Mortgage Myths with Cassie Fuchs from Southeast Mortgage
Myth: You Need 20% Down to Purchase A Home.
Conventional Loan programs allow for as little as 3% down. Some Government backed loans require as little as 0% down. Less than 20% down does mandate Private Mortgage Insurance (sometimes referred to as PMI or MIP). The good news is PMI is tax deductible. On conventional loans, the PMI will disappear without the need to refinance your mortgage. FHA loans will eventually have to refinance into a conventional loan to eliminate PMI.
What’s most common? Conventional: 5% Down. FHA: 3.5% Down. This means most people put LESS than 20% down and enjoy the thrill of home ownership, a healthy tax deduction and, yes, yardwork! 😊
Myth: Prequalification Is The Same As Pre-Approval
Pre-qualification (i.e. Pre-qual) and pre-approvals are not the same nor are they interchangeable.
• First Round : Quick glance at a borrower’s financial information
• Based on borrowers responses and claims (not verified)
• Sometimes borrowers misinterpret income (gross, net, # of times they get paid per year, 1099s, tax returns, write-offs, etc)
Value: Feedback to the borrower and agent on home and mortgage payment price point – and allows the home search to begin.
*My team at Southeast Mortgage upgrades the pre-qual 2 steps further. This takes more time but yields more accuracy. It’s critical that supporting documentation is expected from the borrower in a timely manner*
• The Pre-Approval is much more powerful than a pre-qualification. This is verified and validated. This is similar to a mini-underwriting session.
• All Tax returns, W2s, Paystubs and Bank Statements are reviewed to validate the borrower’s stated information in the application or updated for accuracy.
• The validated application is submitted into an Automated Underwriting System (AUS). Note: There are 2 primary AUS engines, Desktop Underwriter, (often called simply by the letters “DU”) or Loan Prospector (similarly, the letters “LP”) to verify the loan’s inevitable approval more completely.
• Value: The Pre-Approval, powered by the AUS approval gives us a “picture” of an approved loan. Now, we verify employment and updated bank statements to support the approved “picture” leading to final approval.
*** Note that any changes the borrower can make can alter the picture. We always advise the borrower to avoid major changes (purchases, large bank deposits, new credit lines, etc). Keeping the picture the same make for a quick and seamless experience ***
Myth: Your Down Payment Covers Your Closing Costs False. Borrowers know they have to bring down payment money to the closing table. Many calculate that amount and believe that amount is all they need. They neglect saving for loan closing costs.
Closing costs generally range between 3% to 6% of the purchase price. Closing costs cover all fees (Lender, Attorney, Government) and Escrow Deposits. Escrow Accounts are created to cover Property Taxes and Homeowners Insurance. These differ from fees because the money is reserved for the borrower (not the lender, attorney or government), but used later for the borrowers taxes and insurances Sellers are allowed to contribute towards the loan’s closing costs. This is called “seller concessions”. There are limitations to how much the seller can contribute. VIP: Today’s real estate market is very competitive. It is very unlikely that sellers will offer this type of help in this current market. Borrowers can receive some closing costs assistance from their lender. They must be made aware that this may cause their interest rate to edge slightly higher. The difference in rate could impact the monthly mortgage payment. Sometimes the difference is marginal and worth it.
Myth: You Must Have Perfect Credit To Qualify For a Mortgage
Many prospective borrowers are afraid to apply for a loan because they do not believe they have perfect credit. This misconception keeps a large number of families from achieving their dream of owning a home. Very few individuals have perfect credit. That alone is a misconception. Credit scoring are categorized in tiers (example: 680-720 is one tier). Many loan programs are available to borrowers who have scores in many of the tiers, ranging from ok credit, good, great, excellent and yes, even perfect credit
What should borrowers do if they believe their credit is poor? All they need is a plan! I would recommend any person who wants to get on the path of homeownership to contact me to craft a plan. Many borrowers thrive if they understand the guidelines they have to work with and adhere to the crafted plan. Soon, they will too become pre-approved!
(Note: Many borrowers continue to revert to renting rather than leverage the many programs for clients with imperfect credit. Let’s start with a pre-qual and if needed, we can craft a plan and help that borrower toward getting pre-approved).
Myth: Having Debt or Student Loans Will keep you from qualifying. Covid deferred student loans do not count as debt.
False. Double False.
The first group of borrowers believe that having any debt or student loans whatsoever will keep them from purchasing. This is False.
• Debt is a factor in overall approval.
• Most borrowers do have debt
• Having debt does NOT exclude anyone from being qualified for a home mortgage
• Loan Programs apply guidelines to the extent of debt allowed. We call this DTI.
• DTI (Debt to Income) is a ratio of debt to monthly income
DTI = minimum payments of recurring debt divided by gross monthly income (Example: car loan + 2 credit cards = $700 / month. Income = $5500 / month. DTI = 750/3000. DTI = 13%. Proposed mortgage payment is $1600 / month. $1600 + $700 = $2300. $2300 / $5500 = 41.8%. This is in line with a mortgage approval.
The second group believe that deferred student loans (due to covid) do not count. They are ill-informed. While student loans might be actively in Covid forced deferment, guidelines mandate that lenders must still count a monthly payment for those student loans owed.
• Student loans that are in deferment will be qualified as monthly debt (based on a percentage of the total amount due)
• Some programs require a 1% monthly calculation while others require a 1/2% percent monthly calculation
• Think outside the box: There are options to qualify these student loans based on income-based repayment plans as well
Myth: Once you get pre-approved for a mortgage, you're guaranteed a home loan.
While it is important to get a preapproval as a first step in the homebuying process, it does not automatically guarantee approval for the home purchase. At this point, if we had a pre-approval, we have completed some validation and submission into the AUS (automated underwriting system). Now that we have a signed contract to purchase a home, the borrower’s information will be verified by an underwriter. It is important for the borrower to provide as much supporting documentation upfront to have the best chance for approval during underwriting
VIP: It is also important for the borrower to limit any changes (new credit card, job change, how employee gets paid, etc) and to communicate any changes that occur immediately or as early as possible during the homebuying process. Any impactful changes could jeopardize their approval.
Myth: Paying off your mortgage early is always a smart idea.
There is a lot of good with paying off one’s mortgage. You own the home outright. You save on a lot of interest payments. Your debt just decreased. However, there are also reasons why it may not actually be a good idea to pay off your mortgage early.
Mortgage rates are extremely low. Did you know in the 1980s, mortgage interest rates were at or over 18%? With such affordable rates, it could pay to hang on to your mortgage, enjoy the tax benefits involved, and use your extra money for other things. Some suggestions are upgrading your house (creates more value), putting your money into stocks, bonds or other investments that could generate a higher return versus paying off a mortgage with such a low interest rate. Example, let’s say you calculated a return on investment of stock investment at only 7% annual return. If you lock in a 3% mortgage, you're better off earning 7% a year than saving 3%. Note: According to the S&P, the average stock market return is over 15%. With that, earning 15% could be better than saving 3%
Myth: Conventional offers are better than FHA.
Some sellers still look at FHA loans negatively, viewing them as loans of last resort for borrowers with weak credit. They worry that FHA deals are less likely to close because of this. Other sellers believe that FHA home inspections are too stringent, and that they'll need to spend thousands of dollars on repairs that they could avoid if they work instead with a borrower taking out a conventional loan that isn't insured by the federal government. FHA loans historically were seen as 1st time homebuyer loan programs. In reality, FHA loans are still used by all types of buyers who are looking for a great interest-rate that allows them to bring less to closing. Many very financially strong borrowers use FHA loans so they can leverage additional lender credits (lender pays more closing costs; borrower saves money for updating or furnishing their new home.
In today’s market (where many sellers are not offering closing cost credit), many strong buyers are trying to mitigate the total amount of cash needed for closing.
Are FHA Appraisals more stringent than conventional appraisals? Somewhat true. FHA does have slightly higher appraisal requirements. Will this impact you?
• FHA appraisals impact a very small percentage of homes in the market. Most homes meet all the standards for FHA appraisals quite easily.
• FHA appraisals have a strong focus on safety concerns. As long as the home is in good standing with no safety concerns, the FHA appraisal will have the same chances of passing appraisal standards.
• What about home value? It’s the same! Both FHA and Conventional appraisers review comparable sales from the same available pool of homes. Therefore, home value will be about the same amount.
Note: What if the home is a fixer upper and needs some work? Communicate with your loan officer and we will guide you to the right program
About the Author, Cassie Fuchs:
Cassie Fuchs is a senior executive loan originator at Southeast Mortgage with 16 years of loan origination experience. She works with all buyer types from first time home buyers to large investors using FHA, VA, USDA and Conventional loan products to meet her clients needs. She is licensed in Georgia, Florida, Alabama, South Carolina, North Carolina and Tennessee!