Does the Loan Fit?

Does the Loan Fit?

Does the Loan Fit? 

Guest Post by Tim Britt

You’ve heard the old adage “…if the shoe fits, wear it!” As we kick off 2019 and a new season of home buying and selling, I thought I’d borrow this cliché and apply it to the Mortgage Lending Process.  Just like with shoes, there isn’t a “one-size-fits-all” home loan program.  It’s vitally important that homebuyers seek sound advice from a reputable, licensed Loan Officer and understand all of your options for financing your new home purchase.  A mortgage typically represents the largest debt that most Americans will incur in their lifetime.  A poor decision on a home loan product can end up needlessly costing thousands of dollars over the life of the loan.

This is the first in a 4-part series on how to choose the best home loan program. 

Each part of the series will discuss a different category of mortgage loans.  When consulting my clients, I find it easier to start by finding the category that may work best for them, and then choose a program within that category that best meets their needs.  This month – we’ll talk in generalities about each category and some of their features and benefits.  Each month afterward, we’ll dive deep into each category and discuss the details of the programs within each category.

Mortgage Loans can easily be broken down into 3 broad
categories:  Traditional, Affordable, and
Specialty
.

Traditional Mortgages

Traditional Mortgages are loan programs that typically appeal to borrowers with established credit, with loans that offer fixed and adjustable rates and terms.  The potential clients for Traditional Mortgages are those who can afford relatively larger down payments (> 5%) and have higher credit scores (FICO > 700).  The overall benefits include allowing a borrower to choose from a variety of options, from short-term ARMs (Adjustable-Rate Mortgages) to 30-year fixed rates and just about anything in between.  Interest rates and overall loan costs are often lower, (although not universally).

Affordable Mortgages

Affordable Mortgages
are loan programs backed by government agencies or specially designed by Fannie
Mae and Freddie Mac to be affordable
in a variety of different ways.   These programs help borrowers realize their
homeownership dreams through a variety of products with lower down payment
options, lower loan costs, as well as lower credit thresholds (in some cases).  These also include Down-Payment Assistance
and Grant Programs offered by banks through the Community Reinvestment
Act. 

Potential clients for Affordable Mortgages include those with
moderate and lower income levels, as well as first-time buyers who may have
lower down payment ability, as well as those who may have had past credit
challenges.  The main goal of these
programs is to make overall home ownership more affordable, both at purchase
and over the life of the loan.  Borrowers
who would otherwise qualify for a Traditional Loan Product, but are purchasing
properties located in lower income communities may also qualify for one of
these programs.  These typically require
lower down payments, allow for flexible down payment sources, and may include forgivable
grants and/or secondary financing at low rates. 

Specialty Mortgages

Specialty Mortgages:  These products provide financing to clients with very specific needs that may fall outside the purview of a traditional or affordable mortgage program. They also provide financing options for those in specific professions (e.g. 0%-down programs for Medical Doctors).   Potential clients are those who want to construct a home or purchase a lot for future construction, individuals with current or prior military service, or professionals such as doctors and teachers.  These products provide funding for unique situations and often have lower down-payment and flexible financing options.

So – where do you start? 

It’s best to remember that mortgage qualification is determined by the CIA Analysis (not the spy agency!)  Look at your Credit, Income, and Assets.  Your FICO Credit Score, Gross Monthly Income (relative to your credit debt load), and Cash Assets available for the transaction will help you decide which category to begin your research in.  After that – give me a call and I’ll be happy to sit down with you to help you find the program(s) that may best fit your specific needs!  Remember – one size of Mortgage Loan does not fit every situation!

 

 

Tim Britt is a Senior Mortgage Loan Officer (NMLS 1369718) with Fifth Third Bank in Franklin, TN.  He can be reached at 615-415-8887 or [email protected]  The statements or opinions expressed are Tim’s own and do not necessarily represent those of Fifth Third Bank.

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The Mystery of the Credit Score!

The Mystery of the Credit Score!

We can’t thank Tim Britt enough for his regular guest posts on our blog and for regularly educating our clients about their mortgage questions! We don’t exchange any compensation with Tim when our clients obtain a mortgage from him, but we do share his passion for educating and serving our clients through every step of the real estate transaction! If you enjoy this post or want to learn more about Nashville housing and mortgage news, subscribe to our monthly newsletter here for future updates or just reach out to one of us directly! All of our contact info is at the bottom of this post and in the website footer below. We’re always excited to hear from our blog and newsletter readers!

 

In March, I wrote that a mortgage is kind of like a 3-legged stool; there are three components that must be analyzed for their capacity to help an applicant qualify for (or support) a particular mortgage loan program. Think of the abbreviation “CIA.” (hint – not the spy agency!)

This month (and next), we’re going to focus on the Credit “leg” of the stool!

A key element of the pre-qualification and loan approval process is a thorough review of a prospective buyer’s credit history. There are 2 separate, but equally important elements to the credit history: the numerical score, and the historical usage of credit. While time and space don’t permit an in-depth discussion, I want to talk mainly about the Credit Score this month.

A credit score is a statistical means of determining how likely a borrower is to default on a mortgage, based on their credit history compared to the model.

Most residential mortgage lenders use a scoring model created by the FICO Company, specifically designed for our industry. This scoring system yields a number ranging from 300 to 850. FICO has 9 different scoring models that are used by various financial sectors. This, along with the fact that there are many other scoring models available for both commercial and consumer use (Beacon, Empirica, Vantage, Credit Karma, Credit Sesame, etc.), explains the confusion many folks have when they believe their credit score to be at one level, but their mortgage score is quite different!. While I can’t speak to how the other models arrive at their numerical score, I can offer some insight on how a mortgage credit score is derived.

What makes up a mortgage credit score

Revolving charge history and usage is the single-most prevalent component in a mortgage credit score…comprising over 65% of the weight in the scoring model. Historically, consumers who use revolving credit responsibly have a lower mortgage default rate. The logic goes like this: revolving charge account balances and monthly payments can vary from month-to-month (vs. an installment loan with a fixed payment).

When a consumer shows the ability over time to manage a variable payment situation responsibly, history shows them to be a lower default risk. The 2 major factors considered on revolving charge history are the utilization (current balance vs limit) and payment history. If a consumer has a few open charge accounts, where the balances are 30% or less of the limit, and no late payments within the last 36 months, their scores (all other factors notwithstanding) have the opportunity to be closer to the top of the range.

Other factors considered in computing the numerical score are:

  • Types of credit accounts
  • # of inquiries in the last 120 days
  • # of accounts with balances
  • Derogatory events (bankruptcy, judgements, etc.)
  • Length of time accounts have been open
  • Collection accounts

When a lender “pulls” your credit report, it’s considered to be a “hard” inquiry and will reduce your overall score by roughly 3 points in most cases. Keep in mind, however, that when you’re shopping for a home mortgage (or an auto loan), you have a 30-45 day “grace period” from that initial inquiry where you can have other lenders pull your credit with no additional impact to your score. This gives you the opportunity to shop for the lender who will provide the best service for your individual desires and needs, without worrying about the effect on your credit score.

The score is only half the story! Next month, we’ll talk about other items on a credit report that may impact a homebuyer’s ability to qualify for the best home loan program, as well as some suggestion for improving your score if it’s not exactly where you’d like it to be!

(Update: For part 2 of this series, click here.)

Tim Britt Supreme Lending

 

 

Tim Britt is a Senior Mortgage Loan Officer (NMLS 1369718) with Fifth Third Bank in Brentwood, TN. He can be reached at 615-415-8887 or [email protected].

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