4 Things Most Americans Don't Know About Mortgages
When you sign your mortgage papers, you probably think that you’ve read the fine print and understand the financial circumstances ahead. Double-check, though, because it turns out there are a lot of things about mortgages you might not know that you don’t know.
Here are four things most Americans don’t know about mortgages.
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Your Lender Doesn’t Get Your Credit Score From an App
The score you see on most credit card portals is usually a VantageScore 3.0, otherwise known as the consumer-education score, according to Cody Schuiteboer, the president and CEO of Best Interest Financial.
“When it comes to underwriting your loan, however, mortgage lenders pull tri-merge FICO reports using different scoring models: FICO 2 (Experian), FICO 5 (Equifax) and FICO 4 (TransUnion)," Schuiteboer said. “These are different scoring engines that are weighted differently, hence giving different results compared to VantageScore."
Schuiteboer urged Americans to get a mortgage tri-merge FICO report from a reputable mortgage professional 90 to 120 days prior to applying.
“The number might look quite different compared to the one you have been seeing all along and this will be crucial for a mortgage qualification and underwriting,” Schuiteboer said.
Required 20% Down Payment Is a Myth
Over 50% of Americans believe that 20% down is mandatory to receive financing on a home, according to Sain Rhodes, an expert in real estate at Clever Offers, who has witnessed qualified homebuyers delay their purchasing plans by five, six and even seven years because of this.
“However, in reality, conventional loans issued by Fannie Mae and Freddie Mac have a 3% down requirement minimum for both first-timers and repeat buyers alike. FHA loans require as little as 3.5% down with a credit score of 580,” Rhodes said.
Rhodes added that VA loans do not have any minimum down payment and allow eligible veterans and active service members to take advantage of zero-down programs. USDA loans offer 0% down to buyers in eligible suburban and rural markets.
“All this means that on a $300,000 home, the difference between a 20% and a 3% requirement is $9,000 vs. $60,000 upfront,” Rhodes said.
Debt-to-Income Measurement: Gross Monthly Income, Not Take-Home Pay
“Buyers often try to calculate on their own the maximum price of the home based on the debt-to-income (DTI) ratio of their credit score and their gross annual income,” Schuiteboer explained, noting this is the wrong calculation to make. “Calculating your debt-to-income ratio, lenders take your gross monthly income into consideration and subtract your total monthly debt obligations.”
Schuiteboer summed up that the standard DTI ratio does not include your housing payment, meaning the standard DTI is measured against your gross monthly income.
Overestimating Time in a Mortgage
“About 90% of American buyers choose the 30-year fixed mortgage program, yet statistics show that the average homeowner stays in their property for only about 11.8 years,” Rhodes said, citing data from Redfin. “The statistical probability to keep your loan for its full term is very slim, which makes a huge impact on decisions about choosing a discount point or an adjustable-rate program or going for the ‘grow-into-it’ option.”
Rhodes advice to all buyers: Consider a mortgage product based on your realistic time expectation of ownership, not the whole 30 years on paper.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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