Educating homebuyers about mortgage misconceptions related to down payments, credit requirements and other issues might ease the process of them applying for a loan – even if a slight uptick in rates occurs in 2017.
Holden Lewis listed 10 mortgage tips to help homebuyers and those refinancing in an article updated Nov. 25, 2016 on BankRate.com. In the article, Lewis began with the misconception that lenders demand down payments of at least 20%. That’s not true, he wrote.
1. Many lenders require only small down payments. Some don’t require any money down, at all. Among those lenders who offer a 0% down payment to those who qualify: the Department of Veterans Affairs, U.S. Department of Agriculture and Navy Federal Credit Union. Down payments as low as 3.5% are possible with Federal Housing Administration-insured mortgages. Even some private lenders approve conventional mortgages with down payments as low as 3%.
2. Imperfect credit? Federal Housing Administration-insured loans were approved for borrowers with an average credit score of 686 in 2016, according to Bankrate.com. FHA borrowers with credit scores between 500 and 579 have to put at least 10% down, however.
3. Don’t deplete savings to buy a house. Mortgage lenders prefer borrowers have reserves, so mortgage payments aren’t in jeopardy when unexpected expenses arise. Lenders calculate minimum reserves needed and might require mortgage insurance if the down payment is too low.
4. If you refinance, consider a 15-year loan to save money. The shorter mortgages tend to have lower interest rates compared with 30-year loans, and borrowers pay interest for fewer years.
5. Buy what you can afford now. The thinking that stretching finances now because you’ll probably make more money later isn’t sound planning. It’s smarter to move up to a more expensive property when you can afford it and buy what you comfortably can afford now. The rule of thumb: total monthly debt (mortgage included) shouldn’t be more than 36% of pre-tax income.
6. It’s possible to get a mortgage and not pay closing costs. Mortgage fees and closing costs can cost thousands of dollars out-of-pocket. What borrowers might not know is they might be able to pay a slightly higher interest rate—in other words, include the cost of the closing in the mortgage—so, they don’t have to pay out-of-pocket.
7. Veterans often don’t know they can get a zero-down VA loan. VA loans can be used to buy a primary home without a down payment; yet, many veterans, according to a 2010 survey, didn’t know the VA benefit existed or knew little about it.
8. Cash-out refinances have had a resurgence since the housing bust wiped out billions in home equity. Homeowners who want to refinance their mortgages for more than the amount owed might have this option. Other, sometimes better, options for short-term money needs, are to pull the money from a home equity line or line of credit.
9. Just because borrowers have conventional mortgages doesn’t mean they cannot refinance into a VA loan.
10. Lay low, financially, during the underwriting process. Lenders review borrowers’ credit during the loan application period and just before closing. Maxing out credit cards during the underwriting process is a bad idea. Be patient, according to Bankrate.com.
For more great articles on mortgage lending trends, visit OnCourse Learning’s Financial Services blog here.
Source: “10 tips to have an awesome mortgage in 2017,” Bankrate.com (Updated Nov. 25, 2016)