by Karina Gafford
1. Brokers Can Get the Lowest Mortgage Rates for Buyers
As a real estate news blog reading devotee with an unabashed addiction to scanning reader’s comments (it isn’t blog stalking/ lurking if I post my own thoughts every once in a while, right?), I have noticed that the same few mortgage "myths" appear as truisms throughout the blogosphere. In most cases, the comments come from well-meaning people intent on helping their fellow blog readers navigate the complicated realm of Mortgage Land. Unfortunately, other kindly readers take their fellow blog commentator’s erroneous responses as the definitive truth, going forth to spread the same myths on other blogs with the same goodhearted intent to pay it forward. It is time to put these rumors to rest by first, identifying the supposed truisms, and second, setting the record straight. We will address four mortgage myths in this article, so that in the event that you are so benevolent as to want to answer the questions of fellow blog readers you encounter on your travels throughout the internet, you can help set them on the right path with the correct information they need!
A real estate mortgage broker serves as a loan originator, mediating the rates and terms of a mortgage between an individual and a direct lender or financial institution. Those seeking a mortgage often work with a broker in order to have him shop around for rates or negotiate on their behalf with a financial institution to secure the best Annual Percentage Rate (APR) for their home purchase. President of direct lending house Equity Now, Michael Moskowitz
, explains that, except in the case of California, brokers do not have a fiduciary duty to find the best rates for their clients. This means that a broker can often have relationships with lending houses or even a client’s real estate agent that may conflict with the best interests of a client.
In many cases, a homebuyer is introduced to a mortgage broker through a real estate agent; brokers often either work for real estate agencies or they are contractually affiliated with an agency, which means that the agency receives a fee or commission for the referral of a client. For the real estate agency, this means that the prospective buyer is not only paying an indirect commission through the purchase of a home, but also a possible second fee or commission through the purchase of a mortgage for that same home. This is a sales process akin to that of financing a car in-house where you purchase the vehicle from a dealer and receive financing from the same dealer, too; the dealer makes a commission on the car twice. This does not mean that you should avoid financing through the same company that you are purchasing from, but it does mean that you should remain mindful of the intentions of a real estate agent when he strongly encourages a referral to one particular broker.
Treat the purchase of your mortgage as you would a large business investment by taking the time to research rates and fees; reading articles such as those available through MilitaryByOwner’s Resources
are a great way for you to begin to inform yourself about how to make the investment in a mortgage. For full disclosure, I have financed a mortgage through a broker from the same real estate company from whom I purchased a house; however, I also shopped around to make sure that I was receiving the best rate on my mortgage. When I did receive a lower financing rate from another financial institution, I requested a Good Faith Estimate (GFE) showing the rate and fees, and asked the real estate agencies in-house broker if he could match the fees; he could match them, so we did business together. The lesson from this story is that a buyer should always shop around. Know that a broker is eager to close the loan with you in order to move onto his next deal, but you have thousands, or possibly tens of thousands of dollars at risk over the course of the loan’s amortization, so make your investment wisely.
Finally, before you do decide to work with a broker, ask for references to make sure that you are dealing with a broker who will deliver as promised. As the broker himself for references, but do not also forget to ask for references for those in situations similar to your own. For military families seeking loans, ask other military members in the area who they have used for their mortgages; if you know that a servicemember has bought a home from the same real estate agency, make sure to ask if they have worked with the in-house broker, too.
Now that you are prepared to work with a broker, you can find brokers who are experienced in finding mortgages that work specifically for military families through MilitaryByOwner’s Business Directory
. Just don’t forget to ask for references, and make sure to speak with more than one person about your prospective mortgage!
2. If Your Credit Score is Lower Than a 620, You Won’t Qualify for a Mortgage
Credit score qualms are a major factor keeping many prospective homeowners in the rental market
Low credit scores proliferate in the post-recession era, and among the younger families in the armed forces, debt obligations run high, making it even more challenging for a loan originator to find a way to help families meet the debt to income ratios necessary for procuring a loan. The trends for the Millenial generation (those born in the early 1980s to 2000s) show that 40-percent carry student loan debt and another 40-percent carry credit balances
. The average credit score of younger servicemembers in the Millenial age-bracket, those who likely have less than 10-years of military service behind them, hovers at around 630. With a score of 630, conventional loans are not an option in almost every case; conventional loans currently require around a score of 680 or above, according to Gregory Meyer, financial educator and blogger at The Credit Union Guy.
Though as Meyer and other mortgage professionals can attest, those seeking a decent interest rate on a conventional loan should hold a credit score closer to a 740, and should expect to come to the closing table with a hefty down payment of at least 20-percent. Given that the average price of a single family home in the US was $207,300 in 2013, a 20-percent down payment would come to $41,460, an amount that that is close to or exceeds the base salary for most enlisted servicemembers and younger company grade officers. As low credit scores abound, the mortgage market options remains narrower for those seeking loans, but options do remain.
It is fortunate that options remain as, despite low credit scores and high debt obligations, over 80-percent of Americans wish to own their own home, according to the Pew Research Center’s most recent study on homeowner trends. Moskowitz explains that homeownership is a possibility, but the key to procuring a loan with a lower credit score is to find an experienced lender who works directly with government-backed mortgage insurers, such as the VA and FHA. In some cases, he explained, they can even help those with a 620 credit score achieve a conventional mortgage, but such a case would require a higher down payment.
In the event of a low credit score, to make loans work, Moskowitz explains that he looks at the "overall credit factor." This means that they take into account an individual’s work history, debt to income ratio, any assets, retirement accounts, and for military members, he explains, he also looks at how many years they have been faithfully serving their country. Just because an individual has a credit score of 580, Moskowitz explained to MBO, does not mean that the loan is bad; the score may simply be artificially low as a result of a one-time large mishap, such as a short sale or foreclosure as a result of a PCS or illness. If an individual has otherwise proven a long history of credit worthiness and displays strong indications that he will make timely mortgage payments, then a direct lender can make the decision to approve a mortgage with a credit score lower than a 620.
3. You Need at Least 4 or 5 Credit Accounts to Show Your Credit Worthiness
Speaking of credit worthiness, a myth exists that individuals need to hold multiple credit cards in addition to store cards and other lines of revolving credit in order to attain a high credit score. Yes, it is true that credit scores are directly linked to an individual’s interaction with debt, but that does not mean that he needs to sign up for every store card he comes across. Instead of using a Pottery Barn credit card at Pottery Barn and a Pier One credit card at Pier One, choose one or two credit cards that offer strong rewards programs for the items you most value—vacations, anyone?—and stick with those.
If you have too many credit cards, you already know that you do; when your wallet does shut nicely, when you must rummage inside it for a couple of minutes at the cash register to make sure you have the card for that particular store, or when you find yourself putting sticky notes on your cards to remind yourself that this card is for gas station points while the other is for the grocery stores points, you know you’ve gone too far. If you have a friend in any of these categories, please forward this article; it’s for their own good. But, before you rush headfirst into a massive purge of the cards, put the scissors down! You may actually hurt your credit score by paying off charge accounts that have been sitting dormant, which means that your balance has sat on that account for so long while you’ve been making minimum payments on it, that it has literally stopped affecting your FICO score. Strange, but true, according to Moskowitz. This suggestion, however, only really applies to accounts of $1,000 or less; if you have accounts with high balances, pay them off and stop throwing away your money on high interest each month.
For those on the opposite end of the credit spectrum—those who shun credit cards completely—each of the mortgage brokers and lenders with whom MBO has engaged over the past few months strongly advised the regular use of at least one credit card. If you do choose to work in a cash economy, then charge a small amount--$50 to $100 on a credit card each month—and make sure to pay it off. If you do not have a credit card at all, Bankrate suggests that you begin building your credit score with a secured credit card. A secured card means that you open an account with a deposit, akin to that of a checking account. You may, for example, open it with $300, and then make purchases with that account as if it were a checking account. After you have made a sufficient number of deposits and proven your fiscal responsibility to your financial institution, they are then likely to increase your available line of credit without requiring additional deposits from you. Eventually, you should be able to interact with the card as a credit card, making purchases and then paying off the balance.
4. If You Default on a VA Mortgage, You Won’t Get Another One!
Finally, many military families have faced the painful challenge of a short sale or foreclosure. As of the end of 2011, almost one-quarter of all homes for sale in America owed more on the principle balance than the price for which they could reasonably sell their home. Military families who faced a PCS during this recent recession quite often found themselves in a situation where they could neither remain in the home nor continue to pay their monthly mortgage. For example, those who lived in a pricey area such as San Diego faced an average home price for a single-family home of $485,000. An E-5 with dependents in this area earned $2133 in Basic Housing Allowance each month while an O-3 with dependents earned $2316 in 2012. If both members received PCS orders to an area where the BAH rate was significantly lower, such as Maxwell AFB in Alabama, then the BAH rates for each of the servicemembers dropped to $1,203 and $1,626, respectively. Assuming that the individuals had difficulty either renting or selling the home, they would likely now have to either make up a portion of the monthly mortgage that was not covered by rent or face a short sale or foreclosure.
For those who did choose the short sale or foreclosure route, the road to homeownership is not forever blocked. Though the Veterans Administration is quite strict with their lending practices, they will approve a second VA loan following a short sale or foreclosure after a waiting period of two years. The original VA entitlement, however, is no longer applicable; however, borrowers may apply for a bonus entitlement. You can learn more about the intricacies of bonus entitlements for VA loans in MilitaryByOwner’s resource section
Now that you are armed with the truth, you may go forth and spread the good word on how to achieve a better interest rate, how to get a mortgage despite a low credit score, why it is unnecessary to overstuff your wallet with credit cards, and when VA loan eligibility is possible. If you fall into one of these categories and think you may now qualify for a loan, then congratulations! Make sure to check out MiltaryByOwner’s Business Directory
to help you find lenders who are experienced in working with the needs of the military community.
4 Mortgage Myths Debunked!