Buying a home is a long-term commitment that requires considerable thought and planning. You know your budget, what kind of house you need, and your preferred community. But, are you able to pay in full, or do you require a loan? We’ve set out to answer this for you, plus give you a breakdown of the best mortgage lenders of 2019.
A mortgage loan funds the purchase of a new home or other projects on existing real estate. With most mortgages lasting 15-30 years, you’ll have to diligently manage this loan for years to come. Needless to say, the more you know now, the easier it’ll be later, especially with the possibility of foreclosure or repossession.
If you can’t pay your monthly installments or abide by the loan terms, then the lender has the right to repossess your home. They will recover the loss of the loan by selling your property.
There also many factors that influence your monthly mortgage payment, such as interest rates, insurance premiums, down payments, fees, escrow, and market price.
Now, if any of these terms sound strange or intimidating, have no fear! The rest of this article examines all the basic terminology and principles of home loans so that you can secure the best loan.
Key Terms to Know
Pre-Qualifying vs. Pre-Approval
When applying for a mortgage loan, there are two steps before you are actually “approved”:
You will have to submit data on your income, assets, debt, and credit score to the lender. The lender then provides an estimate of your loan amount. The lender will not look too closely at your financial history and current financial situation. Therefore, the pre-qualified estimate may not be accurate or final. Pre-qualification is only an indication of your creditworthiness and ability to pay off debt.
Here you will need to provide the lender with much more information:
- Mortgage application
- Proof of income (W-2 statements or similar) and salary
- Bank statements showing your assets
- Evidence of any other obligations or debt
- Gift letters from family members who might help with a down payment
The lender will then do a full credit check.
Based on an underwriter’s review of your finances, the lender will provide you with a more accurate mortgage amount for which you qualify. You will receive a written “conditional commitment” of the loan amount for which you are eligible. With this information, you can shop for a home that is at or below the loan amount.
If your financial situation changes before closing, you may be denied a loan – even after pre-approval. You must provide full disclosure upon application on topics related to
- Past bankruptcies
- Outstanding debt
- Any financial litigation during the pre-approval process
Some mortgage companies might charge an application fee for the pre-approval process.
Credit Score and Credit History
As mentioned above, lenders use more than one financial metric when approving your application. Two critical details they consider:
Your credit score is a numeric value showing your ability to pay back a debt. Although not all credit scores are FICO scores, over 90% of top lending companies use FICO to assess your credit risk. Scores range between 300 (poor) to 850 (excellent).
FICO will weigh each category differently for everyone. Generally, the following ratio is used to calculate scores:
35% – Your payment history
Here they look at whether you pay your credit accounts on time.
30% – Current level of debt and accounts owned
How much money you owe in ratio to the amount of available credit.
10% – Types of credit you use (Credit mix)
What variety of accounts do you own? A healthy combination of retail accounts, credit cards, installment loans, and mortgages result in higher credit scores.
15% – Length of your credit history
If you’ve had credit over an extended period, your score is generally higher. How long your oldest account has been open, the age of your newest account, and the overall average all factor into the evaluation.
10% – New credit accounts
How many recently opened accounts do you have? Having many new accounts in a short period indicates higher risk, thus resulting in a lower score.
Your credit score is impacted, either negatively or positively, depending on these factors.
Credit score requirements change depending on the type of mortgage broker. With FHA loans, the lowest possible score is 550. For regular mortgages, the score is 620, and with more jumbo loans, you may need a FICO score higher than 700.
With a higher credit score, you will also get better interest rates.
A credit bureau will make a detailed summary of your credit history, known as a “credit report.” This report includes the following:
- Personal information
- Details on lines of credit
- Public records, such as bankruptcies
- A list of institutions and persons who have requested to see your credit report
Debt-to-Income Ratio (DTI)
Mortgage lenders use this ratio to determine your ability to pay monthly installments. You calculate DTI by dividing your monthly gross income with your monthly debt payments. Gross income is your full salary – before any deductions. The debt-to-income ratio is the percentage of your gross income that goes towards paying a debt.
Having a low DTI indicates that you can maintain the right balance between debt and income. High DTI indicates that you have too much obligation relative to your monthly income. The maximum accepted DTI may vary from one lender to another. Lower DTI raises your chance of being approved for a loan or credit.
When applying for a mortgage, a maximum of 43% DTI is generally accepted. However, mortgage brokers usually prefer ratios lower than 36%. Only 28% of this amount goes towards paying mortgage or rent.
To get a better idea of where you stand, you can also make use of the DTI calculator.
Closing cost includes fees or additional expenses when transferring a property from the seller to the buyer. Charges vary depending on your mortgage lender, property location, and property market. Although unlikely, you could negotiate with the seller to pay some or all the fees associated with closing costs. This type of negotiation depends significantly on the property market and state.
Also known as a “good faith estimate,” your lending company is required under the Real Estate Settlement Procedures Act (RESPA) to provide a loan estimate. Closing costs are included. They must provide the estimate within three days of the home loan application. The initial estimate may change from the moment of application to the closing of the transaction. The lender must provide a disclosure statement listing the final closing costs at least three days before closing.
As surveyed by ClosingCorp, the highest found average closing costs are in the Northeast, namely New York, Delaware, Maryland, and Vermont. In these areas, closing cost varies between $6,839 to $12,573. The lowest closing costs, ranging from $2,905 to $3,206, are in Missouri, Indiana, South Dakota, Iowa, and North Carolina.
In some cases, if you can’t pay upfront, you could add closing costs to your mortgage loan. But by doing so, you add debt and raise interest on monthly payments.
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Standard Closing Fees
These are administration fees charged for creating a loan. The lender will typically charge 1% of the total loan amount. In other cases, the lender might not charge origination fees but higher interest rates.
These are like origination fees. This fee covers the processing of the mortgage application.
Property Appraisal Fees
The lender wants to ensure that they don’t finance for more than the home’s value. A property appraisal company assesses your home’s market value to determine your loan-to-value ratio.
Title insurance is a fee paid to ensure that your home’s title is clean. It confirms that the seller is the owner of the property, which protects you and the lender against any claims on the estate. Local governments will also charge recording fees and taxes to record the sale of your property.
Flood Determination and Monitoring Fees
A certified flood inspector will validate that your home is not in a flood zone. This fee also includes ongoing monitoring of flood risk and changes to your property’s flood status. If your home is in a flood zone, then you might need to add flood insurance to your existing homeowner’s insurance policy.
These fees cover the preparation and review of contracts and agreements associated with purchasing a property. Depending on the services involved, they could total $1,500. Getting an attorney to handle the transaction is not a requirement in all states.
Closing Fee or “Escrow” Fee
Depending on state law, the title company, escrow company, or an attorney handles the closing. This fee covers the expenses of the party handling the closing.
Depending on the lender, you may need to deposit two months of property tax and mortgage insurance payments.
When signing paper documents, you will need to get a courier to transport these documents between involved parties. When closing digitally, a courier fee does not apply.
Credit Report Fee
Your lender might need to pull your credit reports. A charge of $15 to $30 may apply here.
Homeowners Association (HOA) Transfer Fee
This fee applies when you purchase a condominium, townhouse, or planned development property. These types of properties or communities generally require that you join their homeowner’s association. The fee covers costs in switching ownership. Make sure to request and review the bylaws, covenants, conditions, restrictions, and rules of the HOA before purchasing a property; some are incredibly detailed.
Prepaying the first year’s insurance premium may be required.
Lender’s or “Owner’s” Title Insurance
You pay this one-time fee up-front to the title company. It protects you if an ownership dispute or lien arises. Legal experts highly recommend this option to avoid future conflict.
Prepaid Daily Interest Charges
This payment covers any interest on your mortgage from the date of closing until the first mortgage payment.
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You must pay taxes that are due within 60 days of purchase at closing.
Tax Monitoring and Tax Status Research Fee
A fee paid to a third-party who will notify your lender of any issues with your property tax payments.
To transfer the property title from the seller to the buyer, you will pay a transfer tax.
Rate Lock Fee
With this, the lender guarantees a specific interest rate. This rate is for a limited period – generally from receiving preapproval until closing.
This one covers the cost of recording public land records, and your local recording office usually does it.
To confirm your property’s boundaries, a surveying company checks property lines and shared fences.
The lender charges this fee that covers the verification of your financial information, income, employment, and credit score. They need to do this research before the final approval of your loan.
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And there’s more…
Some states require further inspection before closing on a property sale. In this case, you will have to pay additional fees directly to a certified inspector of your choice. The required inspections typically include the following:
Lead-bases paint inspection
To determine whether the property has hazardous, lead-based paint.
Inspection of the property for termites, dry rot, or other pest-related hazards or damage.
What about no-closing-cost mortgages?
Sometimes the up-front closing cost is too much to fit in your immediate budget. With no-closing-cost mortgages, the lender will give you an advance on your closing costs.
The advantage is that it can help you get your home faster. You may also end up paying back less of the closing costs if you stay in your home for a shorter period. Watch out for prepayment or cancellation fees, though. Penalties may apply if you own the home for less than three years. It is important to note that the increased amount will result in higher monthly payments and higher interest rates. If that happens, you can always decide to refinance later.
When applying for a no-closing cost mortgage, be sure to ask the lender which costs it will cover. Depending on the lender, you might still have to include some taxes, insurance premiums, and attorney fees.
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Getting the Best Interest Rate for a Mortgage
When applying for a mortgage, your interest rate depends on these criteria:
- Credit scores
- Debt-to-income ratio
- Loan size
- Down payment amount
An optional payment made up-front to the lender. It reduces your loan’s interest rate, resulting in lower monthly payments. One point is equal to 1% of the total loan amount.
Due to the ever-changing economy, rates are constantly fluctuating. The lender will give you a “rate lock” option when applying for a mortgage. Prices may rise from the time of approval to final underwriting. Rate lock ensures that you will have the same rate as when you initially applied. Depending on the lender, you may have to pay a rate lock fee.
Rate locks usually last between 30 to 60 days. This period often is long enough to complete the underwriting process and finalize the sale.
Refinancing means to replace an existing loan with a new one under new terms. You might be able to get better rates now than when you initially applied for a mortgage.
Refinancing can cost between 3% to 6% of the loan’s principal. However, you will have to go through the entire process of appraisal, title search, and application fees again. Thus, it could take years to recoup the money spent on refinancing costs. Is refinancing the right move for you? Before deciding to refinance, ask yourself: “How long do I plan to live in this home?” Also, consider how much money you will save by refinancing.
If your credit score has dropped since getting the initial mortgage, you might get worse rates by refinancing now. With a higher-than-before credit score, it is a good idea to look at refinancing now. You could end up saving on monthly payments and total mortgage cost.
Refinancing in 2019 is a great way to save money, as rates are lower than they’ve been in a while.
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Main Reasons to Refinance
To Lower Interest Rates
You could secure lower interest rates on your existing loan to save money. Although many lenders say that 1% savings are enough, you should aim for a reduced rate of at least 2%. Lowering interest rates also reduces monthly payments and boosts the rate at which you build equity.
Converting to an Adjustable-rate Mortgage (ARM) or Fixed-rate Mortgage
ARM’s will often start with lower rates than fixed-rate mortgages. Periodic adjustments could, however, result in higher rates. In this case, you could lower interest rates and avoid future rate hikes by switching to a fixed-rate mortgage.
If interest rates are falling, it’s usually a smart financial choice to switch from fixed-rate to adjustable-rate loans. ARM will have periodic rate adjustments. Still, it could result in declining rates and lower monthly payments. It is unwise to switch to ARM if interest rates are rising.
You could consolidate all your debt into one loan or free up some cash by tapping into equity. Although a good reason, it could sometimes aggravate your debt situation. Only consider this option if you can resist spending after being relieved from your debt through refinancing.
Tapping into Equity
Remodeling your home could add value to your property. Often, interest rates on your mortgage are less than if you were to borrow money elsewhere. When remodeling your home or, perhaps, funding your child’s education, you could choose to access your home’s equity.
Shorten Mortgage Term
You could save a substantial amount by refinancing when interest rates drop. A shorter mortgage term means slightly higher monthly payments, but less accumulative interest.
Private Mortgage Insurance (PMI)
You may be required to have private mortgage insurance if your down payment is less than 20% of your home’s total cost, which means that you still owe more than 80% of the home’s value. The cost of getting PMI is between 0.5% to 1% of your home’s price. Having PMI will protect the lender from liability if you fail to make payments.
Some lenders require that you pay some or all your PMI at closing. There is also the option to add it to your monthly payments. Your Private Mortgage Insurance is tax-deductible. Having PMI can increase the probability of approval for smaller installments.
Although difficult to do, you could avoid paying PMI by saving enough to make at least a 20% down payment. If not, you could ask to have the PMI removed after having paid 20% of your home’s value in monthly payments. Generally, this requires that you get an appraisal, which could be costly and time-consuming. After paying more than 22% of your home’s value, lenders are required to remove the PMI.
A down payment is a “deposit” amount to secure a purchase. By making a down payment, you show your commitment to the purchase. While some federally subsidized loans do not require a down payment, other lenders may ask for 3-10%.
Advantages to making a down payment are threefold:
- You instantly own a percentage of the property
- You avoid paying PMI by putting down 20% of the home’s value
- Your loan amount is smaller, which saves money on interest and total loan cost
The average price of a home in 2019 is $500,000. If the $200,000 down payment – the recommended 20% – is not feasible, then there are some options where you can put down 10% or less.
House Buying Tips
Before shopping for a new home, get pre-approval from a few mortgage providers, which tells you how much you can afford in terms of real estate cost and down payments.
Pre-approval may initially reflect poorly on your credit score. But, if multiple mortgage providers request your score within 45 days, it will only reflect as a single credit pull and correct itself.
As a first-time homebuyer, you can get mortgages with as little as 3% down payment. If you have a lower income and are looking to buy in a specific area, it may also apply. Banks, such as Chase and Bank of America, offer this option.
In other cases, you may be able to qualify for minimal down payments, even if you’re not a first-time buyer. You must, however, have good credit and be willing to pay slightly higher rates and PMI.
Different Mortgage Programs
It is essential to shop around before settling with a mortgage provider. Look for a mortgage customized to your budget, home, and plans for the property. Think about getting pre-approval from a variety of lenders to see what they could offer. You are looking for the best deal that suits you in this long-term commitment. Here are some loan types.
These loans require a credit score of at least 740 to get the best rates. To avoid paying PMI, you will need to put down 20% of the loan cost. Typically, you are looking at rates of about 5%. In some cases, with good credit, DTI ratios up to 49% may be approved.
If you can only make a 10% down payment, the lender may underwrite a conventional 30-year fixed-rate loan. In this case, you can expect to pay PMI, adding to your monthly mortgage payments. Make sure that you can afford the increased monthly installments. You are generally required to have a higher credit score to get approval for a 10% down payment to a 90% loan amount.
VA Mortgage Loan
You are eligible for a VA loan if you are a qualifying military member or veteran. The Department of Veterans Affairs guarantees this loan, and the federal government backs it. The requirements are lower than when applying for a conventional loan. You will still need to pay fees and to qualify, and your property needs to meet specific standards.
Although there is no PMI, you will have to pay a funding fee that ranges between 1.25% to 3.3% of the loan amount. You can either pay the fee at closing or have it added to your monthly payments. This fee amount depends on your military service classification and loan amount. Some military members or veterans with service-connected disabilities may even be exempt from paying the fee. When making a down payment of 5%, you can reduce the funding fee.
With VA loans, you have lower credit requirements. You will also get better rates with a credit score of 620 than you would with a conventional loan. Though your rates may be higher, approval may be granted with a credit score of around 580. The average rate for a VA loan is 4.73%.
One of the pros with VA loans is that there are no requirements for a down payment. There is also no mortgage interest and capped closing costs. Finally, if you’re worried about your debt situation, you’ll find VA loans less strict about your amount of debt during the approval process. DTI could even go as high as in the ’60s.
Federal Housing Administration (FHA) Loan
With FHA loans, you are required to pay an up-front mortgage insurance premium (UPMIP, which is 1.75% of the principal loan. You can pay this amount at closing or add it to your monthly installments. Depending on your loan term and base amount, an annual MIP payment of 0.45% to 0.85% also applies. You need to pay this fee monthly, though.
Although FHA loans don’t come with PMI, they have their type of insurance. This insurance could end up being more expensive than PMI. It all depends on your home’s cost and loan amount.
FHA loans allow for a higher DTI ratio of up to 56.99%. Having a higher DTI, though, you need to have other compensating factors, which include higher reserves, higher FICO credit scores, and above-average down payment amounts.
A down payment of as little as 3.5% may apply. You might still be approved, even with lower down payments and credit scores. The federal government backs FHA loans and offers better terms for those buyers who want to make smaller down payments.
They tend to be more relaxed about your credit score than private lenders. With a credit score as low as 550, you may still get an FHA loan. It will, however, result in a longer loan term with more fees.
There are also limits to how much you can borrow. Due to it being government-guaranteed, you will have to complete more paperwork.
It may be challenging to qualify for an FHA or VA loan, so some private lenders offer loans amounting to 10% of the down payment. You will need to put down 10% as well. Your home financing comes to 80% mortgage loan, 10% piggyback loan, and 10% personal up-front payment. You can, therefore, put down the full 20% down payment for the mortgage. By doing so, you will have no PMI costs and smaller total loan amounts.
Although it may seem like a good option, you need to keep in mind that you will now have to pay two separate loans. To successfully use this option, be sure to have a:
- Good credit score
- High income and good cash flow
- Solid debt-to-income ratio
- History of sound financial responsibility
A homeownership investment is like a piggyback loan. If you want to get a mortgage with 10% down payment, an investment program can provide you with the other 10%. This way, you can put down the full 20% with your mortgage lender.
The difference between these two loan types is that unlike the piggyback loan, a homeownership investment has neither repayment nor an interest rate. The provider will share in future changes to your home’s value when you sell it: up to 30 years after purchase. The problem with investment programs is that you don’t get to keep all the profit when selling your home.
The Best Mortgage Lenders of 2019
You must make an informed decision when choosing your mortgage loan provider. Not only should your loan payment fit your monthly budget, but it should also be favorable in the long term. By doing your research thoroughly, you’ll end up saving thousands of dollars over time.
The same mortgage provider may have different terms depending on the state. Get quotes from both top lending companies and local lenders to get the best deal for you. Rates and cost estimates tend to vary depending on your local market.
To find a loan to match your individual needs, you should compare these components:
- Mortgage rates: the percentage of the total loan cost, charged monthly.
- Interest rates: for less accumulative interest, opt for a shorter-term loan.
- Loan term: if you can afford higher down payments, a shorter loan will result in more savings. Longer terms will have lower monthly payments but come with added interest, which adds to the total loan cost.
- Fees and closing cost
- Time to close the transaction
- Option to apply online
- Loan tracking services
- Customer service: review the lender’s competence and reputation. Some companies may offer lower rates but fail to close on time. Consult the Consumer Financial Protection Bureau and The Better Business Bureau.
- Credit score: if you have a lower credit score, consider federally subsidized programs.
Five Top Mortgage Lenders for 2019
They are a mortgage marketplace where you can compare multiple offers for the most competitive rates. Lending Tree offers a smooth online application process, providing you with up to five lenders within minutes. Refinancing options, Conventional-, FHA- and VA loans are available. Their database gives you the best rates from a variety of competitors.
Additionally, there are online resources to help you make educated decisions. You can access estimated rates, loan amounts, and credit scores.
It is important to note that Lending Tree is only a comparison platform. If you are looking for the lowest rates on refinancing or a first-time mortgage, then they will give you a comprehensive market view. Once you choose an offer, you will deal directly with the lender.
Rocket Mortgage (by Quicken Loans)
Voted the top lender for customer satisfaction, Rocket mortgage has an exceptional website. Their online app makes the application process seem effortless. It comes with many tools to help you understand the products and make informed decisions. You can compare different loans and track your progress.
Rocket mortgage offers a spectrum of loan types, such as conventional loans, FHA, VA, USDA, and Jumbo loans. They also offer low rates on refinancing. Traditional and USDA loans require a minimum credit score of 620, and, as low as 580 for FHA and VA loans. You can qualify for a loan with a minimum down payment of 3%. Origination fees do apply.
To get a personalized rate, you must create an account and provide some personal information. To get an idea of what the rate will be, you can look on the Quicken Loans website where they post daily national rates.
Fixed-rate mortgage loans are available for 15- or 30-year terms. There is also the option to choose a loan duration of 8 to 30 years.
As one of the newest lending companies on the market, they offer significantly lower rates than most lenders. You will find 15 and 30-year fixed-rate conventional mortgages, and Jumbo mortgages up to $3 million with SoFi, Also offered, are adjustable-rate mortgages for 10-year interest-only payments. If you are refinancing, they offer traditional and cash-out refinancing. They even provide refinancing for student loans.
Loans are only offered on owner-occupied residences. Investment and rental properties are ineligible. SoFi’s rates assume a 0.875% mortgage point, and they tend to offer lower rates than most lenders.
There are no origination fees, and SoFi allows a 10% down payment with additional PMI. If you have an existing SoFi account, then you qualify for a 0.125% discount.
Their 2-minute pre-qualification process will give you a rate estimate. The fast application will also underwrite the loan during pre-approval. When you apply, they focus more on your income and future earnings rather than your credit score. SoFi is, therefore, ideal if you are a first-time buyer will little credit history.
Instead of operating out of an actual branch, they offer online-only services. Finally, SoFi currently has outstanding customer service – complaints are few, and reviews are positive.
As the fifth-largest bank with branches in 29 states, U.S. Bank has an excellent reputation for customer satisfaction. Customer service staff are available on-site or online.
U.S. Bank offers conventional fixed-rate loans, FHA, VA, and Adjustable-rate Mortgage loans. Besides these, there are also options for construction and investment property loans. More flexible fixed-rate terms of 10-, 15-, 20- and 30-year loans are also available. Their Smart Refinance loan offer comes with no added closing cost.
Their handy “loan officer near you” option on the app, makes getting personalized guidance easy. Also, by dialing their national phone number, you can speak to someone directly.
When compared to other large banks, U.S. Bank offers slightly lower, competitive interest rates and APR. You can pre-qualify and complete your mortgage or refinance application online.
With 160 years of mortgage and refinancing experience, PNC Bank is one of the most established loan providers. Loan terms of 10, 15, 20, and 30 years are available when purchasing and refinancing. A minimum of 3% down payment is required. They also offer flexible adjustable-rate mortgages on standard FHA and VA loans.
Voted best for Jumbo mortgages, they offer a higher upper limit with financing up to $5 million for primary or secondary homes or investment properties. To qualify for a jumbo mortgage with PNC, buyers should have sufficiently high credit.
With PNC, there are options for home equity loans, rapid financing, and home equity lines of credit. Their combination loan option also allows you a 10.1% down payment with a second loan of 9.9%.
You can access an interest rate estimate by entering your loan amount and zip code. The lender assumes one discount point on the estimate. Fees and closing costs vary depending on your location and circumstances. With the PNC Bank Planner, you can get an idea of what you can afford. If you’re ready to take the next step, it will lead you to listings within your budget.
PNC blends the digital experience with direct personal service. For pre-approval, you can complete a form online but will need to speak to a loan officer by phone or in a branch to complete your application. They only supply fees and closing costs after pre-approval.
Although customer satisfaction ratings give PNC at an average score, it is fair to say that they do well given the high percentage of loans.
In addition to the basic terminology of the loan industry, it is crucial to select a lender that meets your needs. Different lenders offer different products and services based on market conditions and locations. Buying a home is perhaps the most significant financial investment you will ever make; it’s like going to the store to buy food. Take your time, conduct thorough research, and seek out advice from qualified professionals. Doing so will make this investment a positive one for years to come.
Have a home mortgage? Know a great lender? Have any useful tips? If so, please comment below.