Understanding the Mortgage Process
The mortgage process can be the most stressful part of buying a home, but as with most things in the home-buying process, the more you know, the better. When it comes to the mortgage process, there are a number of misconceptions out there. Take the time to learn as much as you can about this step and to ask questions if you don’t understand something. Below are a few facts about the mortgage process to set the record straight.
Truth: Your Highest Credit Score Doesn’t Always Win
Thinking that your highest credit score will be the one the lender uses when applying with a co-borrower makes sense; but it’s not how most lenders work. Most lenders will look at each borrower’s three credit scores (from Experian, TransUnion, and Equifax), taking the middle score for each borrower and then take the lower of the two. For example, if your score is a 730 and your co-borrower is a 680 then most lenders will qualify you with the 680 score. This will be directly tied to your mortgage rate, meaning that a 680 will push up your rate considerably or could make you ineligible. There are exceptions but typically only on really high loans of over $400,000.
Truth: You Can Choose Fixed Rate or Adjustable Rate Loans
Many buyers, after the financial crisis of 2008, decided to go with more conservative and longer loans at a fixed rate. While this can be a good option, since the rate never changes, this also means that the longer the rate is fixed the higher it will be from the start. How long are you planning to own the home? If you plan to live here a long time then maybe a fixed rate 30-year loan is for you. But you need to really ask yourself this question if you are trying to decide between fixed and adjustable rate loans. For the best deal you should try to get the loan terms to be as close to the amount of time you intend to own the home.
Truth: Your Rate Quote Isn’t Set in Stone
You’ll be quoted a rate in pre-approval and it will change many times after so don’t think your first rate is your end rate. Mortgage rates change several times a day because they are tied directly to the trading of mortgage bonds; this means your rate isn’t locked in until you decide on a home. You’ll want to have your lender or your agent keep you up to date throughout the shopping process about your rate.
Truth: Mortgage Insurance is Your Choice
Most people will tell you that if you are planning to put down less than 20% you are required to pay for mortgage insurance, which is a lender risk premium that is added to your monthly cost. This isn’t always the case. You can create what is called a piggyback loan, combining a first and second mortgage. The first mortgage will be capped at 80% of the home’s value and the second mortgage will be the balance of what you plan to finance. You should sit down and compare the two options and decided which one will be most cost effective for you and your family.
While you can’t take out all the stress from the home buying process, you can make it move a little easier by taking the time to find out the truths of the matter. Learn as much as you can about the different steps and processes before you get started. If there is something that you don’t understand or want more information on, you can always ask your agent or lender to explain it better.