ConsumersAdvocate performed extensive research into the best possible mortgage rates available, using over 100 sources and and 40 vetted companies in their rankings. You can read their entire article here, but keep reading here for a review of the best mortgage rates. based on in-depth reviews.
With mortgage rates falling to a three-year low, learn how to choose the right lender, and how smart mortgage decisions can pave the way to homeownership with affordable monthly payments.
What you need to know:
- August 2nd, 2019’s rate drop has lowered rates for 30-year fixed mortgages to 3.70%
- Mortgage lenders consider many factors for interest rates
- Government-backed options are available at lower rates
- Request a detailed breakdown of all fees and closing costs
HOW WE ANALYZED THE BEST MORTGAGE RATES
Lender Types
The type of lender that services a mortgage can have a significant impact on the rates offered and the service provided. We researched several types of companies, from online lenders and brokers to large national banks and credit unions.
Available Mortgage Types
We looked at whether the mortgage lenders offer fixed- and adjustable-rate loans, government-sponsored programs such as FHA, VA, and USDA, or other types such as jumbo, non-qualifying, or customizable loans.
Customer Experience
We considered the added benefits and perks that lenders provide to assist the customer and simplify the mortgage process, such as an easy-to-use website, proprietary mobile apps, mortgage calculators, in which states they provide service, and the customer service options, among many other factors.
Reputation & Transparency
A company’s reputation determines how much they are to be trusted and how they respond to a buyer’s needs. We examined a company’s complaints registered with the Consumer Financial Protection Bureau (CFPB) and any regulatory actions reported on the National Mortgage Licensing System (NMLS).
Always Shop Around!
Over the course of our research, the importance of comparison shopping quickly emerged. All the people we interviewed, from financial experts to homebuyers, agreed that one of the most crucial steps a consumer should take when looking into buying a home is doing their research. This can be especially confusing with mortgages and other complex financial products—and it can also take a lot of time. The cost of a mortgage involves a number of different factors, including more than just rates, fees, and points. Yet according to the 2018 National Housing Survey, around one-third of homebuyers don’t shop around, preferring to rely on real estate agents and friends. With August 2nd, 2019’s historic drop in interest rates (bringing them to 2016 levels), the average rate for a 30-year fixed mortgage fell to just 3.70%, opening up opportunities for potential homebuyers to get lower rates.
OUR TOP PICKS: MORTGAGE RATES REVIEWS
VETERANS UNITED REVIEW
BEST FOR VA LOANS
As the name itself implies, Veteran’s United specializes in VA loans–indeed, it’s the largest originator of these types of loans in the United States. With VA loans as the sole focus of their business, Veterans United provides customer service and guidance tailored to this community, with 24/7 support and 23 physical branches in 18 states (often near military bases). With an advisory board made up of former military men and women, the company is ingrained with its borrowers’ military culture.
Customer Experience
The experience for Veteran United’s customers begins on the website, a helpful resource for easy-to-understand explanations of how the VA loan program works, mortgage terminology, and solid advice for homeowners. Because of their familiarity with all aspects of the VA loan program, Veterans United’s over 2,400 employees are experts in not only determining eligibility for the applicants, but in helping its customers secure a loan with the lowest expenses and fees.
In addition to articles and videos, Veterans United offers VA-specific calculators to help applicants prepare and budget for their home purchase. These online tools offer borrowers the ability to calculate monthly loan payments, how much home they can afford, and the loan limit specific to the county where the home is located.
Types of loans and how to qualify
Veterans United offers conventional loans, as well as FHA and USDA loans. Where the lender shines is in its requirements. The VA loan program typically strives to make it easier for servicemembers to qualify, understanding that this community faces particular challenges that may make it harder for them to qualify for typical credit and down payment minimums. This is why residual income is considered, aside from just the debt-to-income ratio–this means that underwriters also look at how much money is left at the end of the month once major debt is paid (but not things like food or your internet bill).
To be eligible for a loan with Veterans United, borrowers must meet some guidelines. They must have a minimum credit score of 620, for instance, and there are other, more specific conditions:
Commitment to its community
Applicants whose credit may still not be strong enough for a VA loan can take advantage of Veterans United’s Lighthouse Program–a free, no-obligation credit repair service to assist service members and veterans in reducing their debt and improving their credit profile. The Lighthouse Program is yet another example of a company culture that goes the extra mile to assist military families.
RESEARCHERS’ RATING: 9.2 / 10 – Excellent
LOAN DEPOT REVIEW
Despite its early roots in the online lending industry (stretching back to the late 90s), loanDepot has a tangible commitment to face-to-face service, with over 150 affiliated loan stores around the United States. The lender has a good amount of loan types available: FHA, VA, conventional fixed and adjustable-rate mortgages, jumbo, and refinance.
FHA Loans
loanDepot is one of the largest originators of FHA (and VA) loans in the industry. J.D. Power’s 2018 Customer Satisfaction Survey found that loanDepot had a Power Circle rating of 4 out of 5, among primary mortgage originators, a score that translates to “better than most.” Since so much of the lender’s business is conducted in person, this leads us to conclude that customer service is a high priority for the company, and makes them a good choice for consumers looking for a personal touch.
They also offer the 203k fixer-upper loan we mentioned above, ideal for consumers who need to remodel or update their new home.
Applying with loanDepot
As we mentioned above, the lender has over 150 loan locations in the U.S. and is licensed in all 50 states and the District of Columbia. The focus on service extends to the innovative, as a fairly recent investment of $80 million in proprietary technology now allows the company to verify employment, income, assets, and even conduct credit checks, all digitally. This powers the mello smartloan™, in which loanDepot’s loan engines determine the options that are best for you, cost- or time-wise–in just seven minutes on average.
The idea is that the savings from the lower overhead costs can then be passed on directly to the consumer, allowing for better rates and deals. According to the company, it also reduces the time from application to closing by as much as 75 percent.
RESEARCHERS’ RATING: 9.0 / 10 – Excellent
QUICKEN LOANS REVIEW
BEST OVERALL
Since Quicken Loans’ move to becoming an online platform in 2000, it’s quickly come to dominate the mortgage industry for tech-friendly borrowers. Quicken is the second-largest mortgage originator in America by volume. That size translates into expertise across a wide swath of the mortgage market.
Quicken is a non-depository lender, so their own capital isn’t built from deposits by consumers. In practice, this means that they sell their loans to investors, the largest of which are Fannie Mae and Freddie Mac, both government-sponsored enterprises.
A Home Buyer’s Guide
One of the things we most liked about Quicken was its guide, which offers a step-by-step explanation of the mortgage process. We feel this is especially useful for first-time home buyers, since a common thread among the consumers we interviewed in that situation was that there were still things they hadn’t understood about the process. And no wonder! It’s complicated–which is why Quicken’s clear, concise explanations and tips sections are particularly helpful.
We also found their various calculators helpful for getting a better ballpark idea of home purchase budgeting. Quicken has a calculator for mortgages, affordability, refinance, and amortization–and these are all available via the company’s calculator app, downloadable for iOS and Android.
Customer Experience
Despite being an online lender, Quicken Loans still makes sure to offer its customers the ability to speak to one of their 3,000+ mortgage bankers, should they so prefer. Though borrowers can apply online, they can also contact the company directly over the phone or via chat (after answering a few key questions regarding geographic location, loan purpose, and phone number).
It’s also worth noting here that since Quicken services 99% of its mortgages, the lender’s customer service continues throughout, rather than being parcelled off to another company.
As part of their continuous drive to ease the mortgage process, Quicken Loans has developed an eClosing network, a mortgage closing with a digital note. It can be done one of three ways: an in-person hybrid eClosing, an in-person electronic notarization (IPEN), or a remote online notarization (RON).
Hybrid eClosing is currently available for mortgage refinancing in all 50 states, though IPEN and RON are still being phased in. However, as more states adopt the technology, the growing network will allow any Quicken Loans mortgage to can take advantage of the eClosing option.
Rates and Mortgages
Though we cannot emphasize enough that your specific mortgage rates will depend on your particular situation, Quicken Loans does have a page displaying its current mortgage rates, updated daily.
The company offers a full range of non-bank mortgage products, including fixed- and adjustable-rate home loans, refinancing options, jumbo loans, and a suite of government-backed loans (FHA, USDA, and VA). It also features YOURgage®, a conventional, fixed-rate loan in which borrowers can choose the length (also known as the term) of the loan, anywhere between eight and 30 years for loan amounts up to $484,350. This allows consumers to fully tailor their mortgage to their needs and budget.
RESEARCHERS’ RATING: 9.5 / 10 – Excellent
LENDINGTREE REVIEW
BEST ONLINE MARKETPLACE
When people want to purchase a home, they can either choose a direct lender (like a bank or a credit union), or they can submit an application to a broker that then places the loan with one of the lenders in its network. LendingTree offers a third option, as a third-party service that’s neither a broker nor a seller, but rather a marketplace. This means that after consumers fill out an application on LendingTree, it submits that data to its network of brokers and direct lenders. This leads to competition between them, potentially resulting in lower rates.
Application process
Consumers can submit an application via LendingTree’s website or over their 800 number. After submitting your standard data–income, assets, education, debts, occupation and length of time at your job, and SSN–the company then performs a credit pull. Since LendingTree is not a lender, it doesn’t process the application any further, or have anything to do with approval or denial. Instead, it uses the borrower’s FICO score to select the lenders it will recommend from its network. These (up to 5) lenders then put together a preliminary quote, and contact prospective borrowers (usually over the phone).
Pros and Cons of Using a Marketplace
Shopping around for mortgage offers through a marketplace such as LendingTree can offer several unique advantages. Not only will you receive multiple competing offers from lenders looking for your business, you may also be able to parlay this competition into a lower rate by saying you got a lower quote from somebody else. The convenience of being able to play one lender against another, from just one application, is hard to overstate, as the company itself shows below.
We also liked the amount of educational resources the company offers consumers, with helpful explanatory articles on different home purchase-related topics, tips, and reviews on their mortgage lenders.
However, LendingTree’s business model does mean you’ll have to go through the hassle of being contacted and (likely rather aggressively) marketed to by each of the five different lenders. This scenario happens enough that we found it to be a recurring theme across several different consumer review websites.
Consumers who are worried about hard credit pulls, due to having few accounts or a short credit history, may also want to tread with caution. Though LendingTree itself performs a credit pull, it’s possible that each of the lenders you’re matched with may also want to get one of their own. If these pulls all occur within a month, credit bureaus usually assume you’re shopping around and don’t count them individually. If not, they may cause a drop in your score. Of course, this depends on whether they’re hard or soft pulls. A hard credit inquiry takes place when a financial institution “pulls” your report from one of the three credit bureaus to check when you’re applying for a debt product (like a loan or credit card), and result in an automatic point deduction from your credit score. Soft pulls, on the other hand, have no effect on your score–they occur in situations such as when you check your own report, during background checks, and when you open a new bank account.
RESEARCHERS’ RATING:9.1 / 10 – Excellent
SOFI REVIEW
SoFi is another standout choice for best overall, though it’s particularly good for consumers with good incomes but not much money saved for down payments–they advertise great rates with as little as 10% down, for loans of up to $3 million.
Prospective borrowers can take advantage of the company’s soft credit pull to check what their rates might be, without it affecting their credit score. SoFi also looks at non-traditional income, making it a good choice for the self-employed or with restricted stock units (common in the tech industry).
SoFi has 15- and 30-year fixed-rate loans, as well as a 7/1 ARM. The application process is straightforward, giving consumers a fully underwritten, quoted rate they can use as leverage when making offers on a property, showing they have the financial ability to purchase.
However, consumers should be aware that the lender doesn’t offer government-backed loans, like FHA, USDA, and VA, or home equity loans and lines of credit.
RESEARCHERS’ RATING:9.1 / 10 – Excellent
CHASE BANK REVIEW
BEST BANK LENDER
J.P. Morgan Chase & Co’s mortgage division is one of the top originators in the industry. We like the large amount of mortgages they have on offer, including fixed-rate mortgages with terms between 10 and 30 years and ARMs with 5-, 7-, or 10-year terms, as well as jumbo loans.
For borrowers who can’t make large down payments, Chase has two options aside from FHA and VA loans, called the Standard Agency loan and the DreaMaker mortgage, which allow down payments as low as 3%. Consumers who choose any of these mortgages, and purchase a home in a low- to middle-income area can also obtain grants from Chase of up to $2,500. And the lender also participates in several programs that offer assistance with down payments and closing costs.
Associated Costs
Chase does have rate lock, origination, and underwriting fees, which can significantly raise the total cost of your mortgage. However, the company is upfront about this, and presents estimates for closing costs and lender or third-party fees when showing potential borrowers their rate and fee quotes. Existing Chase customers may also be eligible for certain discounts.
How to Get a Mortgage with Chase
As one would expect with a large lender, Chase offers several different options for its customers’ mortgage process and application: online, at a local branch, or over the phone.
For online consumers, Chase offers two options–a shorter version with just basic information, or a longer form with personal data that gets them closer to a prequalification. Neither completely eliminates the need for real-person interaction, and borrowers will need to either get on the phone or go to their nearest branch to answer more questions, though documentation can be submitted and tracked electronically. Chase guarantees that closing will be completed within 21 days of providing all financial documentation, or they offer a $1,000 to the borrower.
Learning Center
One of the things we really liked about Chase was its educational section. One of the reasons that the mortgage process is so stressful (besides the large amounts of money involved) is the sheer amount of things home buyers need to be on top of. Much of Chase’s home purchase business is with first-timers, which may be why they’ve taken the time to flesh out their Mortgage Learning Center with articles, calculators, how-tos, and videos with customer testimonials.
RESEARCHERS’ RATING:8.5 / 10 – Excellent
PENFED CREDIT UNION REVIEW
BEST CREDIT UNION LENDER
Pentagon Federal Credit Union, or PenFed, has one of the largest selections of mortgage products on the market, including a special program for lower-income borrowers, which helps with the down payment and closing costs. It also has an interesting 15/15 ARM, which only adjusts its rate once over its thirty-year term. PenFed offers all this at low interest rates, as is generally true of non-profit credit unions. Since union profits aren’t taxed, they act as dividends (and competitive rates) for its members.
Applying
Speaking of membership, it’s easier to obtain than you might think. Any current or former member of the military and the National Guard, government employee or contractor, can apply. Civilians may also join through membership in an auxiliary organization, such as the National Military Family Association, or Voices for America’s Troops.
While borrowers can apply for a mortgage on PenFed’s website, and upload documents, the credit union still isn’t completely online–and it’s likely consumers will have to pick up the phone at some point during the process. Despite having a limited number of physical branches, this reliance on customer service and real-person conversations makes PenFed great for people who want the human touch. This doesn’t mean that it doesn’t have good resources on its website–on the contrary, PenFed’s mortgage education section is one of the most robust we’ve seen. We also really liked that it has several calculators available, and that consumers can figure out which mortgage is best for them through a handy filtering widget.
Large Selection of Mortgage Products
PenFed has a wide array of mortgage products available, including conventional loans with terms between 10 and 30 years, ARMs in a variety of lengths (like the unique 15/15 ARM we mentioned above), jumbo loans, and VA loans. It doesn’t offer FHA loans, but does have two programs for new homebuyers, called HomeReady and First-Time Home Buyer, both of which feature down payments as low as 3%. These programs also allow borrowers to use multiple different income sources for their down payment, including gifts and grants–and accept non-traditional income sources for qualification.
RESEARCHERS’ RATING: 7.9 / 10 – Very good
ROCKET MORTGAGE REVIEW
BEST ONLINE EXPERIENCE
Rocket Mortgage is Quicken Loans’ completely digital arm, and offers all the same loan products. Launched in 2016, Rocket has quickly become a top player in the ever-growing online mortgage lending industry. This is helped by the fact that Quicken funnels all its online applications through the app–and by the process’ ease of use.
How to apply
The application process is simple, with questions leading consumers through each step. While a completely online experience may seem scary to some people, as though it may not offer enough support, Rocket does a good job of providing assistance, giving users the ability to chat in real time with a loan specialist.
The application process as we tested it is straightforward; asking bite-sized questions about your loan needs and goals, personal assets, credit score, and other pertinent loan information in nine short sections. If you have all the answers at hand, the process takes less than five minutes. Keep in mind that the more accurate you are with the information you input, the more precisely the final loan package will be tailored to your needs.
Fees
Just as QuickenLoans, Rocket Mortgage’s average origination fees are about 0.50% of the loan amount. Government-backed USDA, FHA, and VA loans fees are slightly higher, but don’t go over 1% of the loan. These fees exclude any discount points you may want to purchase to lower your interest rate. Speaking of rates, it’s impossible to see prevailing rates on the Rocket website, as consumers can only access these after creating an account and entering some information.
Customer Experience
As is typical in the mortgage industry, customer sentiment about Rocket is mixed. Positive feedback emphasized the efficient process and good customer support, while negative comments cited an impersonal touch, which is not surprising due to the company’s large size and the very nature of its online experience. Indeed, we would have liked to have more comprehensive resources regarding the mortgage process and an effort to educate the consumer. Purchasing a home is difficult, and we think that companies should address this need.
RESEARCHERS’ RATING:8.9 / 10 – Excellent
FREEDOM MORTGAGE REVIEW
BEST FHA LENDER
Freedom stands out due to its large menu of loan types. Mortgage products include conventional, ARM, and jumbo loans, as well as USDA, VA, and FDA ones as well.
For this last option, the company offers not just the standard first mortgages, but also the FHA 203k loans, which factors in the cost of certain repairs and renovations into the total amount. Finally, Freedom also has loans for purchasing condos, financing investment properties, or building a house from scratch.
Online Application
Applying really is easy: the application is fully online, documents can all be uploaded and e-signed, and borrowers can even opt in to text message status updates. Consumers could, technically, complete their whole mortgage without ever talking to a person, should they so prefer (though there are loan officers available to help, as well). And if a loan doesn’t close on time, the company covers the first month’s mortgage payment up to $2,500, thanks to its “Close-on-Time Guarantee.”
Transparent Rates
While many lenders that advertise low rates feature numbers that include discount point assumptions, Freedomclaims to be fully transparent about the rates it shows consumers. To get to these, potential borrowers need only click on the “Get My Rate” button and fill out some basic, non-personal information, and they are redirected to a live rate quote they can use for comparison purposes. Rates can be locked for up to sixty days free of charge, and if they go down, you may be able to take advantage of it via the lender’s “lock and lower” program. We also liked that they were clear about their flat-rate origination fee of $795 for most loans (Costco members may be able to lower that to $275).
RESEARCHERS’ RATING: 9.1 / 10 – Excellent
CROSSCOUNTRY MORTGAGE REVIEW
CrossCountry Mortgage is a full-service lender licensed in all fifty states, with 1,600 employees as of June 2019. Interestingly, the company operates under a franchise model with mortgage brokers, allowing it to expand its reach nationally, though it has a limited number of physical branches.
While it doesn’t specialize in VA loans per se, it does have good options within that program, particularly its Interest Rate Reduction Refinance loan (IRRL), also known as a VA Streamline Refinance. An IRRL allows consumers to refinance an existing VA ARM into a fixed-rate VA loan, or reduce your loan term to pay off your home sooner. While you’re not required to provide a certificate of eligibility, it should be presented to ensure you’ve used your VA entitlement.
For its standard VA loans, CrossCountry offers competitive rates, and zero down payment, if the sales price doesn’t exceed the appraisal value. There’s also 100% financing without any mortgage insurance, and closing costs may be paid by the seller.
RESEARCHERS’ RATING: 8.9 / 10 – Excellent
ALLY BANK REVIEW
Ally’s mortgage loans are limited to purchasing and refinancing, and doesn’t currently offer any government-backed options (so, no VA, USDA, or FHA programs).
Its conventional fixed- and adjustable-rate loans are fairly standard for the industry, but it does offer Fannie Mae’s HomeReady low down-payment program of just 3% for borrowers with low to moderate incomes. Its jumbo loans require a minimum down payment of 15%. Though Ally’s conventional loans require a minimum credit score of just 620, borrowers looking for a jumbo loan must have a credit score of at least 700.
Applying with Ally
After the 2008 financial crisis, Ally Bank became a fully online operation–including its mortgage branch, Ally Home, founded in 2016. It’s no surprise, then, that the bank’s main point of contact with its customers is via the internet or over the phone.
Interested borrowers can start their mortgage process either over the phone or Ally’s website, where they’re required to fill out a form which includes their phone number. Once this is submitted, candidates will receive a call from a loan officer, to discuss which combination of mortgage terms, interest rates, and discount points is best for their situation. This first approach leads to a prequalification, but consumers must still provide more information in a formal loan application. Financial documentation and disclosures are usually sent through DocuSign, but can also be sent via snail mail, should the borrower so prefer.
Ally does charge some rates and fees–conforming conventional loans are $995, though customers with an existing Ally account older than a month may be eligible for a $500 discount on closing costs. The bank offers free rate locks for up to 75 days, though a longer period can be negotiated for an additional fee.
RESEARCHERS’ RATING: 8.9 / 10 – Excellent
NEW AMERICAN FUNDING REVIEW
BEST FOR NON-QUALIFIED MORTGAGES
A non-qualified mortgage refers to loans that don’t comply with the Consumer Finance Protection Bureau’s (CFPB) rules on what constitutes a high-risk loan. While this may seem indicative of dangerous practices, it can also be used the way New American Funding does–to offer mortgage loans that use alternate methods of income verification to qualify its borrowers, in the form of its Self-Employed mortgage and Non-QM loan.
New American Funding also offers Interest-Only mortgages–a loan usually offered to high-income borrowers, which only makes interest payments for a fixed term between five and ten years. This means the loan balance doesn’t decrease, and payments towards the principal must be met once the interest-only period is done.
Finally, the lender has the I Can mortgage, which allows borrowers to choose their own mortgage term, provided it’s between eight and 30 years, and they have a minimum credit score of 620.
Qualifying
To qualify for a non-qualified 1-year tax return mortgage program with New American Funding, borrowers must provide proof of employment for two years, personal tax returns for the past year (including schedules and attachments), and business tax returns for the same period.
Another option is the bank statement program, which requires personal or business statements going back 6-12 months, 100% of eligible deposits from both personal and business accounts, and finally, profit and loss statements for the last 12 months, or previous year, or year to date.
Additional Resources
One of the things we liked about New American Funding, besides its inclusive options, is its comprehensive educational resources. While this is always important, it’s especially so when it comes to non-standard debt products consumers may not be familiar with.
Not only does the company provide several calculators (mortgage, affordability, and refinance), but it also has a glossary of terms, and informative videos and articles. Lastly, we were particularly impressed by its large array of checklists available for download, including ones for budgeting, home loans, moving, and more.
RESEARCHERS’ RATING: 8.9 / 10 – Excellent
ALLIANT MORTGAGE REVIEW
Alliant Credit Union is another good choice for first-time homebuyers, with a 0% down payment program for some qualified borrowers, and just 3% down for others. There are no application or escrow waiver fees, which also helps keep costs lower. And Alliant’s origination fee can be as little as $995. However, just like PenFed, Alliant has a limited number of physical locations, so borrowers should be aware that their mortgage process will likely be online or over the phone.
Alliant Mortgages
Alliant offers a wide selection of fixed (10- to 30-year terms) and adjustable mortgage (3- to 10-year) loans, as well as its Alliant Advantage Mortgage (first-time home buyers can get 0% down for loan amounts up to $500,000; and 5% with no PMI for existing homeowners). The credit union also offers jumbo ARMs with low rates, and loans for non-conforming condos, a rarity since these cannot be sold to Freddie Mac or Fannie Mae and are therefore considered risky.
We liked that Alliant has a Ratewatch system that allows borrowers to input their preferred rate and get notified when it’s available. Overall, the union does a good job educating its members and showing its rates clearly and transparently, even offering a step-by-step PDF of the mortgage purchase process.
MOVEMENT BANK REVIEW
BEST FOR LOW CREDIT SCORES
Movement Mortgage is a relative newcomer to the mortgage industry, having been founded in 2008 in the middle of the subprime mortgage crisis. It’s grown quickly, though, and currently has over 4,000 employees in more than 650 locations across the United States.
It offers a wide selection of loans, from the standard fixed- and adjustable-rate mortgages to jumbo and condo loans, as well as FHA, USDA, and VA programs. Interestingly, the lender also includes high-balance mortgages in high-cost areas, as designated by Fannie Mae.
We would like to see more easy to access information on rates, and more educational tools, as the current website is pretty bare bones and doesn’t really offer much by way of informing consumers.
Applying with Movement Mortgage
Almost all of your mortgage application with Movement is submitted electronically, either on the website or via their app, though there is a live customer service hotline available. Consumers looking for a preliminary rate quote will have to use that phone line, since the website won’t offer any rates unless potential borrowers complete the full application.
Movement has set some lofty goals for themselves as regards to the speed of their processes: six hours to underwrite, seven days to process, and one day to close. Considering that federal loan programs average one month to close, and some first-time homebuyer programs can take as much as 45 days.
Options for Low Down Payments
Movement’s mortgages cater to lower to middle-income borrowers by offering a large variety of loans with low down payments. These include its VA and USDA programs, which are sometimes no money down, Fannie Mae’s HomeReady Mortgage, and Freddie Mac’s Home Possible Advantage loan. Most government-backed loans have a minimum credit score of 620, but Movement also has options for consumers with lower scores–a conforming VA loan only requires a score of 580, for instance, and so does an FHA one.
CALIBER HOME LOANS REVIEW
A NON-QUALIFIED MORTGAGE ALTERNATIVE
Though a lesser-known player in the mortgage industry, Caliber Home Loans is a national lender that has been growing fast since its founding in 2013, as it emerged out of the merger between Caliber Funding and Vericrest Financial. It currently has one of the largest rosters of home purchase loans we’ve seen, with a wide array of conventional mortgages, government-backed programs, and the company’s own Caliber Portfolio Lending Program.
This last category includes non-qualified mortgage options, such as the Professional Elite for the self-employed, Investor Access for real estate investing using property cash flow, Fresh Start for consumers who need to rebuild their credit after foreclosure or bankruptcy, Homeowner’s Access which allows late payments, and more.
Caliber aims to get to closing in as little as ten days after completing an application, thanks to a system authorizing the lender to verify borrowers’ income, bank statements, employment, and property details. They do explain that while this ten-day goal is their ideal closing time, some loans may not be suited for digital delivery of certain documents.
PENNYMAC MORTGAGE REVIEW
PennyMac also focuses on online and over-the-phone service, with few physical locations around the United States, though it’s one of the country’s largest non-bank mortgage originators, PennyMac has over 1.5 million home loan customers. While you can submit your documents electronically, and there’s online customer support, the company mainly services borrowers via several call centers staffed with loan officers who help guide consumers through the process. Each loan officer holds an average of 14 or 15 state licences, each of which requires continuing education for recertification– keeping PennyMac’s representatives up to date with the industry.
The lender doesn’t have a minimum income requirement, making it a good choice for lower-income borrowers. However, consumers should be aware that PennyMac may charge an application fee and an appraisal deposit. Finally, we liked that the company offers resources and tools for homebuyers, such as calculators, a mortgage learning center, and a home value estimator.
VYLLA REVIEW
Another good option for poor credit scores
Vylla is the forward-facing mortgage arm of the Carrington Holding Company, formed by the consolidation of Carrington’s real estate brokerage, retail mortgage section, and title business.
Mortgage Menu
Similarly to Movement Mortgage, Vylla also offers a wide selection of loans for consumers with poor credit, or who have trouble getting together a substantial downpayment. Borrowers can choose between conventional purchase loans, jumbo loans, and programs from the FHA, USDA, and VA.
The company also has options for consumers who have bad credit or are self-employed, in the form of its only adjustable-rate mortgages: Flexible Advantage and Flexible Advantage Plus, with 5/1, 7/1, or 10/1 terms.
Minimum credit score requirements are really low at just 500, though this may vary according to the type of mortgage.
Application Process
Rather than have a comprehensive list of its mortgage offers, Vylla prefers to match consumers with the loan that best suits them. To that end, the company’s fully digital application process can start from three different points: “Affordability,” “Monthly Payment,” and “Purchase Price,” depending on where the borrower is in their purchase decision. This prompts a window to open asking for your zip code, and from there, you’re required to answer some pre-qualification questions regarding financial info (such as credit score, down payment, debts, and income). A few clicks later, Vylla matches you with its suggested loans.
MORE INSIGHT INTO OUR METHODOLOGY
LENDER TYPES
We took into account obvious factors such as lender type, which can include all kinds of companies such as national or regional banks, credit unions, online lenders, and marketplaces. Another option is brokers, who work with a network of lenders to help you find your dream home. It’s an important factor because the different lender types have pricing models that vary in their assessments of the consumer’s credit risk. This, in turn, determines eventual costs.
AVAILABLE MORTGAGE TYPES
In addition to lender type, the available mortgage products is also a straightforward factor we reviewed. Lenders that offer multiple types of loans –be they fixed- or adjustable-rate, FHA, VA, jumbo, or others– allow the borrower to compare, contrast, and pinpoint which option works best for their situation. We dedicate a large portion of our Helpful Information section to describe and define these types of mortgage products so you know what you’re getting into before you get into it.
CUSTOMER EXPERIENCE
When it comes to consumer experience, something we always came back to during our research process was the need most customers had for a guiding hand. Sure, the variety of products and the actual rates are very important. But a lender who can provide assistance with clear and precise information, for first-time home buyers in particular, is an undervalued attribute. Online calculators, home buyers guides, consultations over the phone, you name it. A user-friendly website with substantial educational content can go a long way towards easing a borrower’s worried mind.
REPUTATION & TRANSPARENCY
In this sense, reputation and transparency go hand-in-hand with consumer experience in that they remove doubts potential borrowers have regarding the legitimacy and stability of a lender. The Consumer Financial Protection Bureau (CFPB) and the Nationwide Mortgage Licensing System (NMLS) are two sources that record and publish complaints or regulatory actions taken against lenders nationwide. We looked at both numbers to get a sense of a lender’s standing within the industry and the overall satisfaction consumers had with their services.
It should be noted, though, that having many regulatory actions or complaints lodged against a company does not necessarily condemn them to the trash heap. Large lenders, particularly national banks, are going to receive numerous complaints because of the size of their market share and the number of loans they manage. Therefore, these numbers need to be viewed within their proper context.
HELPFUL INFORMATION ABOUT MORTGAGE RATES
Buying a home is one of the most important financial decisions someone can make during their lifetime. It requires a concerted effort, commitment, and patience. It can be a dragged-out process with highs and lows, or a straightforward procedure without many hiccups. Regardless, it will most certainly create conflicting feelings of anxiety and exhilaration. This is the highest form of “adulting”. How do we best prepare to tackle the process of choosing a lender and buying a home?
UNDERSTANDING TERMINOLOGY: A MORTGAGE PRIMER
Navigating the unfamiliar terms you encounter during the process can seem like an insurmountable obstacle. You think you understand what escrow means, when all of a sudden it refers to something else once you begin your monthly payments. You’ve been looking at interest rates all the while but now the lender provides an APR that’s higher. So. Many. Documents.
Don’t fret. In this section, we’ll try to explain some concepts in the simplest of terms so you’re not caught unprepared when talking to a lender.
MORTGAGE TYPES
| Loan Type | Best For | Why It’s a Good Choice |
|---|---|---|
| Fixed-rate | Those who plan on staying in the home for the duration of the loan | Interests stay the same during the life of the loan providing payment stability |
| ARM (Adjustable-Rate Mortgage) | Those who don’t plan to live in the home for more than 5 or 7 years | Lower interest rates during the initial fixed-rate period of the loan |
| FHA (Federal Housing Administration) | First-time homebuyers and those with less than stellar credit | Down payments as low as 3.5% and generally easier to get approved for. |
| VA (Veterans Administration) | Qualifying veterans, active service members, and their families | No down payment or PMI required |
| USDA (US Department of Agriculture) | Lower income homebuyers in USDA-designated rural areas | No down payment required and lower rates |
| Jumbo | High-income earners | Necessary for high-priced homes requiring mortgages that exceed the established FHFA amounts |
| Non-Qualifying Mortgage | Self-employed borrowers | Flexible lending criteria regarding proof of income, credit scores, and debt-to-income ratios |
There are several ways in which we can categorize mortgages:
Conforming and non-conforming
A conforming loan is a mortgage that complies with the guidelines established by the government-sponsored entities (GSEs) Freddie Mac and Fannie Mae. These institutions develop standards for, among other things, the loan-to-value ratio, borrower’s credit score, requisite documentation, and a maximum baseline limit for mortgage amounts; for 2019, the amount is $484,350.
Meanwhile, a non-conforming loan is one that does not comply with all these requirements. For example, a mortgage that surpasses $484,350 is a non-conforming loan that is also known as a jumbo loan. Since these do not meet the standards put forth by the GSEs, it makes them a riskier deal for the lender.
Qualified (QM) and non-qualified (non-QM)
Qualified mortgages (QM) are loan options wherein the lender makes a good-faith assessment of the borrower’s ability to afford the mortgage. By minimizing risky loan practices, such as interest-only loans, and placing limits on the debt-to-income ratio for borrowers, lenders can determine if the mortgage can be repaid. Most mortgages fall under this category.
On the other hand, non-qualified mortgages (non-QM) do not necessarily have to follow every recommendation for safe lending practices. This is not to say that non-QMs are inherently risky: there are many instances in which a borrower cannot meet specific criteria and must look for lenders that offer non-QMs. These types of loans are suited for borrowers who have debt-to-income ratios higher than 43%, who can’t provide proof of income, or who have substantial non-liquid assets.
These classifications notwithstanding, for our immediate purposes, and in the broadest of terms, let’s focus on two major types of mortgage loans: conventional and government-backed.
Conventional mortgages
Conventional mortgages are not insured or guaranteed by a government agency but by a private lender. They’re geared towards borrowers with healthy credit scores, good debt-to-income ratios (expressed in a formula as total monthly debt payments divided by gross monthly income), and who can give a higher down payment. We can subdivide conventional mortgages into two kinds: fixed- and adjustable-rate.
- Fixed-rate mortgages are the most common sort of home loan, and the easiest to understand. As the name implies, the interest rate remains the same during the entire period of the loan repayment, making it easier to budget for.
This is especially convenient for borrowers that plan on staying in the home and keeping the same mortgage for many years. Fixed-rate mortgages traditionally have terms of 15 or 30 years, but some lenders may also offer 10- or 20-year options.
Mortgage lenders offering fixed-rate conventional loans oftentimes require at least a 10-20% down payment (percentage of the house purchase price paid upfront by the borrower), and applicants must have good to excellent credit, as well as be able to prove their financial stability in order to qualify.
Fixed-rate mortgages are ideal for borrowers looking for stability, less risk, and who wish to stay in their home for the long haul.
- Adjustable-rate mortgages (ARMs) are another, though less common, option wherein purchasing a home is initially made more affordable thanks to lower down payments and mortgage rates. Generally speaking, rates remain low and set for a specific period of time, and then are reset at fixed times, according to the market.
If you’re being offered a 3/1 or 5/1 ARM, the first number corresponds to the period during which the rate will remain fixed, and the second number indicates the frequency of adjustment in years. So, a 3/1 ARM keeps the same rate for three years, and starting from the fourth year, the rate will change every subsequent year according to the market.
Because of that changing rate, adjustable-rate mortgages are considered riskier, and you may end up paying more in interest down the road than you would with a fixed-rate mortgage.
Like the former, ARMs are traditionally available in 15- or 30-year periods, though other options may be available. Adjustable-rate mortgages also have down payment minimums that range between 5-20% of the purchase price.
Applicants will need to have good to excellent credit and prove their financial stability in order to qualify. ARMs are worth looking into if the borrower believes they will move out of their home or refinance within the initial fixed-rate period.
Government-backed mortgages
Government-backed programs like FHA, VA, and USDA loans are insured by the U.S. Federal Government, which regulates borrower qualifications to ensure that these products remain accessible to middle- and low-income individuals or people with subpar credit histories. However, interest rates can be just as low for conventional loans as they are for government-backed loans, and both can have either fixed or variable rates.
- FHA loans are insured by the Federal Housing Administration, diminishing the risk for lenders in the event that borrowers are unable to make their mortgage payments. These loans can be secured with as little as a 3.5% down payment and credit scores as low as 500 (or 580 for the 3.5% option).
FHA loans also accept borrowers with a higher than 50% debt-to-income (DTI) ratio, whereas conventional loans generally put a cap at 43% DTI.
These loans are also more forgiving of any bankruptcies or foreclosures in the borrower’s credit history. Because of the lower down payment and credit requirements, FHA loans are a popular option for first-time homebuyers.
- A VA loan is a government-backed mortgage (insured by the Department of Veteran Affairs), which is considered a benefit of service, and is one of the few loan types that does not require a down payment.
If you currently are or have been a member of the U.S. Armed Forces or are the surviving spouse of a member of the U.S. Armed Forces, you may qualify for a VA loan. We strongly recommend that eligible borrowers take the time to explore this option further.
Credit requirements still factor in, but they may be more flexible than with other loan types. Just as with an FHA loan, the house must meet certain requirements and pass an inspection performed by an appointed VA certified inspector. If the house fails the inspection, improvements may need to be made before the sale is finalized, or you may have to find another option that meets VA requirements.
- USDA loans support low- and moderate-income families who otherwise might not be able to afford a home through two different programs, the Single Family Housing Direct Home Loans and the Single Family Housing Guaranteed Loans.
The benefits can include 100% financing, low income requirements, 1% interest rate, and an option for zero down payment. The Guaranteed Loans are processed through a third-party lender, whose requirements you must meet in order to qualify (generally speaking, a 640 credit score is standard). The Direct Loans, on the other hand, are handled directly by the U.S. government. Borrowers must meet certain eligibility criteria to apply for these loans.
To qualify, properties must be smaller than 2,000 square feet, and the payback period is up to a 33- or 38-year term. Both categories of loans are only available for USDA-designated rural areas, which you can verify here.
Besides these government-backed options, there are also multiple state or local programs that provide support and assistance for potential home buyers.
LOAN TERMS
A loan term refers to the duration of the loan’s repayment. In other words, how long until you pay off the mortgage. The common mortgage terms are for 15 or 30 years. However, most lenders also offer 20-year terms and even custom mortgage products that let the borrower decide the amount of years of repayment.
However, before choosing a term, borrowers need to consider the bottom line. Thirty-year terms carry lower interest rates and, therefore, lower monthly payments, but the ultimate costs are much higher than 15-year mortgages. As with almost all mortgage decisions, borrowers need to consider the cost-effectiveness of such decisions before settling on an option.
PRIVATE MORTGAGE INSURANCE (PMI)
Borrowers who don’t put down a 20% down payment are required to purchase PMI. Unlike other types of insurance that benefit the payee, such as homeowners insurance, PMI protects the lender in case the borrower fails to repay, or defaults, on the mortgage.
PMI is rolled into the monthly mortgage payment and can add up to thousands of dollars over the years. The good news is that, once a borrower reaches a certain level of equity in their home (usually 20%), they can request the cancellation of the PMI.
It should be noted that PMI is solely for conventional mortgages, while the mortgage insurance premium (MIP) serves the same function but for FHA loans.
PRE-APPROVAL VS. PRE-QUALIFICATION
Although not strictly a mandatory step, securing a pre-approval or pre-qualification before making an offer on a home is becoming a more frequent and desirable practice for both buyers and sellers; for lenders because it gives them the security that an offer is serious, for borrowers it can prove to be the advantage needed to beat out other offers.
Both these terms are often used interchangeably, even though they are not necessarily the same. It’s important to check with the lender to understand what their process entails.
Generally speaking, pre-qualification is one of the first steps during the home buying process. The potential borrower provides financial and personal information to a lender who then analyzes the data and comes back with an estimate of how much they can afford to borrow. It’s normally a quick process that doesn’t require any financial documentation or a credit pull. However, it is very important to provide honest financial information, otherwise the estimate is not useful.
Pre-approvals, on the other hand, require that lenders dig deeper into a prospective borrower’s financial history. This means they’ll request pay stubs and other evidence of income, as well as checking your credit. With this information, a lender determines whether or not they’re able to offer a loan to the borrower and for how much.
Note that neither pre-approvals nor pre-qualifications are guarantees that the lender will provide you with a loan, or for that amount. Also, by accepting a pre-approval or pre-qualification letter, the borrower is not obligated to take out a loan with that particular lender when all is said and done.
THE DIFFERENCE BETWEEN INTEREST RATES AND APRS
It’s not uncommon for novice homebuyers to confuse these terms. However, it’s very important to understand the difference between them. Simply put, a mortgage interest rate is the cost of borrowing money to buy a home, whereas the annual percentage rate (APR) is composed of the interest rate and other fees and charges from the lender.
Because of this, APRs are always higher than interest rates.
Interest rates are determined by several factors, such as credit score, the home’s zip code, the loan type and amount, among others. Even though lenders have different risk assessments for each customer, interest rates are similar among them.
APRs, however, might include upfront and ongoing fees, such as points that have been purchased (more on that in a bit), processing fees, underwriting fees, escrow fees, and PMI. Because of this, lenders are required to disclose what the APR is composed of so that borrowers can know what it is exactly what they’re paying for.
This is why, when shopping for lenders, you don’t just look at the interest rates, you also look at the APR.
IS BUYING POINTS WORTH IT?
In order to lower interest rates, lenders offer borrowers the ability to purchase points. Borrowers pay an upfront fee during closing to receive this interest rate reduction. Typically, a point costs 1% of the total loan amount and lowers the interest rate by .25%.
Points might be worth purchasing if the borrower is planning to stay in the home for many years. However, it’s important to calculate the break-even point, how much time it takes to recoup those upfront costs. This is calculated by dividing the cost of the points by how much is saved on the monthly payment. This provides the number of months it takes for the monthly savings to match the costs of buying points.
This is yet another example of calculating the return on investment (ROI) that is now a common and necessary task during the whole mortgage process.
EXTRA COSTS
Mortgages always carry additional costs that need to be considered before final decisions are made. Although you might think you can afford a mortgage when you look at the monthly payment, you need to look at all associated costs, as these can add up quickly.
- Closing costs can typically end up between 2% and 5% of the home’s purchase price and can include a whole host of charges, such as underwriting, appraisal, and home inspection fees, just to name a few. Borrowers are encouraged to request a full rundown of all the closing costs, called a closing disclosure, from the lender.
- Homeowners insurance protects the home’s structure and contents against many named perils. Lenders require that borrowers purchase this insurance as a prerequisite to a loan. If the borrower doesn’t choose a homeowners insurance policy before closing, the lender can choose one for them. Borrowers are better served by shopping for their own insurance in order to maintain lower monthly mortgage payments, but sometimes they may not have a choice.
- The amount of property taxes paid is determined by the home’s location (zip code) and the assessed value of the home. Taxes can amount to a significant yearly amount which can be hard to budget for. Homeowners need to set aside thousands of dollars each year to pay a lump sum to the tax collection agency whenever the due date arrives. Alternatively, lenders can take care of property taxes by including them as part of the monthly mortgage payment. Lenders spread out the yearly amount over each month and into an escrow account (the same way they do with homeowners insurance). This way borrowers don’t have to pay a lump sum, they can budget their monthly costs, and they don’t have to pay the taxes directly to the government agency.
- Condos, gated communities, and other types of properties may be subject to Homeowners’ Association (HOA) fees. The HOA’s board of directors determines the amount, frequency, and use of the fee–so borrowers need to assess these amounts before purchasing the property in order to avoid any surprises after. Since these fees come from a third party, lenders do not collect on them. However, lenders do conduct an assessment of the HOAs finances to make sure that the property is being properly maintained.
- Thankfully, realtor fees only apply to the seller, since realtors make their commission off the home’s selling price. Nevertheless, buyers are encouraged to seek out realtors during their home search as they can provide valuable guidance.
ESCROW
Escrow can be a confusing term and mean different things in different circumstances, so we need to make a distinction between being in escrow and an escrow account. When a borrower is about to close on a home, just before they dot the i’s and cross the t’s, an agreement is made between buyer and seller: the buyer provides a deposit that amounts to a specified percentage of the sale price, and the seller removes the home from the market. A third party holds the money before it transfers hands. In this sense, both the property and the initial deposit are in escrow until the closing is complete and the property and deposit change hands.
Meanwhile, an escrow account is an account that the lender maintains to make payments for property taxes and/or homeowners insurance. As mentioned above, borrowers can opt for the lender to pay their property taxes and homeowners insurance. To do this, the lender includes these amounts in the monthly mortgage payment. The escrow account receives the part of the monthly payment that’s destined for taxes and insurance. When the time comes, the lender then uses the amount held in the escrow account to pay both.
AMORTIZATION
This refers to the way a loan’s payments are spread out over time and what these payments consist of, with regards to principal and interest. In the beginning, the majority of the payment amount will go towards interests, while the final payments will be almost totally allocated towards the remaining principal.
The following is the amortization table for a 30-year, fixed-rate, $200,000 mortgage with a 4% interest rate.
| Month | Total payment | Principal amount | Interest amount | Ending balance |
|---|---|---|---|---|
| 1 | $955 | $288 | $667 | $199,712 |
| 2 | $955 | $289 | $666 | $199,423 |
| 3 | $955 | $290 | $665 | $199,133 |
| — | ||||
| 358 | $955 | $945 | $9 | $1,900 |
| 359 | $955 | $948 | $6 | $952 |
| 360 | $955 | $952 | $3 | 0 |
REFINANCING A MORTGAGE
At some point, for a multitude of different reasons, borrowers might want a do-over for their mortgage. Perhaps to change from an adjustable to a fixed rate, to lower their monthly payment, or to finally stop paying PMI. The way to achieve this is through refinancing.
When you refinance your mortgage, you’re taking out a new loan to pay off the old one. This means new rates, new terms… and more paperwork. You’re basically going through the mortgage process again.
Not anyone can refinance at any time, though. Some conditions must be met in order to refinance a mortgage, such as achieving a certain amount of equity in the home. But borrowers should do the math and consult with a financial professional to determine if and when refinancing is a good move.
THE MORTGAGE PROCESS FROM DAY 1 TO CLOSING
You’ve gotten this far, which means you have some idea of what to expect during the mortgage process. But how does it unfold? What are the steps? How much time is involved? Can you do anything to make the process easier?
To grasp the real world application of the concepts detailed in our previous section, we spoke with Marina, a working millennial based in the Midwest, who just completed the journey of buying their first home. We also spoke with Chris Birk, Director of Education for Veteran’s United Home Loans, to give us the experienced lender’s perspective of the process.
Step 1: Preparation
First, some context. According to a 2017 study by the National Association of Realtors (NAR) and American Student Assistance (ASA), millennials believe that their high student loan debt is the cause for delaying homeownership. The statistics back this claim, with an estimated 1.5 trillion dollars in outstanding student loans, as of 2019. Because of these oppressive obligations, saving for any sort of down payment is a considerable challenge for most millennials, never mind actually trying to save up for the traditional 20% down payment (although, as we’ve seen, this “magic” percentage is no longer as important for securing good rates as it has been in the past.)
Tacked on to that, the current home market is a competitive maelstrom where entry-level and starter home prices surge because of heavy demand. Even with optimistic reports that the housing market will continue to grow and mortgage rates will continue to be affordable, the current situation remains inauspicious for those looking to purchase their first home at a reasonable price.
In spite of this daunting prospect, millennials are currently the largest generation of buyers in the home market. Moreover, the barriers millennials believe prevent them from buying a home can be side-stepped or overcome without as much hassle as they might think.
Birk believes that “a big stumbling block [for first-time home buyers] is assuming all lenders charge the same rates, or that shopping around doesn’t really pay off [and] that you’ll only get the best rates with conventional financing.”
Don’t think you have a large enough down payment? There are several government-backed loans that don’t require close to the 20% many people erroneously believe is necessary, such as FHA (3.5% or 10%, depending on the borrower’s FICO score), VA, and USDA (as low as zero down each). These loans also consider lower credit scores, poor credit history, and higher debt-to-income (DTI) ratios.
Besides the government-backed programs, many lenders also provide conventional mortgage products that do not require high down payments, although they might come attached to higher rates.
Even so, there are ways to find lower rates among lenders. When we asked Birk what preemptive measures first-time home buyers could take to guarantee a lower rate, he stated that “working to bolster your credit profile before starting the homebuying process can do wonders for your future interest rate.” This also means paying down any accumulated debt you might have to get your DTI under the 43% threshold most conventional mortgages require. If you’re carrying the burden of student loan debt, refinancing may be in order.
Furthermore, potential buyers should “utilize a credit monitoring service or download copies of your credit reports from AnnualCreditReport.com. Look for errors, erroneous accounts, and other issues that could be hurting your score”. In the event you need assistance with this, credit repair companies can provide services to bring your finances up to snuff.
When Marina decided she wanted a home, the first thing she did was check that everything was all right with her credit. Fortunately, it was in order and her score was exceptional. But if she had seen any issue, she would have had to contact the credit agencies to resolve any errors, a time-consuming task.
At this point, it’s a good idea to request a pre-qualification letter from one or more lenders. The letters can provide a rough estimate of the mortgage amount you can afford. But Marina already had a general idea of what type of home she wanted, in which neighborhoods, and how much she was capable of spending. She took the time to calculate her monthly spending to arrive at a realistic number. With this knowledge, she was ready to begin her search.
Step 2: The Search and the Decision
At first, Marina tried to go it alone. She began looking at listings and calling real estate agents to view homes she was interested in. She also began searching through lender’s websites and requesting quotes, eagle-eyed to spot the best deals.
It soon, however, became overwhelming. Not only did it consume most of her free time, a lot of new and unknown terminology started popping up. Things like HOAs and homeowners insurance and APRs, term length and PMI and amortization. Although she still wanted to do it herself, she recognized she needed some guidance.
First, Marina decided to speak with her friends and acquaintances who had gone through the home-buying process. She told us that just by listening to their stories, she gleaned insights into things she had completely missed. Obviously, every home-buying journey is different, so each individual should pick and choose what works for them and discard any advice or concern that doesn’t apply to their specific situation. In Marina’s case, she finally understood what homeowners insurance was for and how it was completely different from private mortgage insurance (PMI).
When one of her friends recommended a lender they had used for their purchase, it got the ball rolling again. With a more focused idea, she now knew to look for professional help.
According to the NAR’s 2019 Home Buyer and Seller Generational Trends Report, “Help understanding the purchase process was most beneficial to buyers 28 years and younger at 87 percent and for buyers 29 to 38 years at 72 percent.” Since millennials’ primary method for looking at homes and lenders is the internet, they value clear and precise information and step-by-step instructions.
Lenders who provide educational tools such as glossaries or explainers, interactive elements like calculators and checklists, and readily-available mortgage professionals (either by chat, phone, or in person) are no longer just added value for a company, they’re indispensable.
At this stage, Marina had set her sights on a condo listing and was considering making an offer. But she still hadn’t chosen a lender and, worse yet, she hadn’t gotten pre-approval. Pre-approval lets sellers know that the buyers mean business and that they’ve got the financial backing for the proposed offer. As Birk told us: “Loan pre-approval is essential in today’s real estate environment. Sellers and listing agents want to see offers from pre-approved buyers.”
Furthermore, he added, “prospective buyers should seek pre-approval from multiple lenders and consider multiple loan products to help ensure they’re getting the best deal possible.”
To get pre-approved, you may well need to present detailed financial information, including, but not limited to: tax returns, bank statements, w-2s, and personal identifications. Although pre-approvals require credit inquiries than can affect your score, you should request as many as you need to make sure you’re getting the best deals. According to the Consumer Financial Protection Bureau (CFPB), “the impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first credit check.”
This allows you to comfortably shop around with only one hit to your credit score. Remember, you’re not bound to any pre-approval you request. When the time comes, you can still choose the lender of your preference. So Marina went ahead and got a pre-approval letter for the best deal she could find and for the type of loan that best suited her needs.
She also spoke to a realtor to get a sense of the seller’s intentions. The realtor came back with a piece of advice: write a letter to the seller explaining why you should get the house (otherwise known as a cover letter). Because of the current competitive market, Birk agreed, saying that “cover letters can help boost your chances, but every seller is different. If you’re likely facing a multiple offer situation, it might not hurt to add that personal touch.”
Equipped to present an offer, Marina proceeded to take the leap. It was out of her hands now.
Step 3: A Hectic and Fluid Time
And, waddya know, the offer was accepted. Celebrations all around, but soon a whirlwind followed.
At some point after pre-approval, the lender gave Marina the option of locking up her interest rates, which meant that the rates she had available at that moment would remain the same for up to 45 days and would not rise due to market volatility. Seeing as she had a good rate, Marina decided to proceed with the lock. Now, though, it meant that it was a race against the clock to close on the house before that lock-in period expired.
First, the lender begins the process for loan approval. This invariably takes some time to complete. In fact, “one thing… that lenders don’t have control over,” Birk says, “[is] all of the costs and time frames associated with a home purchase.”
Since the offer was accepted and a contract was agreed upon, Marina had to supply an earnest money deposit, considered a good-faith gesture assuring the seller that she was serious about buying the house. This deposit is typically held in escrow by a third-party, in Marina’s case a real estate brokerage. Earnest money deposits can vary in amount depending on the state, so buyers need to make sure they consult with a professional to understand the contract clauses.
Meanwhile, you also need to set up a home inspection (paid by you, of course) to examine the structure and the home’s functionality. Maybe there are some faults in the plumbing, maybe there’s a broken screen door. Any issues found need to be taken up with the seller and negotiated before closing.
Lender also want to take a look at the home for an entirely different reason. This is the appraisal (which you also pay as part of the closing costs). The lender wants to determine the real market value of the property and will look at the ins and outs of the home. This, in turn, determines what amount the lender will approve.
Lenders also require that borrowers present evidence of homeowners insurance. Buyers are encouraged to take the time to search for the best deal among homeowners insurance companies on their own, but that’s not always the case. Marina was too busy at the moment to take the time to shop around, so she elected to have the lender make the decision for her.
During all this, the underwriting process is taking place. Lenders analyze every bit of your financial information and they ask for every single document they deem necessary, so it’s best to be prepared to comply. Lenders also do a title search to make sure the deed of house is transferable; this includes looking at the property’s history, the neighborhood’s zoning ordinances, any liens it may have, and every conceivable situation that could derail the process.
From the underwriting process comes the decision: either your application is approved, denied, or it may require additional documentation to finally be approved.
The wait can be nerve-wracking because, in all honesty, a lot of things could happen: during their appraisal, the lender could find an outstanding lien on a property; the lender could determine that the house’s appraisal value is below the sale price leaving you without the necessary funding to buy the home; during the inspection the consultant may find that the house has critical foundation damage that presents an imminent risk; the lender may require additional documents from your financial history.
Meanwhile, the clock keeps ticking.
Step 4: Closing It Out
In Marina’s case, and to her great relief, the process was relatively painless and only took about a month to complete. The only thing she was worried about was the locked-in rate period, but she was able to clear that with several days to spare. Everything else had gone according to plan.
If something were to come up before the closing, however, know that there still are valid and legal reasons to walk away. A careful examination of any papers or contracts that you’ve signed should provide the means to protect you in case the deal is not to your liking.
Nonetheless, after Marina’s loan was approved and she was satisfied with the terms (she received documents specifying the terms and all manner of loan details), she was notified of the closing date. Now, the deal she had secured with her lender included her closing costs into the loan, so she wouldn’t have to pay them at once. But this is not common.
What usually happens is that buyers receive the closing disclosure, that is, the document that details what the closing costs include: appraisal fees, origination fees, underwriting fees, escrow fees, recording fees, and many others. This is a very important document to review.
When it was time to sign the final documents, she read over them as best she could–it certainly took some time–but she wanted to make sure everything was on the up and up. She signed the documents, elated that, after all the sacrifice and hard work, she finally had a place to call her own.
Unfortunately, not everyone can expect the same trouble-free process as Marina. The important thing is to try and take everything in stride. Preparation is critical to be able to navigate through any trouble that arises. Choosing the right professionals to help you along the way can ease a substantial amount of worries. As Birk concludes, “the key is to find a lender you trust who can help you evaluate your options given your specific needs, goals and financial profile.”
With proper guidance, you’ll be crossing the threshold and achieving the dream of homeownership in no time.
TIPS FOR APPLYING
There are many ways in which you can improve your borrower profile before and during your home and mortgage search. As we’ve mentioned before, nothing beats receiving professional assistance. But in the meantime, here are some things you can do that give you a leg up during the process.
- Pay down current debt, especially credit card debt.
- Check your credit report and make sure that everything is in order. If not, make sure you contact the credit bureau to fix the mistake.
- Don’t drain your savings. They’re there for a reason, of course, and you should use what you feel comfortable using for a down payment. If you do not have enough money for the type of down payment you wish to give, hold off on purchasing, or find alternative ways to have a lower down payment.
- Look for lenders to give you a pre-approval or pre-qualification. This provides the seller with an idea of what you’ll be able to afford and can give you a boost over other potential buyers.
- Write a cover letter that explains to the seller the reasons why you want and should get the property. In a highly competitive market, this can make the difference between two similar or equal offers.
- Understand the total costs that go into buying a property. As we’ve covered, your monthly mortgage payment is not the only expense you’ll incur. Make sure you calculate and can afford other required costs such as property taxes and homeowners insurance, as well as budgeting extra costs such as maintenance fees, condominium dues, and other payments.
- If you get a good rate, go ahead and lock it in, but make sure you close before the period expires. Most lenders allow you to lock in a rate for an extended time frame (usually 45 days). But those rates will only apply if you’re able to close before the 45 days are up.
- While shopping for rates, lenders will check your credit history, causing a hard inquiry that will affect your score. However, you can request rates from multiple lenders during a 45 day period and your credit score will only take one hit. It’s important to focus only on mortgages at the moment: you should wait before applying for a credit card, car loan, or any other type of loan product.
More than anything, calculating the return on investment is essential when making financing decisions of this type, such as deciding whether to purchase points for a lower interest rate, choosing a 15- or 30-year loan, or determining between ARMs or fixed-rate mortgages.
WHAT TO WATCH OUT FOR WHEN CHOOSING A MORTGAGE LENDER
CALCULATORS – USEFUL BUT NOT INFALLIBLE
A common feature of many company websites, and authoritative pages as well, is the mortgage calculator. While they can serve a useful purpose in helping to get an idea of what you’re in for, they might not paint a complete picture of what you’ll actually be paying.
In most of the basic calculators available, users input the loan amount, loan term, and interest rate to determine the monthly payment. Although useful as an initial calculation, it is only a very rough and broad estimate that in no way reflects what the final monthly payment will be.
This was much more of a problem in the past, since today’s calculators have additional input boxes for property taxes, HOAs, PMI, and other variables, that provide a more accurate payment amount.
Remember, though, it’s still just an estimate and you should never assume any amount given by one of these calculators will be your final amount. Nonetheless, these online tools do serve as a fine jumping off point towards understanding homeownership costs. Which takes us to…
BUDGETING – A LITTLE MATH NEVER HURT ANYONE
Many potential buyers are so enamored with the idea of a large home, that they don’t stop to think if they really need it. They want a luxurious kitchen, with all the latest appliances, and even a little breakfast nook… but they haven’t cracked an egg in weeks. Or they might want a spacious dining room, with a long table that seats 8, but all their meals are had in front of the tv.
More does not mean better. It’s great to dream, necessary even, but when it comes to large-scale purchases such as a home, a heavy dose of realism is required.
Knowing what you can afford to pay each month is essential for your financial health. Lenders are supposed to adhere to good-faith lending practices, but it’s conceivable that you might qualify for a mortgage that, realistically, is beyond your financial capacity.
There isn’t a set percentage of what you should or shouldn’t spend on your monthly home ownership expenses, but a good rule of thumb is to follow the 28/36 rule. It states that a household should not spend more than 28% of their monthly income on home expenses. This includes the mortgage payment, property taxes, homeowners insurance, and HOA fees, and may also include assorted home needs such as lawn care, maintenance or repair, and furnishings.
In addition, the household shouldn’t spend more than 36% on outstanding total debt, which includes the home as well as car loans, personal loans, student loans, and credit card debt.
While it may seem like a tall order, something as simple as sitting down and putting pen to paper can help in planning a monthly budget. Make a list of every conceivable expense, from utilities and food to savings and transportation, and you’ll be able to budget to the last dime.
If it’s still too burdensome, consider using a personal finance website or enlisting the help of a financial advisor.
FIXER-UPPERS – TOM HANKS AND SHELLEY LONG WOULD LIKE A WORD
You see a listing for a 3,500 square foot craftsman in a charming neighborhood for less than half of its market value. You immediately jump on that deal, right? Easy there, partner, it’s probably too good to be true.
Nevertheless, armed with high hopes, you decide to view the listing. The kitchen is in disrepair, with severe cabinet damage. The hardwood floor is creaking. There’s even a piece of collapsed roof in one of the bedrooms. Lo and behold the fixer-upper, siren song to the thrifty home buyer and ambitious DIYer.
While fixer-uppers can come in many shapes and forms–anything from a fresh coat of paint to a complete electrical rewiring–they aren’t usually move-in ready. That makes them a poor decision for buyers that need to move in quickly and those that don’t want to partake in any sort of renovations.
Now, fixer-uppers can be a good option for some home buyers. However, many things have to be taken into consideration before taking the plunge.
- A property inspection should be arranged before any type of deal is made. The inspection can find problems the untrained eye will not catch on first viewing.
- Although there are many talented individuals with honest-to-goodness home improvement chops, the home could require hiring contractors and other professionals to tackle large-scale projects. The search for a professional builder whom you can trust can be lengthy and cost you top dollar.
- In addition to the selling price, the renovation costs must be considered and compared to the actual value of the property. The sales tag may be cheap, but if the total cost of the project adds up to the difference in the market value of the home, there’s not much of a deal there.
- Fixing, renovating, and adding to the home requires permits that cost extra and call for visits to government offices that will inevitably interrupt the renovations.
- Prepare for the unexpected. Everything might be going according to plan, but setbacks occur often. If black mold is found during a routine reflooring, expect delays and increased costs.
Although there are times when a good deal is hard to pass up, fixating on a selling price without focusing on the amount of money and time that will be needed to establish a functional, livable home is a mistake seen far too often.
FAQS ABOUT MORTGAGE RATES
What documents will I need to complete a mortgage application?
Mortgage lenders will let you know what documents are required for pre-approval and, later on, for the loan itself. The types of documents needed will also depend on the type of loan; VA loans, for example, require a certificate of eligibility. The CFPB provides helpful guides to help buyers during the application process. Among the documents needed are: pay stubs, W-2s, federal tax returns, evidence for other sources of income, bank statements, evidence for the down payment amount, picture ID, Social Security number, and others. The documentation varies on a case-by-case basis, so make sure to discuss this with your lender ahead of time, so that you won’t be caught running around like a chicken with its head cut off.
What is a reverse mortgage?
A completely different instrument than traditional mortgages, reverse mortgages are financial agreements made between homeowners and lending institutions in which the owners borrow against the value of the home. It’s basically a loan against the accumulated equity, which can be received as a lump sum, periodic payments, or as a line of credit. Although reverse mortgages have gotten a bad rap, primarily in the way they are marketed as “free money”, they could be a useful financial tool for some retired individuals. As such, borrowers need to consult with financial professionals and take appropriate measures before initiating any process.
OUR MORTGAGE RATES REVIEW SUMMED UP
| COMPANY NAME | BEST |
|---|---|
| Quicken Loans Mortgage | Overall |
| Rocket Mortgage | Online Experience |
| Veterans United Mortgage Rates | For VA Loans |
| LendingTree Mortgage | Online Marketplace |
| PenFed Credit Union Mortgage | Credit Union Lender |
| Freedom Mortgage | FHA Lender |
| Movement Bank Mortgage Rates | For Low Credit Scores |
| Chase Home Lending Mortgage Rates | Bank Lender |
| New American Funding Mortgage Rates | For Non-Qualified Mortgages |
The following companies are our partners in Mortgage Rates: Nationstar Mortgage, Guide to Lenders, First Internet Bank of Indiana, AmeriValue, Amerisave, Sebonic Financial, Veterans United, Better.com Mortgage, Reali, Veterans United, Paramount Bank, and FIGURE.
This article first appeared on ConsumersAdvocate.com. To read the original, click here.