As a mortgage broker, educating prospective home buyers is my favorite part of the job. And even after many years in the industry, I’m still surprised by some of the things I hear about why my clients are hesitant about the process of getting a home loan. 2015 should be another robust year in the housing market in Central Oregon and for those considering a home loan in the near future, here are the top 5 misconceptions about home loans, Demystified!
MYTH #1: “Getting a loan is harder now because banks don’t want to lend money”
A bank that doesn’t want to lend money probably won’t be around very long! The mortgage industry is a cyclical business model that requires that banks continue to make loans, and then those loans are bundled and sold on the secondary market in the form of mortgage backed securities. The home loans available today have always required full disclosure of income and assets by applicants, even before the housing market imploded in 2008. “Reduced documentation” or sub-prime loans that required little more than a credit check and a cursory verification of your employment prior to close no longer exist. Getting a mortgage in the current lending environment is a full disclosure process, and lenders may request paystubs, tax returns, bank statements, a detailed credit report, and explanations for any aspect of your fiscal profile that may be out of the norm. But the reward is that you get the best loans possible by doing so.
MYTH #2: “I need to wait and save. I don’t have 20% down.”
You’re not alone! But that doesn’t mean you can’t purchase a home. Mortgage Insurance (MI) is required on most conventional Mortgages (those that are saleable to Fannie Mae and Freddie Mac) where the buyer puts less than 20% down. Currently, the minimum down payment for a conventional loan is 3% of the purchase price, and mortgage insurance is tiered based on the percentage of the sales price the buyer puts down and their credit score. However, the costs of mortgage insurance are not as painful on the wallet as one might think, and borrowers can choose a monthly paid policy that is cancellable once the borrower has a certain equity position in the home, or a policy that is “baked into” the rate they choose. Both varieties have their pros and cons, and the type of MI a borrower chooses should be determined—among other things—by how long they plan to keep the home. In the case of federally insured loans, like FHA loans, Federal VA loans, and USDA loans, the mortgage insurance costs are paid typically through a one time funding fee added to the loan amount at closing, and a monthly policy. In the case of USDA and federal VA loans, a borrower can purchase a home with no down payment, while FHA loans require a 3.5% down payment.
In the low rate environment we’ve enjoyed over the last few years, many homebuyers have chosen not to make a larger down payment—even when the funds are available—in order to keep those funds working for them in an interest bearing investment. The theory being, why not borrow a little more, put less down, and let those funds that could be used for a down payment keep working for you. careful consideration of each borrowers unique fiscal profile, their long and short term financial goals and their comfort with the payment should have a bearing on how a mortgage will fit into a homebuyers overall fiscal profile and putting more money down towards a home purchase may not be the best option in every situation.
MYTH #3: “I’m self-employed, so my tax returns don’t show enough income to qualify”
What you report to the IRS and how a lender will analyze your income are very different. “Paper losses” like depreciation, amortization, casualty loss, business use of your home and many other line items on your tax returns that drop your taxable income are actually added back into your bottom line when qualifying for a home loan. a Skilled loan officer will have the ability to complete a comprehensive income analysis of both your personal and corporate returns to determine your qualifying income for purchasing a home, so if you’ve been self-employed for more than a year, consider having a mortgage broker calculate your buying power. You might be surprised!
MYTH #4: “I can’t qualify because my credit isn’t perfect”
Lenders realize that life happens. A bill gets missed or maybe the housing collapse in 2008 resulted in a major derogatory event in your credit history. It’s not the end of the world, and even if you’re not ready to buy now, consider having your credit history reviewed by a knowledgeable broker. They should be able to give you some hints about how to improve your scores to get the best terms possible. Oftentimes, restructuring debts, closing outdated accounts, or even opening a new revolving account to build credit history could pay big dividends in the form of better terms on your next loan when the time comes.
In addition, the waiting periods after a significant derogatory credit event, like a bankruptcy, foreclosure, or short sale, vary between conventional loans and government product like FHA or VA, so it’s wise to have a skilled broker thoroughly investigate the derogatory event to determine which waiting period will apply.
MYTH #5 “There’s no rush, the government will keep rates low”
Our government does NOT control mortgage rates. The sale of Mortgage Backed Securities and the price they garner on the open market are what predicate the rates that consumers can expect on mortgage loans. And the sale of mortgage backed securities, like stocks, other bonds, and other investment vehicles will vary from day to day and even hour by hour during trading. As such, Mortgage Rates can and do change daily in response to a myriad of economic events both domestically and globally over which our government has no control. And as our economy continues to improve along with economies around the globe in 2015, you can expect that mortgage rates will rise. Most economic forecasts predict 30 year fixed rates to land around 5% by the end of 2015.
So for those of you considering a home purchase in 2015, don’t let the “myths” deter you, and don’t be afraid to start the process now.