A minimum credit score of 660 is required by most mortgage lenders (however, you'll have access to lenders who offer loans at 580 scores) in today’s housing market. This is a far contrast from ten years ago when anyone with a pulse could qualify for financing. This minimum is necessary to comply with guidelines set forth by Fannie Mae and Freddie Mac, the two largest suppliers of home mortgage funds, and is not a problem if you maintain a high score. But if you’ve experienced credit problems in the past, there’s another option that your lender may not tell you about.
FHA mortgage loans, which are insured by the Federal Housing Administration, do NOT require a minimum credit score; it is various mortgage lenders who set their own credit score (and other criteria) requirements (a.k.a. investor overlays). This is perfect if you’re in the process of rebuilding your credit. You can qualify for a home loan at a competitive rate with less-than-perfect credit. Plus, the down payment requirement on an FHA mortgage is less than a conventional mortgage.
#2. Loan Fees and Rates Can Vary Among Banks
The good faith estimate (GFE) a lender provides once you’re approved for a home loan details the various closing costs, such as the credit report fee and the title search fee. Plus, mortgage lenders typically charge a 1% – 2% loan origination fee, which is essentially their profit. The majority of these fees are paid on your closing date, and depending on where you live, closing costs can range between 3% and 6% of the sale price. This is a huge chunk of cash, and if you don’t have the money, this can kill the mortgage deal. However, you can shop around and look for cheaper fees.
A lender may charge higher fees betting on the fact that you will not shop around. Don’t go along with the first mortgage loan quote you receive. Shopping around doesn’t hurt your credit score. As a matter of fact, multiple mortgage applications completed within a 30-day span count as a single inquiry, according to MyFICO.
#3. It’s Cheaper to Close at the End of the Month
You can choose any day of the month to close on your home loan, but there’s something your lender might not share. Another mortgage secret exposed: Closing at the beginning of the month actually increases the amount of “prepaid interest” that’s due at closing.
Let’s say you close on November 6th. In this case, your first mortgage payment isn’t due until January 1st. This mortgage payment includes December’s interest. But since interest accrues from the date your transaction closes, you’re also responsible for the interest until December 1st. Thus, you’re required to prepay 24 days of interest at closing.This increases your closing costs, but if you wait until the end of the month, you lower your amount of prepaid interest. For example, someone who closes on November 27th only pays three days of interest at closing.
#5. How Much You’re Actually Paying in Interest
Some mortgage lenders push 30-year mortgages due to their affordability factor. However, you can save on mortgage interest rates and build equity faster with a shorter mortgage term. The more interest you pay, the more money your mortgage lender receives. Personally, I like the 20 year mortgage because it allows you to build equity more quickly and still allows affordability. For example, on a $100,000 loan amount with 4.5% interest the payment difference is only $125.96. If you choose the 15 year loan, that payment difference increases to $258.30. I’m a BIG believer by leveraging your cash into investment vehicles, such as a good growth stock mutual fund (with a good 10 year track record) with a history of at least an 8% return*. Even after your tax liability, you are still earning more than the 4.5% interest the lender is charging you. (*Consult your financial adviser)
#6. You Can Take a Mortgage Break
Most homeowners are familiar with government modification programs and short sale options, which can stop a mortgage foreclosure. Yet, there’s another hardship provision that isn’t heavily advertised. Unknown to many, some mortgage lenders offer a skip payment or forbearance option to help borrowers who experience financial hardship. Depending on the severity of the situation, a bank may suspend payments for several months. With this mortgage secret revealed, you can contact your lender for mortgage relief the next time you endure severe economic hardship.
Mortgage lenders advertise no-closing cost mortgages and refinances to bring in new customers. Understand, however, that lenders have to make money somehow. You might avoid out-of-pocket costs at closing, but in situations like this, lenders typically charge higher mortgage interest rates. This is how they compensate for offering a no-cost home loan.
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