Buying a Home? Here Are Costs You Can Expect

Congratulations, you are ready to buy a home! The purchase price is easy to find, but there are other costs associated with a home purchase, especially if you are financing the transaction. These are some of the most common costs in a purchase transaction.

Lender Fees. These fees are paid directly to the lender at closing. Many of them will include origination charges (processing, underwriting and cost for the rate). Government loan programs also have additional fees, such as upfront mortgage insurance premiums for FHA loans and funding fees for VA loans.

Third-Party Fees. The fees are paid to nonaffiliated vendors in the transaction, and some, such as the appraisal fees, must be paid up front at the beginning of the transaction. Title and escrow companies also charge fees for their services.

Attorney Fees. These are also an associated cost in states that require attorneys to be present and review documents at closing.

Home Inspection Fees. These are often not mandatory but should be strongly considered for such a large investment. Paying for a home inspection will give you a much better idea of the condition of your home, such as the plumbing, foundation and sewage system.

Reserve Requirement. Reserve requirements are not fees but are still costs in the home-buying process. If you are impounding (escrow) your taxes and insurance, there has to be enough in the account to pay your tax and insurance bills when they are due. Depending on the time of year your loan closes, this could be a significant cost. Your mortgage payment will take smaller portions monthly that will later be applied to your taxes and insurance, but you will still need to pay money at closing to ensure adequate funds.

To learn more about the specifics of these costs, call or email me, and I will go over the details.

Prepayment Penalties: Should You Be Concerned?

A prepayment penalty is a clause in a mortgage contract stating that a penalty will be applied if the borrower pays off or significantly pays down the mortgage before term, usually within the first three years of committing to the loan. Sometimes the penalty is a certain number of months’ worth of interest. Sometimes it is based on a percentage of the remaining mortgage.

Prepayment penalties were originally designed to protect the lender from people refinancing repeatedly when rates fluctuate. It is costly for lenders if you pay off or significantly reduce your mortgage balance. The income the lender makes is generally a payment stream over time, so if the loan is paid off early or reduced, this limits their income. This is especially true if the lender is also the servicer of the loan (who you make the payments to). In order to incur a penalty, buyers would usually have to pay off a significant portion of the loan very quickly.

A typical example is to pay 20 percent of the loan in one year. On a $100,000 loan, this would require paying down $20,000 in 12 months. A homeowner paying even $1,000 per month extra on the principal would fall well short of reaching that point.

Does your mortgage have a prepayment penalty? Most likely, it does not. After the mortgage reform bill (Dodd-Frank) in 2010, the penalties became illegal on most residential mortgages. Chances are if you started your loan after July 2010, you are most likely free of any worries about prepayment penalties. However, certain types of mortgages may still have them.

If you are worried that your mortgage might have one, a quick call to me is all it takes to find out. I am always here to help.

How Can I Get My Credit Scores Higher?

The credit situation for each person looking to purchase a home is unique. Let’s look at the basics of attaining and maintaining high credit scores.

If your credit needs further attention than what it would currently take to purchase a home, if needed, we can tap into other resources that may be able to help get you to that point. The first thing, and this can’t be overstated, is to start as early in the process as you are able to. This may mean when you are just thinking about purchasing a home.

The first thing to keep in mind is to pay your bills on time. This sounds overly basic, but it needs to be said. Lenders look for patterns in your ability to pay your monthly obligations on time, including rent payments, car payments, credit cards, etc. Late payments, especially recent ones, will drive down your credit scores.

The second thing to keep in mind is that even if you are paying your bills on time, you want to show lenders that you are living within your means. Credit scores favor those borrowers who have low debt and specifically low balance-to-limit ratios on credit cards. Maxed-out credit cards, especially multiple cards, will lower your credit scores.

Credit scores will adjust as these balances are paid off, but, as stated above, this may take time, and knowing what needs to be done earlier rather than later will make the process go more smoothly.

I am here to help you get into a buy-ready position, and if you have more questions about credit within the mortgage process, I am only an email or a phone call away. I would be happy to go over the options and help you determine what is right for you and your circumstances.

I Have Collections or Judgments Against Me – What Now?

Let’s look at the terms “collection” and “judgment.” A collection is a debt that the creditor has been unable to collect from the person to whom they have provided goods or a service. Often these are medical related. A judgment is a legal and public ruling that requires one person to pay another for something.

The mortgage program you choose to finance your home will have guidelines that will determine what happens with each type of credit item.

Conventional mortgages are those that use guidelines from Fannie Mae and Freddie Mac. In their March 3, 2021 guidelines, they state that typically, and there are exceptions, collections don’t need to be paid back, but judgments do, either before or at closing.

FHA has a different approach. Their guidelines, effective November 18, 2020, state that any derogatory credit accounts over $1,000 may need to be paid back. Judgments with FHA are either going to be paid off before closing, or if there is a preexisting agreement with the creditor and those payments have been made on time, that agreement may be able to stay in place.

Before paying off any collection, see how old it is. Some collection accounts, especially smaller and older ones, have less impact on your scores over time.

When you pay them off, you are “updating” them on your credit report, and they may temporarily drop your credit scores.

Let me help you review your collections and judgments, and let’s put together a plan to get you in a buy-ready position.

What Credit Score Do I Need to Get a Mortgage?

This is probably one of the most-asked questions by borrowers who apply for a mortgage. The short answer is that it will depend on the type of mortgage program you elect to take and other factors, such as your down payment.

Many borrowers with both lower credit scores and lower down payments are interested in what the Federal Housing Administration (FHA) has to offer. You can get into one of these mortgages with as little as 3.5% of the purchase price as a down payment and, depending on the lender, a credit score of 620 or less.

FHA will accept credit scores under 600, but lenders who take the application may be unwilling to accept credit scores that low, at least with a 3.5% down payment. While FHA loans are easier to obtain than other types of loans, such as conventional loans (meaning those that use Fannie Mae guidelines), they can be more expensive to own.

What makes FHA loans costly to own are one-time fees and monthly premiums charged that are related to mortgage insurance.

On the conventional mortgage side, the higher your credit score, the more favorable terms you can expect. You can, in fact, get a mortgage with Fannie Mae with a credit score of 620, and they could require a down payment of 25%.

Plus, Fannie Mae puts a premium on the interest rates of borrowers with lower credit scores. Even someone with a credit score of 680 would have significantly better financing options than someone with a lower score. It really does pay to have the best credit you can before applying for a mortgage.

I am here to help you find the best mortgage program for you based on your credit profile and down payment. I am just a phone call or email away.

How Often Should I Hear from My Lender?

The mortgage business is like most any other type of business in that customer relationships are more important than the product that is being transacted.

The mortgage business, however, is unlike any other business in several ways. The first is that you may finance a property maybe a handful of times in your lifetime and may feel a bit intimidated by what is happening, especially if this is your first time. The second reason that home finance is unlike any other type of business is the number of steps that need to be gone through to get the end result, meaning the closing.

What people financing a home want more than anything is somebody who will keep them updated as to the progress of their loan. Getting a mortgage to the closing table may come with many twists and turns, especially on a purchase transaction, and this should be explained to you at the beginning of the process to properly set your expectations.

What you as a borrower should be doing in the early meeting or meetings, even if they are virtual, is to set your expectations with your lender as to when you want to hear from them. Some borrowers want minimal communication. Others want it more regularly.

Whatever you want or need, your lender should be listening to you and providing that. Call or email me, and I can help you navigate the financing of a home. I am always here for you, and I’m happy to help.

Ratios That Mortgage Lenders Use in Reviewing My Application

There are three ratios lenders use when they review your mortgage application. One relates to the equity in your home. The other two are related to your debt. We’ll get into each of them here.

Loan-to-value ratio. This is how much you are borrowing from your lender relative to how much your home is worth.

Let’s say that you plan to purchase a home with an appraised value of $100,000. If you are putting down $20,000, or 20% of the purchase price, you would be borrowing $80,000, or 80% of $100,000. Your equity position in the property is 20%.

With some lending programs (often with conventional loans), the more you put down on the property, the lower the interest rate you can get. This is because should you default and the lender has to sell the property, the likelihood is higher that they will recoup their investment.

Lenders look at two debt ratios. They are called the front-end and back-end ratios.

Front-end ratio. In simple terms, this is how much your housing expense costs you each month compared to how much you make. To be clear, your housing expense includes your mortgage payment, property taxes, homeowners insurance and association dues, if you have them.

Example: If your housing expense is $1,000 per month and your income before taxes is $4,000 per month, your front-end ratio is $1,000 / $4,000 or 25%.

Back-end ratio. Continuing the above example, if you add to your housing expense a monthly car payment of $400, your back-end ratio becomes ($1,000 + $400) / $4,000 or 35%. Minimum ratios will vary among loan programs.

When you finance again, call or email me, and I can help you calculate your equity and debt ratios on your home buying or refinancing journey. I am always here to assist and make the process as smooth as possible.

Fixed-Rate Mortgages vs. Those with Adjustable Rates

Fixed-rate mortgages have rates that stay the same, and adjustable-rate mortgages have rates that change. But beyond that, why would someone want one over the other?

Part of the answer lies in how long you plan on living in the property, for two reasons.

The first reason is that most adjustable-rate mortgages have a fixed-rate period at the beginning of the loan. This period is called the initial fixed-rate period and can be one, three, five or seven years long.

The other reason is that the fixed-rate period is often the lowest of any other time during the life of the loan.

Let’s say you were going to buy a property and planned on living in it for just five years. You could likely get an adjustable-rate mortgage, having an initial fixed-rate period of five years, with a lower interest rate than you would be able to get on a fixed-rate mortgage.

There are two considerations to keep in mind here. The first is that if you wound up staying in the property for more than five years, you could potentially see your interest rate increase over time.

The other is that when you qualify for an adjustable-rate mortgage, you would need to show enough income to make the payment as if it were as high as it could ever go.

Let me help you find the best type of mortgage for you, fixed or adjustable, on your next purchase or refinance transaction. I am just a call or email away.

What Fees Will My Lender Charge Me on My Loan?

While there are many fees that you’ll pay in the course of purchasing a home, and they can all be very confusing, only some of them are related to the financing of it. These other fees, in other words, would exist even if you were to pay cash for the property.

Origination Fee. This will likely be the highest of the several lender fees that you will pay. To go into a little more detail on this, the income that a lender makes comes in one of two forms. The first is through origination fees paid by you, the borrower. The other source of income is from the investor who buys your loan from your lender once it closes. The higher your interest rate, the more money the lender can charge in the sale of the loan to the investor.

That being said, though, to be competitive in the marketplace, a lender needs to be as low as possible on both the fees and interest rates they charge while still having something left over to pay their own bills. If you find yourself coming up short on funds to close, the option of accepting a higher interest rate to lower your lender fees (and hence closing costs) may be an option for you.

Processing Fees. These are just as they sound. There is quite a bit of overhead that a lender puts into a file before it is ever reviewed by an underwriter, which, if done in-house, is in itself another lender fee. Processing fees include various verifications, ordering of title, flood certification fees and others.

Remember that it costs nothing to meet with me to learn more about lender and other fees. I’m always here to help you understand all of the costs that you’ll come across when you finance a home.

Difference between Pre-approval and Pre-qualification Letters

While the terms “pre-approval letter” and “pre-qualification letter” sound similar, they are different in what they provide to you as a borrower.

A pre-qualification letter, the more basic of the two, is something you get from a lender after they verbally collect information from you (for example, relating to income or assets) but before they have documentation from you to support what you have told them. Before issuing a pre-qualification letter, though, they will likely run your credit report to see if, from that perspective, you are able to qualify to purchase a home.

At this point, the lender will give you a letter saying that, pending further verification, you will qualify for a certain payment amount. However, if information they later find tells them something else, then you may either qualify for a lower payment or potentially no amount at all.

Getting a pre-approval letter is a much more involved process where you show items such as pay stubs, tax returns and bank statements, to name a few. This is the letter you want to be showing a real estate agent when you go home shopping, and many will ask for one before they spend time with you.

If you are thinking about purchasing a home and want to get pre-qualified before you start any type of search, call or email me. I’ll help prepare you to be able to put your best foot forward when you go out to find the home of your dreams.