Q&A with a Mortgage Lender
When discussing things like refinancing, home equity loans, new home and 2nd home purchases, there are some common questions that arise. We sat down with Scott Gruber, Senior Mortgage Lender with First Mid Illinois Bank and Trust (NMLS#466924) to talk about these topics and more. See our conversation below:
Q: Is there a consensus in the mortgage industry about the future of interest rates?
A: Mortgage rates are certainly higher than they have been in recent history, but not as high as experts thought they would be by the start of Q4 in 2018. Overall, rates have been stable for the last 3 or 4 months. Of course, nobody can be sure where rates are headed, but now industry experts are saying to expect higher rates in the future.
Q: Because of where rates are today, does it make sense to refinance?
A: The first question I ask is “why do you want to refinance?” It all depends on what you want to accomplish by refinancing. Some people are looking to lower their interest rate, some are looking to get on a shorter term, and some are looking to free up cash flow. Because of the rise in rates, it may be difficult to get a lower interest rate unless you are willing to setup a shorter term.
Freeing up cash flow also could be a benefit of refinancing. For example, if someone has a high amount of credit card debt or other debt, they can potentially roll that debt all into their home loan by refinancing or even using a home equity loan. However, we stress to our customers how important it is to remain disciplined with that approach. If you wipe out all your credit card debt, the last thing you want to do is run those credit card balances back up after having paid them off.
Ultimately, we’re seeing less people refinancing today than we’ve seen the last few years, but it’s possible it could make sense for you, based on your goal.
Q: How can people purchase a home without a 20% down payment?
A: It’s common to think you need 20% down to purchase a house. However, that’s not true. A conventional loan will require 20% down to avoid PMI (private mortgage insurance), but conventional loans can also be done with as little as 5% down, given that the buyer pays PMI until they reach 20% equity in the home.
In rural areas, there are special loans available called Rural Housing Loans. In eligible areas, a Rural Housing Loan can provide up to 100% financing, meaning no down payment for buyers with household income of less than $88,000 per year. There is also no requirement to stay in the house for any period of time when using Rural Housing Loans.
Then, you have FHA loans, which require 3.5% down as well as PMI. However, PMI on an FHA loan never goes away, unlike on a conventional loan where the PMI will fall off once the homeowner reaches 20% equity in the home. The rates for PMI on an FHA loan also tend to be higher. But, FHA loans can be a good option for those that cannot qualify for other types of loans because of a lower credit score. FHA loans will typically be approved with a credit score of at least 580, while Conventional and Rural Housing loans usually require a credit score of at least 640.
Of course, all different loan types have additional requirements that need to be met as well, but it’s important to know what the main pros and cons of each type are.
Q: How can a younger person build good credit?
A: The best way to build good credit is to pay your bills. However, for those that are young enough, they may not have any bills. If you’re trying to help your young adult child build credit, you can list them as an authorized user on your credit card. Another option would be to have them cosign for their car loan. It’s not typically advisable for a young person to go out and apply for several different credit cards, but the previously mentioned methods can begin building positive credit.
Q: What are the main ratios that underwriters look at to approve potential borrowers?
A: First it’s important to understand that just because a bank will loan you money, that doesn’t mean you should borrow the maximum that they will allow. You have to make sure you can not only make your payments, but also leave yourself enough for all of your other living expenses.
With that said, the first ratio banks look at is the Housing Ratio. The Housing Ratio consists of your housing costs (principal, interest, taxes, insurance, and PMI) divided by your total income. Lenders will typically look for your housing ratio to be under 36%, meaning that less than 36% of your total income would be devoted to housing costs.
For example, for someone earning $10,000/month, a lender would prefer that total housing costs are less than $3,600.
Another ratio lenders look at is the Debt to Income ratio. This consists of all debt payments divided by total income, and the threshold for this ratio is typically 45%. So, for someone making $10,000/month, a lender would prefer that person be paying less than $4,500 toward the mortgage, student loans, car loans, credit card minimum payments, etc. It’s possible to be approved if you don’t reach these standards, but these are the guidelines that most lenders will use.
Q: What is the most important thing for borrowers to be aware of?
A: Borrowers need to understand that there can sometimes be a lack of transparency in how mortgages are quoted, and that rates don’t always tell the whole story. In some cases, you may be quoted a lower rate, but with additional fees and closing costs added on. You also need to be aware of how your lender will evaluate your loan application. It’s important to avoid as much red tape as possible during this process. This will help you cut down on processing times and get into your house quicker.
Another thing to consider is how accessible your lender is to you. Some people opt for more DIY lenders via online providers, and the downside there is less accessibility and perhaps no local representation from the lender. This could increase the chances of loans falling through at the last minute. I typically recommend that borrowers get at least 2 opinions so that they can fairly evaluate the pros and cons of each loan offer.
Before you look into making any decisions involving your mortgage, we urge you to take these items into consideration and look into getting a 2nd opinion. Not all loans are the same, and not all lenders are created equal. If you can educate yourself ahead of time, it should help you navigate the process. And, as always, we believe you should reach out to your advisor for additional support during this process. We routinely work with lenders and clients to make sure that we are reaching the best solution for our clients’ financial well-being.
CarsonAllaria Wealth Management (CAWM) is not a mortgage lender and does not provide specific advice regarding real estate transactions. CAWM also does not endorse the statements made by Scott Gruber of First Mid Illinois Bank and Trust. This Q&A is intended as general education only and not to be confused with personalized advice.
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