage Maven can help you determine if you will need reserves and how much by simply downloading our app and answering 7 questions.
The amount of money that you put down matters for a few reasons. One of those reasons is mortgage insurance. If you get an FHA loan, which only requires 3.5% down for those with a credit score of 580 or higher, you will pay mortgage insurance payments. Those will affect your monthly payments. You will have to pay them for at least 11 years (so long as you don’t refinance). If you owe less than 75% of the home value after those 11 years then you will no longer have to pay mortgage insurance. If you choose a conventional loan you will pay PMI or private mortgage insurance when you put less than 20% down. If you are putting down less than 20%, factors like your credit score, income and savings will help to determine which loan program will be best for you.
When it comes to conventional loans your interest rate will be affected by your credit score and down payment. If you put down more than 10% you can avoid any mortgage insurance and potentially receive a lower interest rate than you would have otherwise received if you had put down less. Strategizing your ideal mortgage is an important part of the home buying process and we are here to help.
The minimum down payment for a conventional loan is 3% and for an FHA loan is 3.5% If you want to put 3.5% down for an FHA loan you will need a credit score of 580 or greater. Conventional loans require a credit score of 620 and a minimum of 3% down. It is important to remember that putting only 3% down with a 620 credit score will add 3.75% to your interest rate. If you are looking for a low down payment option it is important to explore the full cost benefit analysis of FHA and conventional option.
Wherever the down payment comes from it needs to be documented. You can borrow from your 401k, IRA, friends, family or your savings account but you need to be able to verify where it came from and it needs to be in your bank account for at least 60 days before closing your loan.
All opinions expressed by LoanVerify on this website are solely LoanVerify opinions and do not reflect the opinions of any wholesale mortgage lender, direct mortgage lender, federal depository bank, FNMA, FHLMC, HUD, or any other lending institution or government agency. LoanVerify opinions are based upon information the company considers reliable, but neither LoanVerify nor its affiliates and / or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. LoanVerify statements and opinions are subject to change without notice. LoanVerify does not guarantee any specific outcome. You should be aware that mortgage strategies discussed may fluctuate in price or value. Mortgage strategies mentioned may not be suitable for you. This material does not take in to account your particular objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make independent decision regarding mortgage loans mentioned here. Before acting on information found on this website, you should consider whether it is suitable for your particular circumstances.