This executive mortgage banker is right on the money! This is good advice so you will know what to expect, especially for first time buyers. And he’s right when he says real estate agents don’t care what lender you use, however they will have good advice on who is best for your desired area. It’s our job to know the neighborhoods backwards and forwards and part of that is knowing which lender does too.
Your best credit scores are used in your loan approval
If you’re applying for a mortgage jointly with a co-borrower, logic suggests that your lender would use the highest credit score between both of you.
However, lenders take the middle of three credit scores (from Equifax, TransUnion, and Experian) for each borrower, then use the lowest score between both borrowers’ “middle scores.” So if you had a middle score of 780 and your co-borrower had a middle score of 660, most lenders would qualify and approve you using the 660 credit score.
Rates are tied to credit scores, so in this example, your rate would be based on the 660 credit score, which would push your rate up significantly — or potentially even make you ineligible for the loan.
There are exceptions to this lowest-case-credit-score rule. Most notably, if you have the higher credit score and are also the higher earner, some lenders will allow your higher credit score on the file — but this is mostly for jumbo loans above $417,000.
Ask your lender about exceptions if you have credit score disparity between co-borrowers, but know that these exceptions are rare.
The rate you’re quoted is the rate you’ll get
Unless you’re locking in a rate at the moment it’s quoted, that rate quote can change. Rates are tied to daily trading of mortgage bonds, so most lenders’ rates change throughout each day.
Refinancers can often lock a rate when it’s quoted — as long as you’ve given your lender enough information and documentation to determine if you qualify for the quoted rate.
Homebuyers will often be quoted a rate when you’re beginning your pre-approval process, but a rate lock runs with a borrower and a property. So until you’ve found a home to buy, you can’t lock your rate. And while you’re home shopping, rates will be changing daily, so you’ll need updated quotes from your lender throughout your home shopping process.
Rate quotes also come with an annual percentage rate (APR), which is a federally required disclosure that shows what your rate would be if all loan fees are incorporated into the rate.
This can make you think that APR is the rate you’ll get, but your loan payment will always be based on your locked rate, and the APR is just a disclosure to help you understand fees.
Fixed rate mortgages are always better than adjustable rate mortgages
Many borrowers became conservative in the recessionary years that followed the 2008 financial crisis, and strongly prefer 30-year fixed loans.
For good reason, too: The rate and payment on a 30-year fixed loan can never change. But the longer the rate is fixed for, the higher the rate. So before settling on a 30-year fixed, ask yourself this question: How long am I going to own this home (or keep the loan) for?
Suppose the answer is five years. If you got a 5-year adjustable rate mortgage (ARM) instead of a 30-year fixed, your rate would be about .875 percent lower. On a $200,000 loan, you’d save $146 per month in interest by taking the 5-year ARM. On a $600,000 loan, the monthly interest cost savings is $438.
To optimize your home financing, you want to peg the loan term as closely as you can to your expected time horizon in the home.
Real estate agents don’t care which lender you use
A federal law enacted in 1974 called the Real Estate Settlement Procedures Act (RESPA) prohibits lenders and real estate agents from paying each other fees to refer customers to each other. So as a mortgage shopper, you’re always free to use any lender you choose.
But real estate agents who would represent you as a buyer do care which lender you use. They’ll often suggest that you use a local lender who’s experienced with nuances of your area, such as local taxation rules, settlement procedures, and appraisal methodologies. Each of these areas are part of the loan process, and can delay or kill deals if a non-local lender isn’t experienced enough to handle them.
Likewise, real estate agents representing sellers on homes you’re interested in will often prioritize purchase offers based on the quality of loan approvals. Local lenders who are known and respected by listing agents give your purchase offers more credibility.
Mortgage insurance is always required if you buy with less than 20 percent down
Mortgage insurance is a lender risk premium placed on many home loans when you’re putting less than 20 percent down. In short, it means your total monthly housing cost is higher. But you can buy a home with less than 20 percent down and avoid mortgage insurance.
The most common way to do this is with a combination first and second mortgage — often called a piggyback — where the first mortgage is capped at 80 percent of the home’s value, and the second mortgage is for the balance of what you want to finance.
Comparisons of mortgage insurance vs. piggyback loans that simplify the math can help you make decisions.
Julian Hebron is a mortgage banking executive and writer based in San Francisco. He’s the editor of influential consumer finance and housing blog The Basis Point, and EVP of Sales with RPM Mortgage. His work is regularly cited by CNBC, The Wall Street Journal, and Marketwatch. Follow him on twitter: @thebasispoint