Learn

1. Prepare

MORTGAGE ESSENTIALS

We’ll first help you decide whether a) buying is right for you.
If it is, we’ll walk you through b) mortgage basics, c) the different types of lenders out there,
and finally help you d) obtain and optimize your credit score!

Disclaimer: While our site is designed to provide you important information, everyone’s situation varies and therefore always consult your attorney or advisor before making any decisions.

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Rent

A. Should I Buy?

I. Buying vs. Renting Pros & Cons

Before you get too excited to buy your dream home, we recommend first weighing the trade-offs between buying and renting which we have summarized below:

Pros of Buying

Financial Advantages

  • Building equity value versus walking away with nothing when you rent
  • Potential source of wealth creation as over long periods of time most areas in the country have shown significant growth in home values
  • Historically low interest rates make today a good time to buy (see Mortgage Rate Trends)
  • Tax deductions for your mortgage interest (depending on your tax situation)
  • Mortgage payment may be similar to the rent payment, depending on various factors
  • Security of knowing your payment will not rise if you have a fixed rate mortgage (unlike renting where you can likely expect annual rent increases)
  • Payments will end when the mortgage is paid off (unlike renting where payments will never end)

Other Advantages

  • Your credit score improves with a mortgage (unlike renting), assuming you pay on time
  • You are not subject to a landlord’s mercy!  Ownership avoids headaches such as an unresponsive landlord to repairs or potentially being forced to move if they decide to sell the property
  • You make the rules (no landlord rules etc.), including decorating your home to your own taste!
  • Personal satisfaction of knowing you own your home
  • It’s the American dream!

Cons of Buying

Financial Disadvantages

  • Your home value could decline
  • Almost all mortgages require some down payment, which means you need some significant savings (unlike renting which generally requires you to only put down a security deposit)
  • You may bear significant additional costs such as real estate taxes, homeowners insurance, and Home Owners’ Association (HOA) dues
  • If you move often, the transaction costs of buying and selling homes often makes it less economical than renting

Other Disadvantages

  • It is easier, cheaper and faster to move from one rental to another than by buying and selling a home
  • You are responsible for all maintenance and repairs
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II. Renting vs. Buying Calculator

Now that you understand some of the tradeoffs, we recommend running the math.  There are various calculators on the market to compute the financial impact of buying versus renting, but the best one we found is by the NY Times which you can access by clicking here.

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affordability calc

III. Affordability Calculator

Finally, an important factor into making your decision is understanding what you can afford, which you can compute using our affordability calculator:

    Annual Income ?$
    Monthly Debt Expenses ?$
    Down payment ?$

    Advance Options+
    Loan Terms (Yrs)
    Mortgage Rate ?%
    Property Tax ?$
    Home Insurance ?$
    HOA Fees (monthly) ?$
    Front-End Ratio ?%
    Debt-to-Income Ratio ?%
    Monthly P&I Based on Front-End Ratio ?$
    Monthly P&I Based on Debt-to-Income ?$
    Maximum home you can afford $438,922

    Breakdown of Monthly Budget

     

    While there are many factors you should consider in your decision to buy versus rent, a simple rule is that generally you need to stay at least 4-5 years to make the closing costs of a home purchase worth it. This simple rule however doesn’t take into account home appreciation, which if you are fortunate enough to have, can significantly affect the results.

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    Rent
    Loan types

    B. Learn About Mortgages

    In this section we’ll go through I) Mortgage Types II) Interest Rate Features and III) Recent Interest Rate Trends.

    I. Mortgage Loan Types

    Still interested in buying? Then it’s time to arm yourself with critical loan information before negotiating with various lenders! Tired of reading long and complicated articles about all the various loan types? We were too, so we summarized the different loan types below:

    Conventional Loans (Conforming Type)

    Conventional Jumbo Loans (Non-Conforming Type)

    FHA (Federal Housing Admin)

     VA (Veterans Affairs) 

    USDA/RHS (formally sec. 502 loans)

    Description

    Bank loans for homes up to a certain loan amount ($453,100 for most counties) with standard qualifications.

    Bank loans for larger loan amounts with stricter qualifications.

    Government approved loans to help buyers that can’t qualify for a conventional loan.

    Government approved loans for military service members and their families that don’t require a down payment.

    Government-approved loans for homes in rural areas (covers ~97% of the country!) below a certain income level. 

    Government Sponsored?

    No

    No

    Yes

    Yes

    Yes

    Interest Rate

    Average

    Average*

    Higher

    Lower

    Lower

    Minimum Down Payment

    5%+

    5%+, though most lenders will likely ask for a higher amount

    3.5%

    0%

    0%

    690+ with exceptions

    720+, though most lenders will want a score in upper 700s

    580+, though some lenders may require slightly higher scores

    620+, though some lenders will lend below this score

    640+

    Mortgage Insurance Required?

    Required typically if down payment <20%

    Required typically if down payment <20%

    Required

    Not Required (but funding fee is required)

    Required (plus funding fee)

    45%

    38%

    43%

    41%

    41%

    Good For…

    Those with good credit (click here to download a table of loan limits by county)

    Those needing a larger loan that exceeds the typical loan limits

    Those with lower credit or down payment

    Qualifying veterans or active military (Click here to determine if you qualify)

    If you qualify! (click here to see if your income qualifies and here to see if your area qualifies)

    Pros & Cons

    Disclaimer: Please use the above chart only as a guide as there maybe exceptions made by certain lenders.
    * Occasionally a jumbo loan will be priced lower than a conforming conventional loan as it allows the bank to loan out more money (and therefore earn more interest).
    ** General industry standards; occasionally a lender may break these limits slightly.

     

    It’s worth spending 2 minutes to quickly see if you qualify for the USDA program as you will generally receive the best rate with this type of loan. Click here to see if your income qualifies and here to see if your area qualifies.

    Conventional Loans
    (Conforming Type)

    Good For… Those with good credit (click here to download a table of loan limits by county)

    Pros & Cons 

    Conventional Jumbo Loans
    (Non-Conforming Type)

    Good For… Those needing a larger loan that exceeds the typical loan limits

    Pros & Cons 

    FHA
    (Federal Housing Admin)

    Good For… Those with lower credit or down payment

    Pros & Cons 

    VA
    (Veterans Affairs)

    Good For… Qualifying veterans or active military (Click here to determine if you qualify)

    Pros & Cons 

    USDA/RHS
    (Formally sec. 502 loans)

    If you qualify! (click here to see if your income qualifies and here to see if your area qualifies)

    Pros & Cons 

    Disclaimer: Please use the above chart only as a guide as there maybe exceptions made by certain lenders.

     

    It’s worth spending 2 minutes to quickly see if you qualify for the USDA program as you will generally receive the best rate with this type of loan. Click here to see if your income qualifies and here to see if your area qualifies.

    Interest Rate Features

    II. Mortgage Loan Interest Rate Options

    Equally important, the interest rate option you choose dramatically changes your monthly payments over the life of the loan. We’ve listed the different options below in order of most common to least common (note that not every option below is always available with each type of mortgage loan).

    Interest Rate Features
    Interest Rate Features

    Fixed Rate

    Fixed interest rate for the full length of your loan (typically 15 or 30 years).

    Adjustable Rate Mortgage (ARM)

    Lower fixed rate for an initial period (typically 5, 7, or 10 years), after which the rate moves up and down every year for the rest of the loan.

    Interest-Only ARM

    An ARM with lower monthly payments that cover only interest for a specific period, after which payments increase significantly to payback the loan.

    Interest Rate Features

     

    If you are planning to stay in your home for only a few years, gaining the lower interest rate of an ARM loan may be right for you.

    interestratetrends

    III. Mortgage Loan Interest Rate Trends

    The Federal Reserve (the government body that governs interest rates) has recently lowered rates to record lows, creating a unique opportunity to obtain a mortgage at rock bottom rates!  Given the uncertainty of the current markets, especially as COVID-19 doesn’t appear to be going away anytime soon, we don’t anticipate the Fed raising rates significantly anytime soon.  Buyers are in a unique period today where they benefit not just from low mortgage rates, but also likely declining real estate prices given the high likelihood of a near-term recession.

    Click here to receive quotes from some of the nation’s top lenders.

    Use the slide ruler below to zoom in or out on interest rates from the past 30 years
    30 YEAR FRM15 YEAR FRM5/1 ARM
    interestratetrends
    Loan types
    learnlenders

    C. Learn About Lenders

    In this section we’ll summarize all the different types of lenders out there and compare them for you.

    Traditional Banks

    We found you will get the best deal based on how aggressive and how senior your contact is at the bank.  Use online reviews to find who these top folks are as: 1) Their status in the company usually gives them more leeway to get something done at a preferred rate and 2) Because of the volume they do (and how much they make), they can afford to be more aggressive on pricing and take a smaller commission. Use online reviews to find who these top folks are!

    Mortgage Lenders

    Given the smaller nature of these firms, we only recommend working with one that is accredited with a strong rating by the Better Business Bureau (BBB). Click here to check an organization’s BBB rating.

    FHA Community Banks / Credit Unions

    If you are a member of a credit union or local bank, ask about their relationship pricing, which is where you get a preferred rate if you transfer in or hold a certain amount of assets with them. Following the closing of the loan, you usually are not under any obligation to keep those assets in place!

     Mortgage Brokers

    We recommend going through the process first yourself and getting some quotes from the different various lenders to see if you can save yourself the mortgage broker commission; yes it is more work, but 1% of your loan amount as a fee is a lot of money!

    Traditional Banks

    Mortgage Lenders

    FHA Community Banks / Credit Unions

     Mortgage Brokers 

    Description

     Major banks (Wells Fargo, Chase, etc) as well as mid to smaller firms which lend directly.

    These firms will underwrite mortgages with their own funds but will typically sell your mortgage to a large bank 30-60 days after close.

    Community banks and credit unions (owned by the account holders) are local institutions that lend directly.

    Individuals that shop around lenders for you (often they will have their own lender network). Typically take 1% of the loan amount as a fee.

    Pros

    • Since the banks are lending directly, you are only dealing with one entity
    • Special relationship pricing may exist if you are a customer of the bank
    • Don’t worry as your terms won’t change when your loan is sold!
    • Sometimes these lenders are able to price their loans more competitively knowing a bank will buy a group of loans from them at a premium.
    • Smaller size of firm may give you better personalized service.
    • May be competitive in their rates for their members.
    • Personalized service is usually strong.
    • Take a large part of the process off your hands, saving you time.
    • Sometimes they have strong relationships with lenders to get you competitive rates.

    Cons

    • Depending on size of the bank and who you work with, you may not receive personalized service
    • While your terms can not change, the customer service of the new bank may not be as good.
    • Expect many information requests when going through the application process.
    • Very fragmented industry with no clear leader; firms are harder to find.
    • Generally the technology is not as strong as the larger lenders (may not even have an online portal).
    • Some don’t offer government backed loans such as FHA, VA, or USDA mortgages.
    • Sometimes they are more conservative in their financial requirements.
    • Expensive as you will typically pay 1% as an upfront “loan origination fee”.
    • You limit your ability to work with lenders as you will have to sign an exclusive with the broker.

    Tips

    We found you will get the best deal based on how aggressive and how senior your contact is at the bank.  Use online reviews to find who these top folks are as: 1) Their status in the company usually gives them more leeway to get something done at a preferred rate and 2) Because of the volume they do (and how much they make), they can afford to be more aggressive on pricing and take a smaller commission. Use online reviews to find who these top folks are!

    Given the smaller nature of these firms, we only recommend working with one that is accredited with a strong rating by the Better Business Bureau (BBB). Click here to check an organization’s BBB rating.

    If you are a member of a credit union or local bank, ask about their relationship pricing, which is where you get a preferred rate if you transfer in or hold a certain amount of assets with them. Following the closing of the loan, you usually are not under any obligation to keep those assets in place!

    We recommend going through the process first yourself and getting some quotes from the different various lenders to see if you can save yourself the mortgage broker commission; yes it is more work, but 1% of your loan amount as a fee is a lot of money!

    learnlenders
    scores

    D. Obtain & Optimize Your Scores

    In this section we’ll go through I) How to Obtain Your Scores and II) How to Optimize your Credit Score.

    I. How To Obtain Your Scores

    Before using your new knowledge to reach out to lenders, it’s important to focus on your scores first.  Why?  Your credit score and your Debt-To-Income (DTI) ratio are the two main scores lenders will look at to determine if they will lend to you and what rate you will receive. You will want to maximize both of these metrics to receive the best possible rate.

    D. Obtain & Optimize Your Scores

    In this section we’ll go through I) How to Obtain Your Scores and II) How to Optimize your Credit Score.

    I. How To Obtain Your Scores

    Before using your new knowledge to reach out to lenders, it’s important to focus on your scores first.  Why?  Your credit score and your Debt-To-Income (DTI) ratio are the two main scores lenders will look at to determine if they will lend to you and what rate you will receive. You will want to maximize both of these metrics to receive the best possible rate.

    CREDIT SCORE

    Two companies, FICO and VantageScore, pull data from the three credit bureaus (Equifax, Experian and Trans Union) and compute a score between 300 (the worst) to 850 (the best) to indicate your creditworthiness.

     Click here to learn more about credit scores.

    How to Find Your Score

    Fortunately finding your credit score is very easy these days as most credit cards and banks allow you to see your score for free when you log into your account.  If you don’t have access to your score, there are many free credit score websites.

     Click here for a list of free credit score sites

     Click here to learn how to get a free detailed credit report

    DEBT-TO-INCOME RATIO

    Another very important metric lenders will look at is your Debt to Income (DTI) ratio, which is an indication of how likely you are to pay off your debt.  It is a simple calculation that takes your monthly income and divides it by your monthly debt payments.

    How to Compute your Score:

    What Your Credit Score Means

     

    ♦ Excellent (800+)
    You will qualify for the top rate

    ♦ Very Good (740 – 799)
    You likely will qualify for the top rate

     Good (670 – 739)
    You likely will receive a competitive rate

     Fair (580 – 669)
    You likely will need to go with a government sponsored loan such as FHA, VA or USDA

    Poor (300 – 579)
    Unlikely you will be able to receive a loan

    Checking your credit score is considered what is called a “soft inquiry” so it will not harm your credit in any way.  You can check your score as much as you want as it will have no effect on your score.

    What Your DTI Score Means

     

    ♦ Excellent (below 20%)
    Your debt level is what lenders view as at a very desirable level; there is a very high likelihood they will approve your loan (subject to you qualifying on other factors they look at)

    ♦ Good (20% – 36%)
    Debt is at a very manageable level and lenders are likely to approve your loan (subject to you qualifying on other factors they look at)

    ♦ Fair (37% – 43%)
    You are managing your debt adequately but lenders may ask for additional eligibility factors

    Risky (44% – 100%)
    Lenders are likely to limit your borrowing options or not lend to you at all

    Lenders will generally consider a debt-to-income ratio of 43% as the highest level they will accept.  If you are considering paying off some of your debt to increase your DTI score, bear in mind that only the minimum monthly payment amount (and not the balance owed) count into the DTI calculation.  Therefore, you may want to consider paying off the form of debt you have with the highest required monthly payment in order to increase your DTI score. 

    What Your DTI Score Means

     

     Excellent (below 20%)
    Your debt level is what lenders view as at a very desirable level; there is a very high likelihood they will approve your loan (subject to you qualifying on other factors they look at)

     Good (20% – 36%)
    Debt is at a very manageable level and lenders are likely to approve your loan (subject to you qualifying on other factors they look at)

     Fair (37% – 43%)
    You are managing your debt adequately but lenders may ask for additional eligibility factors

     Risky (44% – 100%)
    Lenders are likely to limit your borrowing options or not lend to you at all

    Lenders will generally consider a debt-to-income ration of 43% as the highest level they will accept.  If you are considering paying off some of your debt to increase your DTI score, bear in mind that only the minimum monthly payment amount (and not the balance owed) count into the DTI calculation.  Therefore, you may want to consider paying off the form of debt you have with the highest required monthly payment in order to increase your DTI score. 

    optimizes

    II. How To Optimize Your Credit Score

    Now that you know your credit score, it’s time to learn the key tricks to optimizing it!  This is very important in order to receive the best possible rate from lenders.

    Credit Score Components

    Below is a snapshot of the components that make up your credit score along with which pieces you have influence over in the short term.

     Can influence in short-term
     Can not influence much in short-term

    How to Optimize Each Component

    Click on each component below to learn how to maximize that piece of your credit score.

     To simulate how financial decisions will impact your score, click here.

     

    Start implementing the above strategies ideally 60 days prior to your lender pulling your score to give time for your score increase significantly.  The difference of optimizing your score could be be enough to put you into a new lending category and decrease your interest rate! 

    optimizes
    scores
    optimizescores
    optimizes

    II. How To Optimize Your Credit Score

    Now that you know your credit score, it’s time to learn the key tricks to optimizing it!  This is very important in order to receive the best possible rate from lenders.

    optimizes

    CREDIT SCORE COMPONENTS

    Below is a snapshot of the components that make up your credit score along with which pieces you have influence over in the short term.

     Can influence in short-term
    ♦ Can not influence much in short-term

    HOW TO OPTIMIZE EACH COMPONENT

    Click on each component below to learn how to maximize that piece of your credit score.

     To simulate how financial decisions will impact your score, click here.

     

    Start implementing the above strategies ideally 60 days prior to your lender pulling your score to give time for your score to increase significantly.  The difference of optimizing your score could be be enough to put you into a new lending category and decrease your interest rate! 

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