So you think the historically low mortgage rates guarantee the cheapest home loan ever? Think again. Here are five common mortgage myths and the sobering reality.
- No. 5. Myth: 620 is the magic credit score. When evaluating loan applicants, lenders pull credit scores from the three major reporting agencies and use the middle score to gauge eligibility. Indeed, 620 is considered the minimum eligible score for most loans nowadays, but you should aim higher to avoid paying more. Thanks to loan-level adjustments from Fannie Mae and Freddie Mac, a 620, or even a 680, may result in additional fees. The adjustments result in higher mortgage rates, which raises monthly payments. Someone with a 675 credit score, who puts 20% down on a $500,000 house, will end up paying about $11,000 in additional fees when compared with someone who has a score in the high 700s.
- No. 4. Myth: Once the bank initially approves your file, you're home free and guaranteed a mortgage. Not so fast. Under new "Loan Quality Initiative" programs from Fannie Mae, as of June 1, lenders must make sure an applicant's credit doesn't change between application and closing. This means that even after an initial approval, banks will probably pull your credit again, at the last minute, sometimes right before closing. If your credit score has gone down, the bank may refuse to issue the loan, at the 11th hour -- in which case the sale of the house will fall through. We always counsel our buyers to be very careful with purchasing anything on credit between the time of pre-approval and closing.
- No. 3. Myth: For those with stellar credit scores, mortgage rates, and monthly payments, are historically low. Not if you're buying a condo. Buyers without a minimum 25% down payment may have to pay additional closing-cost fees equal to 0.75% of the loan, regardless of credit score, under rules that took effect last year. Those fees are often rolled into the mortgage, which raises monthly payments.
- No. 2. Myth: A good income guarantees a good loan. Not for the self-employed...it has become tougher and tougher. This is true for a couple of reasons. One, it's easier for a lender to evaluate a few years of steady W2 tax forms than it is an erratic stream of 1099 forms. Two, business owners and the self employed have a habit of deducting everything in sight to keep taxes down. That's great when April 15th rolls around, but not so great when a mortgage broker is evaluating an applicant based on taxable income.
- No. 1. Myth: Foreclosures are decreasing and mortgage money will be easier to get. Not so much. The delinquency rate for mortgage loans on residential properties increased to 10.1% of all outstanding home loans at the end of the first quarter 2010 (and almost 25% here in Florida), according to the Mortgage Bankers Association. The share of loans on which foreclosure processes started in the first quarter was 1.23%, up from the previous quarter. The total percentage of loans in foreclosure at the end of the first quarter was a record 4.63%.
If you are currently home (and mortgage) shopping, please give us a call to discuss your situation and goals...
