Mortgages rates may not be as low as they were a few years back but they have stayed at a surprisingly low level. The average rate is about 4.14% at the moment, this is great compared to the 6%+ rates of the last decade. Keeping this in mind, ‘now’ makes for a great time to purchase a house – granted, of course, you have your finances in check (good savings, credit score/history, stable flow of income, etc.) and have a desire to be a homeowner.
Unlike most other loans, getting a mortgage is a more strenuous and lengthy process – there is a certain approach you have to follow in order to be approved.
Here are some points to keep in mind when dealing with mortgages and the home buying process in general.
Assess Mortgage Insurance
Borrowers are required to pay mortgage insurance when they are unable to afford at least a 20% down payment on the mortgage – this is done so that lenders can remain protected in case the borrowers default on their loan.
Until 2014, borrowers had to rely on Federal Housing Administration (FHA) insured loans because they only required a 3.5% down payment. However, insurance premiums they offered were extremely high. In 2015, Fannie Mae and Freddie Mac lowered the 20% requirement to 3% – the premium plan depends on one’s credit score, credit history, amount put for down payment, and other risk factors. The best part is that private mortgage insurance premiums are generally affordable when compared to FHA premiums.
Get Preapprove Before Closing
This tip is more regarding the home buying process than it is about mortgages.
Looking for houses before getting preapproved should be avoided at all cost. This is because not only will the sellers find the buyers less attractive for their lack of dedication, but many complications can arise in the process and therefore it is best to get it out of the way to make life less complicated.
The key is to get an actual preapproval – and not just work with estimates. A lender will give more accurate numbers based on the buyer’s credential (credit score/history, income, etc.). This is important because buyers need to understand all the financial obligations they will face as home owners.
Keep Your Credit Score In Check
Altering credit obligations between preapproval and closing of the mortgage severely impacts the buyer in a negative way; not only does the credit score and history take a bump, future lenders may raise the rates and fees of the loan – or simply disqualify the buyer.
One should also refrain from any activity that significantly impacts the credit. It is ideal to keep all credit card balances in check (do not miss any payments), opening or closing credit lines, buying a new car (or any other loan) should be avoided until your home is purchased.
In the two months leading up to the closing of the deal, it is advised that buyers keep all their financial documents organized. This includes all bank statements, pay stubs, any cancelled checks, W-2s, tax return for at least 2 years, and all essential documents for another owned property. It is extremely ideal to scan these documents and creating PDF copies as well – as most communication now takes place through the internet.
Do Not Tamper With Other Investments
It is ideal for buyers to not transfer, reallocate, or withdraw money from any investments. Some scenarios to avoid include transferring money from savings account to certificate of deposit (CD), cashing investments from stocks, retirement accounts (401 (k), IRA, etc.), or CDs. This is to avoid any hassle that may arise from proving the lender where the money came from.
Similarly, it is best to not use savings account to pay off any debt as the lender sees this as a risk factor – they worry about your means of paying the closing costs.
Get Ready To Answer “Unnecessary” Questions
Most lenders want every detail of a buyer’s financial life before they feel confidence in their investment – unfortunately, many questions could seem unnecessary. The best (and the only) approach is to answer them.
For example, one can be asked about large cash gifts in recent past (discussed in next point), the reasons for any credit line denials and/or why one changed their jobs recently. These inquiries are quite normal and must be dealt with patience.
Large Cash Gifts
Receiving money from relatives to help pay the down payment is normal – but lenders want reassurance that the money is actually a gift and not a personal loan. Therefore, it is best to deposit all large cash gifts at least 2 (but preferably more) months to avoid having to source it to the lender – hence it is advised that the gifts be received way ahead of the time of closing.
If the lender does notice the gift during the inquiry, the gift-giver is then required to prove that it was a gift by signing a gift letter. The gift giver could also be asked for a copy of the check and verify that they are financially stable to afford the gift.
Strict Planning For Those Self-Employed
Since stricter mortgage requirements went into effect in 2014, self-employed buyers are required to show two years of tax return documents; this can be a tricky situation as self-filed taxes can raise a lot of red flags. It is ideal for self-employed buyers to take fewer deductions a few years before they seek loans – this is one of the best ways to show high income (at least on paper). If this is not possible, it is best to co-sign the loan with someone who files a W-2.
Unfortunately, the only other option is to seek loans through unorthodox institutions.
The low rates have allowed many mortgage owners to reap benefits of refinancing their loans; paying the same monthly payment with a lower interest rate certainly saves one lots of money that would go into paying the interest. Refinancing may not be so beneficial if one has just picked up a loan – but could be for someone 7+ years into their plan. It is highly encouraged to talk to the broker to see if refinancing is an ideal option.