5 Tips for Mortgage Shopping

Home mortgage is one of the biggest loans most individuals borrow during their lifetimes. Yet, most borrowers enter the process of obtaining a home mortgage without a solid game plan, which can potentially cost them thousands of dollars more every year in mortgage. Here are some of the useful tips to follow while shopping for a home mortgage: 

  1. Know what you can afford: Buying more than what you can afford can potentially ruin your financial well-being. Assess your earning potentials and calculate your monthly expenditures to make sure you will be able to pay your mortgage, taxes, insurance, maintenance, and utilities, as well as pay for emergencies, for several years. A conservative approach is to borrow 10% to 15% less than what you can afford. Mortgage calculators can help you determine the amount you can borrow based on factors such as, what monthly mortgage payment you can afford, type of loan best suited for your situation, your credit score, interest rate, etc. 
  2. Learn about various loan options you may qualify for: There are different types of mortgages (fixed rate mortgage, adjustable rate mortgage, hybrid, etc.), each with various options (20-year fixed, 5/1 ARM, convertible ARM, balloon payment, etc.) and features (early payment penalty, assumability, portability, etc.) offered as either conventional (non-government insured) or government-insured (FHA, VA, USDA, etc.) loans. Furthermore, they can be classified as a conforming loan or a jumbo loan, depending on the amount you need to borrow. Do your own research and/or work with your mortgage broker or lender to learn about various mortgages you may qualify for, and understand the pros and cons of each to select the one that is best suited for your situation. 
  3. Understand actual loan cost: Once you have determined the type of loan best suited for your needs, before embarking on a shopping tour, understand the actual cost of that loan. The actual loan cost includes not just the interest rate, but also various fees that may be associated with securing that loan. Some of the lender-related fees may include discount points, origination fee, application fee, credit report fee, private mortgage insurance, title insurance fee, appraisal fee, etc. Other fees may include homeowner insurance, title insurance, recording fee, attorney fee, survey fee, etc. Never hesitate to ask questions about all fees – why they are charged and how they are calculated.
  4. Shop around: With the knowledge acquired while going through the above three steps, now you are ready to go comparison-shopping for the type of mortgage you need. You can get a mortgage from mortgage lenders or mortgage brokers. You can either contact a bunch of different mortgage lenders and compare their interest rates and fees with one another to determine the least expensive one, or you can work with a mortgage broker who typically represents many mortgage lenders and therefore can do this comparison shopping for you. Think of mortgage brokers as your mortgage “personal shoppers”. Mortgage brokers also handle all the paperwork and coordinate with all the parties involved in a mortgage transaction.
  5. Know your rights: Fair lending is required by law. The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act. The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin. Under these laws, a consumer may  be refused a loan based on these characteristics, nor be charged more for a loan or offered less favorable terms based on such characteristics. 

Congratulations on finding your dream home and best of luck finding the best mortgage!

10 Mortgage Terms a First-time Homebuyer Should Know

There is a lot to learn when it comes to home mortgages, especially if you are a first-time homebuyer. Certain mortgage terms that you may come across during the process of securing your home mortgage may be quite confusing and overwhelming, yet understanding them is extremely important for making informed decisions.

Here is a brief description of 10 mortgage terms that you are likely to encounter during the process of securing your home mortgage:

  1. Pre-qualification: It is an estimate of how much you can afford in a mortgage payment. It is based upon the information provided by you and is subject to the approval process, including further details such as a credit report, appraisal, and income verification.
  2. Pre-approval: Unlike a pre-qualification, a pre-approval is a firmer commitment by the mortgage provider and is a more formal process, which includes a credit check, as well as employment verification. During a pre-approval, the mortgage company does all the work of a final approval, except for the appraisal and title search.
  3. Fixed Rate Mortgage (FRM): As the term suggests, in an FRM, the interest rate remains the same (the term “fixed”) throughout the life of your loan (i.e., 5% for 30 years). An FRM offers mortgage rate and payment stability and is typically more preferable if you plan to live in the same house for 7 years or longer.
  4. Adjustable Rate Mortgage (ARM): Unlike an FRM, an ARM is a mortgage type in which the interest rate adjusts to a new rate (the term “adjustable”) after the expiration of the initial mortgage term. For example, 5/1 ARM means your interest rate will remain the same for the initial term of the first 5 years and will then adjust every year to a new rate starting from year 6. Compared to an FRM, an ARM offers lower interest rates during the initial term but higher volatility in your mortgage rate and payment after its expiration, making it more preferable if you plan to live in the same house for less than the initial mortgage term.
  5. Government-insured mortgage: The examples of government-insured mortgages include FHA, VA, and USDA loans. They are insured either partially or completely by the government, and offer lower down payment requirement (typically 3% to 5%) and less stringent mortgage-qualifying standards, but carry a higher interest rate as compared to the conventional mortgages. 
  6. Conventional mortgage: Unlike government-insured mortgages, conventional mortgages are not insured by the government. They come in various types and features, such as fixed or adjustable interest rates.
  7. Private Mortgage Insurance (PMI): Since the conventional mortgages are not insured by the government, you may be required to purchase a PMI, which is a type of mortgage insurance used with conventional mortgages to protect the lender in case you default.
  8. Discount points: They are actually a prepaid interest on the mortgage loan. A point is equal to 1% of the loan amount. The more points you pay, the lower the interest rate on the loan, and vice versa.
  9. Appraisal: It is a process of estimating the value of your property by a qualified professional appraiser. The lender requires a home appraisal.
  10. Title insurance: It is an insurance policy that protects your and your lender’s financial interest in property against losses due to title defects, liens, or other title-related matters.

Knowing these common mortgage terms helps you make informed decisions while going through the process of securing one the biggest loans of your lifetime.

Mortgage Myths

When it comes to home mortgages, there is a lot of conventional wisdom out there that is either misleading or flat-out wrong, causing borrowers to make poor financial choices and costing them thousands of dollars more in their mortgage payments. Even worse, these misconceptions may discourage them from even attempting to seek a home mortgage.

Here is a list of six most prevalent mortgage myths:

  1. Your credit has to be perfect or near-perfect: While there is no doubt that a high credit score helps in getting a home mortgage, a not-so-high credit score is not a deal-breaker. If you have some credit blemishes and financial scrape-ups, but for the most part pay your bills on time and make a steady income, you probably don’t have much to worry about.
  2. You must have a 20% or more down payment: This is a matter of preference, not necessarily a requirement. Putting 20% down payment is preferred by some borrowers to avoid paying for Private Mortgage Insurance (PMI – typically about 0.5% higher mortgage rate), but it is not required to qualify for many mortgage programs. If you can’t afford to put 20% down, there are several mortgage programs available for your situation (for example, FHA, VA, USDA, etc.). Depending on your credit history and income situation, you may even qualify for a conventional mortgage with less than 20% down payment.
  3. A 30-year fixed rate mortgage is always the best: The mortgage term is the total number of months it takes to pay off the mortgage. The longer the term, the lower the mortgage payment, but the more interest paid over the total life of the loan, and vice versa. Also, an adjustable-rate mortgage allows a lower mortgage payment but comes with a mortgage rate and payment volatility. Thus, whether or not a 30-year fixed-rate mortgage is the best for your situation depends on many factors including your mortgage payment affordability, budget flexibility, desired longevity of home ownership, and tax situation.
  4. Lowest interest rate is always the best: Not necessarily. For example, an adjustable-rate mortgage offers a lower interest rate compared to a fixed-rate mortgage during the initial mortgage term, but comes with a much higher volatility in interest rate and mortgage payment in later years. Also, while comparing two identical mortgage products, make sure the product with a lower interest rate doesn’t come with a higher mortgage fees to make up for the lower interest rate and then some more.
  5. Pay off your mortgage as soon as you can: While paying off mortgage early may relieve you from the financial burden of being able to make mortgage payment every month and may make sense in some financial situations, this is not always the right move and it warrants some considerations. For example, consider how paying off mortgage will impact your tax situation and needs for an emergency fund. Instead, consider using this extra money either to pay down your other debts that have higher interest rates than your mortgage rates, or to invest it in investment vehicle(s) with higher return potentials with the same risk, or both.
  6. You can tax-deduct your mortgage interest: While your mortgage interest is generally tax deductible, there are some limitations you should be aware of. For example, your mortgage interest is tax deductible only if you itemize your deductions on your federal tax return. Even then, you only benefit to the point where your total deductions exceed the standard deduction that you are already entitled to. Also, remember your interest payments shrink over time as you pay down the mortgage, so your tax benefit may not be as much as you expect it to be in later years.

Now that you are armed with better information about mortgage myths and what to avoid, go out and find a mortgage for your dream home with confidence.

Main Reasons for Mortgage Denial

Being denied for a mortgage loan can certainly be a disappointment, especially when you consider all the hard work you had gone through applying for it. When your mortgage application is denied, the best thing to do is to find out the reasons and remedies to improve the chances of approval.

According to the Mortgage Bankers Association, almost 30 percent of homebuyers who apply for a mortgage are turned down. Also, about 1 in every 2 applications for refinancing are rejected. Below are the top five reasons why your mortgage loan application could be denied:

  1. Poor credit history: A poor credit rating is the most common reason for mortgage denial. Your credit history is reviewed by mortgage lenders when looking at whether or not, or how much, to lend you. If you had problems paying your debt in the past, for example, on a credit card, personal loan, or even your utility bills, it will show up on your credit report and will very likely be the reason for a denial. This is because the lenders will consider you more likely to miss a mortgage payment or be unable to pay on time. Checking your credit report regularly will enable you to stay on top of what it contains and get any incorrect information fixed.
  2. Too much debt: A debt-to-income ratio compares your monthly debt payments, including your estimated monthly mortgage payment, to your monthly income. It assures the sufficiency of your income in comparison to your debt obligations. The lenders prefer borrowers to have their debt-to-income ratio at, or below, a certain level (usually around 40%), and if yours is higher than that, try paying down some of the debts that have the maximum impact in lowering your debt-to-income ratio.
  3. Undocumented income: The most important factor while assessing your application is your income and expenditure. Lenders look more favorably upon the incomes that are consistent, sustainable, and verifiable, rather than just their size. Make sure you have accurate records of your finances and documentations of all of your income (i.e., most recent W-2 statements, tax returns, bank statements, and paycheck stubs).
  4. Inadequate employment history: Before applying for a mortgage, it is essential that you have a consistent employment history. It is better if you have two years of consistent employment before applying for a loan. The reason is that a lender wants to know that you are able to hold down a job long enough to pay back the money you have borrowed.
  5. A small down payment: While there are many mortgage programs and lenders that require a smaller down payment (for example, an FHA loan requires only 3.5% down payment), providing a larger down payment can offset some of your other not-so-strong loan qualifications (such as higher debt-to-income ratio or weaker credit than preferred), if any. The lenders look at your down payment as your skin in the game, so bigger is always better when it comes to a down payment to strengthen your home mortgage loan application.

With a little patience and extra work at your end, you can find yourself in a position to get your mortgage application approved the next time.

Why Use a Mortgage Broker?

Like most mortgage borrowers, your home mortgage is perhaps one of the biggest loans you will borrow during your lifetime. Shopping, comparing, and negotiating for the most favorable mortgage deal can potentially save you thousands of dollars over the life of the loan. Since most borrowers simply don’t have the knowledge, skills, and time required to secure the best deal for their situation, the solution is to work with an expert who does – a mortgage broker.

A mortgage broker is a middleman between mortgage borrowers and mortgage lenders/banks, who gets paid to facilitate a transaction. For mortgage borrowers, a mortgage broker is their personal shopper who works on their behalf to secure the most favorable mortgage rates and terms, in the most timely, efficient, and stress-free manner. For mortgage lenders/banks, a mortgage broker is someone who does all of the work on the loan – from origination to qualification to submission to closing.

Unlike a direct lender or a bank, a mortgage broker works with dozens of different lenders and banks with various loan standards and processes, to offer his clients the widest variety of mortgage programs and products at the most favorable rates and terms possible.

A mortgage broker is considered as:

  1. An Expert: Mortgage brokers are experienced and qualified industry experts. A mortgage broker has an experience in securing hundreds of mortgages from different lending sources for various credit situations over the years, which can be helpful in identifying and securing the most suitable loan option at the most competitive rates and terms for you.
  2. A Personal Shopper: Mortgage brokers have the knowledge, skills, and time needed to shop, compare, and negotiate the best mortgage deal for you. A mortgage broker helps you prepare a strong mortgage application that is likely to receive multiple bids from various banks and lenders. The more bidders you have competing for your mortgage, the more you save.
  3. A Negotiator: Mortgage brokers are savvy negotiators. A seasoned mortgage broker is experienced in negotiating the best mortgage rates, fees, and terms numerous times in the past, which can be invaluable in negotiating the best deal for you.
  4. A Facilitator: In addition to shopping, comparing, and negotiating the best mortgage deal for you, mortgage brokers also handle all the mortgage-related paperwork, and coordinate amongst various parties involved in the loan process to facilitate a successful transaction.
  5. Responsive: Mortgage brokers are more accessible and approachable than direct lenders and banks. You can’t reach a direct lender or a bank, but can talk to a mortgage broker anytime during the mortgage process. Also, mortgage brokers don’t keep “banker’s hours”, meaning they are likely be available after regular business hours and on weekends.

Mortgage brokers are typically compensated by the lenders for the services they provide to both borrowers and lenders. To earn your business, mortgage brokers create a multiple bidding situation on your loan application, and then negotiate with all the bidders to ensure that your overall cost of borrowing (interest rates, mortgage fees, miscellaneous charges, etc.) is less than what it would have been had you worked directly with a single lender or a bank.

In a nutshell, a mortgage broker helps you find a better deal on your mortgage than what you might be able to find on your own, while also handling all your mortgage-related paperwork and providing you a superior customer service experience.