Getting organized before trying to obtain a mortgage can help the process unfold more smoothly. Knowing what to expect can help ease your anxiety surrounding the process. Below are some of the most common mortgage misconceptions, debunked.
Approval is Based on Your Best Credit Scores
If you are applying for a mortgage loan with a co-borrower – perhaps your significant other, or a business partner – you may think your lender will base approval on the best credit score between the two of you. Think again. Lenders will typically use the three recognized federal credit bureaus, Equifax, TransUnion and Experian, taking the middle of the three scores for each borrower to use in their process. The lower of these two scores is what they will use to base your qualification and loan approval on. Rates are also based in part on credit score; generally, the lower the score, the higher the rate. There are some exceptions, though. One of the more common exceptions occurs when the individual with the higher credit score is also the higher earner as lenders will often go with the higher score in this case.
The Rate You’re Quoted is Not the Rate You’ll Get
Very rarely is the rate you are quoted at the beginning of your pre-approval process the same as the one you will end up getting. The rate on your own mortgage loan is tied to the rates of daily traded mortgage bonds and changes constantly, often times even over the course of the same day. Also, you will be required to furnish your lender with a certain amount of information during the approval process, which will also affect your rate. One of the biggest pieces to your rate puzzle will be the actual property you decide to buy, as it impacts not only the collateral you have backing your loan, but also how much you will need to borrow as a loan.
Fixed Rate Mortgages Are Better than Adjustable Ones
The aftermath from the recent recession caused borrowers to become more conservative than before, with the majority of them preferring 30-year fixed loans as mortgages. This made complete sense, as the rate and payment on a 30-year fixed loan will not change once secured, which was important as lenders became more and more conservative when it came to how much and who could borrow money. However, as the economy continues to recover it is important you ask yourself how long am I really going to own this home, or keep this loan? If you don’t plan on living at your home for more than five, maybe ten years tops, obtaining a five or ten-year adjustable rate mortgage (ARM) can lower your rate by as much as 1 percent – which, depending on the size of your loan, can translate to savings of several hundred dollars per month.
For Down Payments of 20 Percent of Less, Insurance is Always Required
Mortgage insurance is the premium lenders charge for the risk they assume when lending money for the purchase of a home. This usually is the case when a buyer’s down payment is 20 percent or less of the home’s price. For a borrower, this means a higher total monthly housing cost. However, it is possible to put 20% or less down for a home and avoid paying mortgage insurance. A common way to do this is through a combination of your first and second mortgage – known as a “piggyback.” A “piggyback” caps the first mortgage to 80 percent of the home’s value, the second mortgage is then the balance of what you want to finance.