Advertiser Disclosure

Mortgage

Most Important Factors to Getting Approved for a Mortgage

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iStock

When David Inglis and his wife decided to move to San Diego last year, they were expecting a relatively smooth process. They'd keep the house they owned in Los Angeles and rent it out as a source of passive income, then they'd buy a new house in San Diego. They even had a 20% down payment ready to go.

"The problem was that we found renters and had to get out of our current house and close on the new house within 21 days," Inglis, 40, a yacht broker, tells MagnifyMoney. That gave them just 21 days to get a mortgage — easier said than done. As Inglis put it: "Getting approved for a mortgage is a process, to say the least."

With what felt like a moment's notice, the couple had to gather up and submit everything from tax returns to current income statements, and do mountains of paperwork in between to get pre-qualified for a loan. From there, their lender picked through their credit scores, debt-to-income ratio, employment history — you name it. They closed on their new house in the nick of time at the end of 2017, and it was anything but a stress-free experience.

If you're new to the whole buying-a-house thing, locking down a mortgage loan isn't something that happens overnight. That's not to say it isn't worth it though. One recent Value Insured survey found that the vast majority of younger folks—a whopping 83%, in fact—still associate buying a home with the American dream.

At the starting line? There are a number of important factors that go into determining if a lender will approve you for a home loan. Here's everything you need to know.

Getting approved for a mortgage — 5 things lenders are looking for

Credit score

Remember: A mortgage is a type of loan. When you're applying for any type of financing, your credit score is perhaps the most important piece of the puzzle. This three-digit number essentially provides lenders with a general idea of your creditworthiness.

If you have accounts in collections or a history of making late payments, for example, you'll have a lower-than-average score, which directly affects your loan options. That means you could get hit with higher interest rates or bigger mortgage insurance premiums, or both.

"Your credit score is really important on conventional loans,” John Moran, founder of TheHomeMortgagePro.com, tells MagnifyMoney. “Some other loan programs are less credit-sensitive."

For conventional home loans, Moran says your credit score has to be at least 620, but for FHA or VA loans, you may be able to get away with a score in the 500s. But it’s not just about getting approved. The lower your score, the higher your mortgage rate will likely be — and that can add tens of thousands of dollars to the cost of your loan over time.

FICO, America's leading credit reporting agency, looks at several important factors when determining your score. Your payment history, amounts owed, and length of credit history are chief among them. If you’re aiming for a home in the next year or two, you’ve got time to improve your credit if you start now.

Trust us — it’ll be worth the effort. You can see below what estimated mortgage rate folks would get based on their credit score and how much it could cost them over time. For our purposes, we’ll assume they’re all getting a $250,000 30-year fixed rate loan.

Score Range

APR

Monthly Payment

Total interest paid

760-850

3.914%

$1,181

$175,224

700-759

4.136%

$1,213

$186,760

680-699

4.313%

$1,239

$196,072

660-679

4.527%

$1,271

$207,462

640-659

4.957%

$1,335

$230,777

620-639

5.503%

$1,420

$261,180

Source: Calculated using the MyFico Loan Savings Calculator
Rates current as of Feb. 2, 2018.

You can find a detailed breakdown of your credit score by pulling up your credit report for free. Your report unpacks your credit history for lenders, so it’s vital to know what’s on it. This is crucial because you could end up spotting an error that's weighing your score down.

If your credit score could use some work, don't fret—there are plenty of ways to give it a good boost before buying a home. Establishing credit history, keeping your credit utilization ratio below 30%, and making consistent on-time payments are all on the list.

Debt vs. income

Your credit score goes hand in hand with your current debt load. Lenders specifically zero in on how your debt relates to your income. Together, this determines what's known as your debt-to-income ratio (DTI)..

To calculate out your DTI, it’s fairly simple: Add up all your monthly debt obligations (not including your current housing payment unless you own the home and plan on keeping it), then divide that number by your gross monthly income. So if you pay, for example, $2,000 a month toward debt and you're grossing $4,500, your DTI comes in at about 44%.

What’s a good DTI? Strive for 36% or less.

Fannie Mae, which sets the lending standards for the vast majority of mortgage loans, generally requires a maximum total DTI of no more than 36%. However, if the borrower meets certain credit and reserve requirements, they can generally get away with 45%.

Why? A high DTI is a red flag to lenders that you may not be able to afford a new monthly loan payment. In a lot of ways, it's more telling than your credit score.

"The only thing that really matters to lenders is how this new monthly payment and your other debts relate to your income," said Moran. "One of the quickest ways people can turn things around is by paying down revolving debts like credit cards and lines of credit, which increases your available credit and decreases your credit utilization ratio."

He adds that making a smaller down payment in order to pay down revolving debt might improve your chances of qualifying since doing so will boost your credit score relatively quickly. Knocking those balances down also lowers your monthly minimum payment, so you may be able to qualify for a larger loan. In other words, your DTI isn't the end-all-be-all when applying for a mortgage loan, but it’s pretty important.

Down payment

Lenders also look at how much of a down payment you can make, which ties directly back into your debt-to-income ratio. According to Bob McLaughlin, director of residential mortgage at financial services company Bryn Mawr Trust, putting down a higher down payment makes you more likely to get approved since it essentially decreases the risk for the lender. As a result, better loan terms and interest rates will likely be on the table.

"If you have the ability to put 20% down, you also avoid having to pay private mortgage insurance, which makes it easier to qualify," he said.

Another perk is that you'll have more equity in your home as well as a lower monthly mortgage payment. But for many, saving for a 20% down payment is a serious barrier to homeownership. Not surprisingly, a 2016 report put out by the National Association of Realtors found that the average down payment for first-time homebuyers has fallen in the 6% range for the last few years. The good news is that according to Moran, you can still get approved with a lower down payment.

"You can put 0% down for VA loans, 3.5% for FHA loans and even as little as 3% for conventional loans," he said.

"There are people all the time buying homes with these minimum down payments, but it really all boils down to what you're comfortable with and the kind of monthly payment you can handle."

FHA and VA loans are usually the first low down-payment loans that come to mind, but options like personal loans and USDA loans may also be worth considering. Just keep in mind that taking this shortcut could potentially translate to a financial burden — low down payments typically necessitate higher insurance rates and extra fees to protect the lender.

That said, lenders are really looking at your big financial picture, not just your down payment size. If you're putting down less, but have a good score and a steady source of income, you're much more likely to get approved for a mortgage loan than someone with a lower score and/or spotty employment status.

Employment history

Our insiders say that your income and employment history are just as important as your credit score, DTI and down payment size. Again, it all comes down to lenders feeling confident that you can indeed repay your loan.

"You have to fit the underwriting guidelines per your profession, and there is little flexibility there," said McLaughlin.

Piggybacking on this insight, Moran says that the ideal situation is if you've worked for the same employer for two years and you're salaried. The second ideal way to get the green light is if you're an hourly worker who's been with the same company for at least two years.

But all this begs one obvious question: What about self-employed folks? The freelance economy is growing rapidly. According to the latest Freelancing in America survey conducted by Upwork and the Freelancers Union, these folks are predicted to make up the majority of the U.S. workforce within the next decade. Moran says that for these workers to qualify for a mortgage, they'll need to have a two-year work history.

Check out our guide on getting approved for a mortgage when you’re self-employed.

"It's a little bit of a kiss of death to start self-employment right before applying for a home loan," he said.

"Most lenders won't approve you because they want to be sure you'll be able to afford your new loan payment. The only way to really prove you have a steady income is with two years' worth of tax returns."

In rare cases, Moran adds, you may be able to get away with one year, but it’s not the norm. Things are different of course, for self-employed newbies who are applying with a spouse who works a steady 9-to-5, which could tip the scales in their favor. Again, it's all about the big picture. That said, a new salaried position will typically erase doubts stemming from a spotty employment history, as long as you have about two months’ worth of pay stubs, according to McLaughlin.

Loan size

All the factors we're highlighting here are interwoven. The size of the loan you're applying for fits right in. The higher your loan amount, the higher your monthly payment, which impacts that all-important DTI.

This is why you may be more likely to get approved if you're seeking a lower amount. But whether you're looking for $100,000 or $400,000, it really boils down to how big of a monthly payment your budget can absorb. (Lending Tree, which is the parent company of MagnifyMoney, has a Home Affordability Calculator that can help you figure this out.)

The general rule of thumb here is to keep your mortgage loan (including principal, interest, taxes, and insurance) at or below 28% of your total income. Moran has worked with ultra-conservative folks who like to keep that number at 25%, but he says it really varies from person to person.

"Some people like to travel and don't want to be house poor; others are homebodies and just really want a nice house because that's where they're going to spend their time," he said.

"It's all a trade-off, but either way, lenders will only pre-qualify you for what they think you can actually afford."

How to get preapproved for a mortgage

Pre-approval is a term you're likely to hear in the home-buying process. This is when the lender takes into account everything from your credit score and debts to employment history and down payment size to offer you a maximum loan amount.

When you come to the table with a pre-approved offer of lending from a bank, you’re already way ahead of the competition. And this can really give you an edge. When you’re living in a metro where most people are coming with double-digit down payments and pre-approvals to boot, you’re competing with very attractive borrowers.

Pre-approvals will ding your credit score, but the hit won’t be too bad if you complete several mortgage applications over a short time period, like 30 to 45 days. Multiple inquiries should only count as one hard inquiry on your credit report.

A good rule of thumb is to get mortgage quotes before you apply for pre-approval. You can get quotes quickly from different lenders at LendingTree by filling out a short online form.

Included in a pre-approval letter will be the estimated loan amount you might qualify for and your estimated mortgage rate.

The pre-approval process is also meant to prevent you from making offers on homes you can't afford. But this doesn't mean you have to actually take out a loan for the full amount. Many choose to get preapproved for their top number, then dial back during negotiations.

Final word

When it comes to mortgage approval factors, there are a lot of moving parts. Far and away, your credit score and debt-to-income ratio carry the most weight for potential lenders. From there, your ability to prove that you're steadily and reliably employed is equally important.

At the end of the day, all that really matters is that you're applying for a loan that you'll actually be able to repay hiccup-free. The larger your down payment, the better your odds—especially if it eliminates the need for PMI. Either way, it's probably in your best interest to meet with lenders before you start house hunting.

"You don't want to put the cart before the horse by going with a realtor to look at houses, only to fall in love with something you can't afford," added McLaughlin. "Your emotions can definitely make the mortgage application process more stressful, which is why it's best to go through the prequalification process first."

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

TAGS: ,

Advertiser Disclosure

Mortgage

3% Down? Why Small Down Payment Mortgages Could Be a Bad Idea

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iStock

For prospective homeowners, the idea of saving up for a 20% down payment — usually tens of thousands of dollars — can often be paralyzing. As a result, small or no down payment mortgages are extremely attractive.

But as usual, taking a shortcut financially can come back to bite you. Mortgage loans that have a low-minimum down payment usually require extra fees or insurance to make it worth the lender’s while.

To determine whether a small down payment mortgage is right for you, it’s important that you know what you’re getting yourself into and how much it can cost you in the end.

Mortgages that require a small down payment

Small down payment mortgages are attractive primarily because they allow people to buy a home sooner than if they had to put a full 20% down.

This can be appealing for personal reasons since owning a house often makes it feel more like home. And it can occasionally be attractive for financial reasons, potentially saving you money compared with renting, particularly if you stay in the house for an extended period of time.

Additionally, there are several home loan programs that offer small or no down payment mortgages to those who qualify:

Veterans Affairs (VA) loans

These loans are insured by the U.S. Department of Veterans Affairs for certain veterans, service members, spouses and other eligible beneficiaries.

They don’t require a down payment or mortgage insurance but do charge a one-time funding fee of 0.5% to 3.3%, depending on the type of loan, the size of the down payment and the nature of your military service.

U.S. Department of Agriculture (USDA) loans

The U.S. Department of Agriculture insures home loans for low- to moderate-income homebuyers in eligible rural areas.

Like VA loans, there is no down payment for a USDA loan. But there is an upfront fee of 1% and an ongoing annual fee of 0.35%, both of which apply to purchases and refinances.

Federal Housing Administration (FHA) loans

Insured by the U.S. Department of Housing and Urban Development (HUD), borrowers can get an FHA loan with a down payment as low as 3.5%.

Additional fees include an upfront mortgage insurance premium of 1.75% and an annual mortgage insurance premium of 0.45% to 1.05%, depending on the type, size and length of the loan and the size of the down payment.

Conventional loans

Some mortgage lenders offer small down payment mortgages — as little as 3% down payment — to borrowers who qualify.

These loans, however, aren’t insured by a government agency, so the lender will require private mortgage insurance (PMI). The cost of PMI varies but is often between 0.5% and 1% of the loan amount. You can typically request to have your PMI dropped once you have at least 20% equity in the home.

Learn more: Planning your down payment

The benefits of small down payment mortgages

These small and no-down payment mortgage options are designed for those with low- to moderate-incomes who either don’t have enough cash on hand for a large down payment or find it difficult to qualify for a conventional mortgage for credit reasons.

For example, you can get an FHA loan with a 3.5% down payment with a credit score as low as 580. VA loans technically don’t have any minimum credit score requirement, although you may still get denied if you don’t meet the lender’s financial criteria.

As a result, these small down payment mortgages are attractive because they make homeownership more accessible. You can save enough for a down payment much sooner than if you had to put the full 20% down, and you can secure a mortgage even if your credit isn’t perfect.

Why a small down payment could end up costing you more

Home loans with a small down payment are often billed as affordable options for homebuyers because of the fact that you don’t have to bring as much money to the table upfront. But the flipside is that you’ll likely spend more money over the life of your loan than if you waited until you had saved enough to make a larger down payment.

For example, let’s say you’re buying a $200,000 home, putting 3% down, and not rolling your closing costs into the loan. On a 30-year mortgage with a 4% interest rate, your monthly payment will consist of the following elements:

  • Principal: The amount of each payment that goes toward reducing your loan balance.
  • Interest: The amount of each payment that goes toward paying the interest on the loan.
  • PMI: Private mortgage insurance paid to a third party to protect the lender in case you default on your loan. For our example, we’ll assume a 0.75% rate.
  • Homeowners insurance: This covers certain damages to your home, the loss of personal belongings and covers your liability in the case that you accidentally injure someone or damage his or her property. Lenders typically require homeowners insurance and collect your payments in an escrow account, making payments to the insurance company for you. We’ll assume a $70 monthly insurance payment for our example.
  • Property tax: Your property tax rate will depend on your state and county. For the sake of simplicity, we’ll use a 1% tax rate for our example.

Using MagnifyMoney’s parent company, LendingTree’s online mortgage calculator, here’s how your monthly payment will break down:

  • Principal and interest: $926.19
  • PMI: $121.25
  • Homeowners insurance: $70
  • Property tax: $166.67

If you total these up, your monthly payment will be $1,284.11.

Now, let’s compare that with your monthly payment if you make a 20% down payment instead.

 

3% Down Payment

20% Down Payment

Principal and interest

$926.19

$763.86

PMI

$121.25

$0

Homeowners insurance

$70

$70

Property tax

$166.67

$166.67

Total Monthly Payment

$1,284.11

$1,000.53

That’s a savings of $283.58 per month, for a total of $102,088.80 over the life of the loan.

What you could do with the money you saved by making a bigger down payment

Even if you don’t plan on staying in the home for the full 30 years, having an extra few hundred dollars per month can make a big difference for your budget. Here are just a few things you can do with that additional cash.

  • Invest: Whether for retirement or some other long-term goal, investing is the best way to get your money to work for you.
  • Pay down debt: Student loans, credit cards, and other debts are easier to pay off when you have extra room in your budget.
  • Save: Saving ahead for home repairs and routine maintenance, as well as building an emergency fund to handle big, unexpected expenses.
  • Travel: More disposable income makes it easier to travel, whether you want to explore somewhere new or simply visit friends and family.
  • Home improvement: If your new house isn’t your dream home, you can use the monthly savings to work on renovations.

If you do plan on staying in your house for the life of the loan, that extra $102,088.80 can go a long way toward securing every part of your financial future.

How to decide if a low down payment mortgage is for you

While it’s generally better to make a bigger down payment, there are some situations in which a small down payment mortgage may be the better option.

You don’t plan on staying in the home very long

Over a 30-year period, you can save tens of thousands of dollars by opting for a higher down payment. But if you’re only planning on staying in the home for a few years, the savings won’t be nearly as high.

That said, it’s important to also consider the transaction costs.

“The cost of buying and then selling a home runs about 8% to 10% of the purchase price, depending on where you live,” said Casey Fleming, mortgage advisor and author of “The Loan Guide.” “Buying with a low down payment only makes sense if you plan on being in the home long enough to make back at least your acquisition and sale costs.”

You need the liquidity

Even if you have enough money to make a large down payment, you may not want to part with all of it. For example, you might prefer to keep your emergency fund intact rather than deplete it. Or you might want to keep some cash available for repairs. Or you might want to invest some of that money with the hope of getting a better rate of return.

“With a larger down payment, you're taking money that's liquid and making it illiquid,” said Dan Green, founder of Growella and the branch manager for Waterstone Mortgage in Pewaukee, Wis. “The only way to get to your money is to refinance, sell your home or take a line of credit. It's very important that before making a large down payment that you have a sufficient emergency fund, a budget set aside for home repairs.”

Ways to build up to a larger down payment

If you’ve set a goal of making a 10% to 20% down payment on your next home purchase, now is the time to start getting your strategy in place. While it can sometimes take years to save that kind of money, there are a few things you can do to speed up the process.

Find extra cash to save

Sometimes the best way to reach a financial goal is a good mix of offense and defense.

On offense, consider finding ways to earn more money either by negotiating a raise, starting a side hustle, getting a second job or booking the occasional side gig.

On defense, create and maintain a budget to find areas where you can cut back. Set a monthly goal for how much you want to save, automate that savings and funnel any extra cash toward your down payment fund. Tools like You Need a Budget and Mint.com can help you create and execute this plan.

Pros

  • The opportunities to earn extra money are virtually endless.
  • You have control over how and where you spend your money.
  • Negotiating a raise at your current job can provide extra money without requiring extra work.
  • Starting a side hustle could bring in extra income long after you’ve reached your down payment goal.

Cons

  • These strategies can require more time than other options.
  • If you have a lot of debt and other essential expenses, cutting back can be hard.
  • Creating new habits and sticking to them can be difficult. You have to be committed for the long run.

Borrowing from family or friends

If a friend or family member is willing to loan you money, you might not have to spend time finding extra cash. You may even be lucky enough to receive the money as a gift — subject to federal gift tax rules — which would provide the money at essentially no cost to you.

However, if you are structuring it as a loan, Neal Frankle, a certified financial planner and the founder of Credit Pilgrim, recommends adhering to the current guidelines for Applicable Federal Rate (AFR), which specify minimum interest rates for various types of loans.

Pros

  • You’ll get into your new house sooner.
  • You can often get a lower interest rate from family or friends than you’d get from a lender.
  • You may have more flexibility with the repayment terms.

Cons

  • It can damage your relationship if something goes wrong.
  • Your family members or friends may not consider you trustworthy enough to loan money.
  • Not all mortgage lenders allow you to borrow your down payment.

Borrow from your 401(k)

Qualified retirement accounts like a 401(k) typically penalize you for taking withdrawals before you’ve reached retirement age.

But many 401(k) plans offer loan programs that allow you to borrow from your account balance, often with relatively low-interest rates even if you have poor credit. And if you are using the money in order to purchase a primary residence, you may be able to pay the loan back over a period of 25 years, as opposed to the standard 5-year term for most 401(k) loans.

Pros

  • You can get into your new house sooner.
  • 401(k) loans often have lower interest rates than a personal loan.
  • The interest you pay goes back into your 401(k) account rather than to a lender.

Cons

  • You’re forfeiting potential investment gains on the borrowed money.
  • If you leave your employer for any reason, your loan may be due within 90 days, putting you in a difficult financial position.
  • Not all 401(k) plans offer loan programs.

The bottom line

There are certain situations where a small down payment mortgage might be a good idea. It can get you into a home sooner, and many federally-insured mortgage programs can minimize the costs and allow you to buy a home with less-than-perfect credit.

But in many cases, it’s better to go above and beyond the minimum down payment required. A larger down payment can save you money both in the short term and the long term, helping you invest more in your future financial security.

Making the right choice for your personal situation involves both running the numbers and taking your personal goals into account. If you do your due diligence, you’ll be in a better position to make a good decision.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt at matt@magnifymoney.com

TAGS: ,

Advertiser Disclosure

Mortgage

Taking out a Mortgage for a Manufactured Home

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iStock

Looking to buy a place to call home without taking on massive debt? A manufactured home may be the least expensive way to buy a house that meets your family’s needs. The average sales price of a new manufactured home was just under $75,000 in August 2017, according to the Manufactured Housing Survey. That’s less than a quarter of the median price for a new single-family home, which was $314,200 in August.

“More people are turning to manufactured housing to deliver homes that fit their needs and wants, at prices they can afford,” according to Patti Boerger, VP of Communications for the Manufactured Housing Institute. On average, manufactured homes cost about $51 per square foot — that’s nearly half the price of a traditional site-built home, according to 2015 Census data.

However, the inexpensive house often comes with an expensive loan. According to research from the CFPB, between 2001 to 2010, two-thirds (65%) of all manufactured home owners used the expensive chattel loan option to pay for their mortgage. While chattel loans provide a viable solution for buying a manufactured home, many homeowners have lower cost financing options. This is especially true for the two-thirds of manufactured homeowners who own their lot.

Manufactured, modular or mobile? What’s the difference?

Many people use the terms manufactured, modular and mobile homes interchangeably, but there are some distinctions. For a home to be a manufactured home, it must meet Manufactured Home Construction and Safety Standards set up by the Housing and Urban Development department (HUD) in 1976. Homes that meet the standards receive a certification called a HUD tag. HUD tags make the home eligible for a variety of financing including Federal Housing Administration (FHA) insured loans. Fabricated homes built prior to 1976 cannot be HUD certified, so the HUD department calls them mobile homes.

Modern manufactured homes can either be attached to a permanent foundation (like a concrete slab or pier footings) or a temporary foundation (such as a ground and anchor foundation). Homes attached to a temporary foundation could accurately be called mobile homes since you could move them. However, even moving a mobile home is a massive task.

Modular homes are a type of manufactured home that is delivered to the site in multiple pieces. These homes must meet the local standards of site-built houses rather than the Manufactured Home Construction and Safety Standards.

Despite the differences, many companies manufacture and install both manufactured and modular homes.

How to finance a manufactured home

iStock

While taking out any mortgage is a huge undertaking, manufactured home mortgages can be especially confusing. Borrowing options for manufactured homes aren’t only limited by your credit, down payment and income qualifications. The home you buy also influences which loans are available to you.

These are the steps you’ll need to take when buying a manufactured home, according to a loan officer who specializes in manufactured-home financing.

Buying a used manufactured home

Buying a used manufactured home is a bit like buying a used car from a private seller. You can get a great deal, but you need to complete due diligence before buying.

  1. Decide whether to buy the lot: Nearly two-thirds of manufactured homeowners own the lot where their home is located. Buying both the lot and the home means you may qualify for conventional mortgages. Homebuyers who plan to rent their lot will only qualify for chattel loans.
  2. Check for the HUD tag: The home needs to have a HUD tag indicating that it meets safety standards. The tag is a metal plate that you should be able to find on the outside of the manufactured home. If you can’t find the physical HUD tag, ask the owner to request a Letter of Label Certification from the Institute for Building Technology and Safety.
  3. Check title history: Every manufactured home has a unique serial number that can be used to look into past ownership information. As a buyer, you’ll want to look into statements of location to determine whether the home has moved in the past. The exact site for searching manufactured home history varies by state. However, the most likely candidates include your state’s department of transportation, department of housing, or register of deeds websites.If you find that a home has moved from its original location, the home won’t qualify for a traditional mortgage (like an FHA, conventional, or VA loan).
  4. Compare loans options: Use the information you gathered in the previous steps and the guide below to help you determine the best loan for your situation. Whether you choose a traditional loan or a chattel loan, you can compare rates from multiple lenders to get the best deal.
  5. Property appraisal: Once you qualify for a loan, your lender will appraise your manufactured home. The lender will also send inspectors to check on the home’s foundation and confirm that it meets current standards.
  6. Close on loan: If the property meets the required standards, you may proceed with the loan closing process.
  7. Transfer title: Following the loan closing, the title will be transferred to you. At this point, you may have to convert the home from personal property to real property (more on that later). Your closing attorney or lender can help you with the conversion.

Buying new

Buying a new manufactured home means you can buy the exact home you want. It also opens up more opportunities to qualify for traditional mortgages (if you also own your lot).

  1. Find lot: Whether you plan to rent a lot or buy one, you’ll need to find a location for a home. Some people will place a new home on land they already own.
  2. Start home design process: In some cases, you may pick a manufactured home right off of a vendor’s lot, but many people choose custom designs for their homes.
  3. Determine loan options: Home manufacturers may point you toward certain lenders, but don’t be afraid to shop around. Comparing multiple lenders often yields a better deal. If you plan to buy land, you can consider using a conventional mortgage.
  4. Property assessment: Before a bank will allow you to close on a conventional loan, they will require a property assessment. This assessment will determine whether the site can hold a proper foundation.
  5. Close on loan: Once the property passes inspection, you’ll close on your home loan. If you’re taking out a conventional mortgage, your initial loan may be a construction loan, but it will convert to a mortgage once the manufacturer completes the home.
  6. Home delivered to property: After the loan closes, the manufacturer will deliver and install the home on the property.
  7. Title property: Once the home has been delivered, you’ll need to title the property. If you’ve taken out a traditional mortgage, you’ll have to title the property as real property.

Choosing the best mortgage for your manufactured home

Traditional mortgages such as FHA loans, conventional mortgages and VA loans offer financing up to 30 years with (potentially) low fixed rates. However, they also have more stringent buying criteria. Chattel loans have higher interest rates and shorter payoff periods, but the criteria for borrowing is a bit looser.

You can use the information below to determine what loan may fit your situation best.

 

Chattel Loans

FHA Loans

Conventional Mortgage

VA Loans

VA Loans for Manufactured Homes

Overall

Best for borrowers who want to buy the home only, and place it in a rented lot.

Best for borrowers with a small down payment who want to buy a manufactured home and the lot.

Best for borrowers with a large down payment who want to buy a manufactured home and the lot.

Best for military members who want to buy a manufactured home and the lot.

Best for military members who want buy a manufactured home and rent a lot.

Credit score required

Ability to pay criteria

500, but banks have minimum underwriting standards

620

Credit score standards set by lender

Credit score standards set by lender

Down payment required

5% (10% for borrowers with credit scores 500 or below)

Credit score between 500-579: 10%



Credit score at or above 580: 3.5%

5% (10% for people with thin credit)

None

5%

Interest rates

Average 6.79% in 2014 (most recent data available)



Between 0.5-5.5% higher than traditional loans

Average 4.22%

Average 4.25%

3.97%

Varies by lender

Upfront financing fee

Up to 2.25% (can be financed)

1.75% (can be financed)

None

1.25-3.3% depending on your military status, homebuying experience and down payment (can be financed)

1%

Mortgage insurance

Up to 1%

0.45-1.05%

0.5% annually

None

None

Mortgage limits

Home only: $69,678


Lot only: $23,226


Home and lot: $92,904

Generally, $294,515 for single-family units, but it varies by location, and you should check the limits in your area

Generally, $453,100

Generally $453,100

Value of home and lot

Mortgage term limits

20 years for home only



20 years for single-section home and lot



15 years for lot only



25 years for a multi-section home and lot

Up to 30 years

Up to 30 years

Up to 30 years

15 years for lot only



20 years for single-wide home



20 years for single-wide home and lot



23 years for a double-wide home



25 for a double-wide manufactured home and lot

Titling requirements

Personal Property

The house must be titled as real property, and you must own the lot where the house is located.

Must own land (or be part of a co-op), and home must be titled as real property.

The house must be titled as real property, and you must own the lot where the house is located.

Personal or real property

Foundation requirements

Foundation anchors or permanent foundation

Permanent foundation (including pier and footing)

Permanent foundation (foundation anchors may be appropriate depending on the manufacturer’s requirements)

Continuous slab or load-bearing piers and footings.

Foundation anchors or permanent foundation

Minimum size

400 square feet

400 square feet

600 square feet

None

400 square feet (single wide), 700 square feet (double-wide)

Can home move?

Yes

Only from manufacturers to permanent foundation (even if purchasing used).

Only from manufacturers to permanent foundation (even if purchasing used).

Must be permanently affixed and titled as real property.

Yes

Where to compare lenders

Manufactured Housing Institute

HUD FHA Lender Search

LendingTree mortgage comparison*

LendingTree VA mortgage comparison*

Manufactured Housing Institute (Call to ask about VA loans)

*LendingTree is MagnifyMoney’s parent company.

Personal property versus real property titling

When it comes to financing a manufactured home, one of the most important considerations is how you plan to title the home. Buyers can choose to title a manufactured home as personal property which is how you title a boat, RV or vehicle, or real property which is how you title a traditional home.

In most parts of the country, you have had a permanent foundation to title your loan as real property. Some states require you to own your lot while others allow you to title your home as real property on leased land. You can find out the exact titling requirements in your state by working with the register of deeds in your county.

How you title your property will have a tremendous effect upon your total ownership experience. These are the seven ways titling may affect your experience:

Upfront taxes: When you purchase real property you pay transfer taxes, but when you purchase personal property you pay sales tax. The sales tax rate is generally higher than the transfer tax fee. Some states have sales tax exemptions for manufactured home buyers.

Property tax rate: Real property may be taxed at a higher rate than personal property in your state. If you title as real property, you may pay higher property taxes every year you own your home.

Default process: If you choose to title your home as personal property, your lender can repossess your home if you default. The default process will be governed by the Uniform Commercial Code, so you don’t have the full rights and protection of a property owner. People who title their home as real property have the right to a full foreclosure process which may give them time to get out of default before losing their home. Foreclosure laws vary by state.

Loan modifications: People who are in danger of losing their home often look for loan modifications to make their home affordable again. The largest home loan modification program is the Making Home Affordable Program, which outlines criteria for Home Affordable Mortgage Program (HAMP) loan modifications. HAMP modifications are only available to manufactured homeowners who own their lot and home and have both classified as real property.

Rights of joint owners: Titling your home as personal property also has disadvantages if your spouse defaults on a debt. In some states, manufactured homes that are classified as personal property may be seized for a default on debt, even if the home is owned by both spouses and the default was the responsibility of just one spouse. On the other hand, homes classified as real property do not face that problem.

Borrowing options: If you title your home as personal property, you have the option to take out an FHA chattel loan, a personal loan or owner-held financing solutions. When you opt to title your home as real property you gain the option to take out FHA loans, conventional mortgages, VA loans and other government-backed mortgages. These mortgages tend to be lower cost and have more protections.

Advantages of manufactured homes

Manufactured homes are no longer the boxy trailers of a few decades ago. Buyers can now select a range of new features that are attractive to new buyers including fully-functional kitchens, open layouts and attractive roofs. These features come at about half the price per square foot of site-built homes.

Much of the cost savings come from the manufacturing process itself, which ensures that home building isn’t subject to costly weather delays, and the standardized parts make it easier to build.

In addition to lower construction costs, manufactured homeowners often have lower utility bills than site-built homeowners due to the small size of manufactured homes. Older manufactured homes are notorious for having poor energy efficiency, but manufactured homes built after 1994 are subject to current HUD energy standards for manufactured homes. Some home manufacturers are taking energy efficiency a step further by manufacturing Energy Star-certified manufactured homes which are at least 15% more efficient than manufactured houses built to code.

Disadvantages of manufactured homes

Despite the cost and energy advantages, manufactured homes have drawbacks. Manufactured homeowners who do not (or cannot) choose to title their home as real property has decreased rights if they default on their loan. When titled as personal property, manufactured homes may be repossessed or taken as part of another debt settlement suit (depending on state laws). Manufactured homeowners who don’t own their land may miss out on a wealth-building opportunity since the land may appreciate while home structures tend to depreciate in value.

Finally, the mortgages available for manufactured homes may be more limited than those for site-built homes. In particular, many manufactured homeowners have to rely on high-priced chattel loans rather than mortgages for site-built homes.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

TAGS: , , , ,

Advertiser Disclosure

Mortgage

Understanding Good Faith Estimates and Loan Estimate

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

understanding good faith estimate vs loan estimate
iStock

Nearly half of homeowners make a huge mistake during the homebuying process, according to the Consumer Financial Protection Bureau (CFPB) — they don’t compare lenders when shopping for a mortgage.

Not only do many consumers neglect to compare lenders in the process of purchasing a home, but a number of homebuyers express being unfamiliar with important factors that can greatly affect the cost of their mortgage as well, including:

  • The different types of mortgages
  • The money required at closing
  • The process of getting a mortgage
  • The income needed to qualify for a mortgage
  • The down payment requirements
  • Current mortgage rates
  • Personal credit history or credit score

This unfamiliarity increases even more for first-time home buyers. Without knowing what to expect, homeowners can go into the mortgage process unaware of what they are actually getting and paying for. From title searches to pest inspections, appraisals and more, the average homebuyer is purchasing much more than a home.

How much money do you bring to the closing table? Will you pay your taxes and insurance outright or have them escrowed (rolled into your mortgage payment)? What loan fees are set in stone versus ones you can shop around for? Will your loan interest rate remain the same or change at some point?

Depending on your choice for a home loan product, the outcome can have a big effect on your finances. A home is such a significant purchase — in fact, it’s probably the biggest purchase you’ll ever make — that just a few percentage points difference in interest can add up to tens of thousands of dollars saved (or lost) over the life of the loan.

Fortunately, it’s not all that difficult to compare mortgage loan offers between lenders these days. There’s been some standardization in the way banks present mortgage estimates to loan applicants. This is where the Good Faith Estimate (GFE) comes into play.

What is a Good Faith Estimate?

A Good Faith Estimate (GFE) is a standard template used by lenders to give you the rundown on your loan terms: interest rate, origination fees, monthly payments and more. However, you should know that as of October 2015, the Good Faith Estimate document was replaced by a document called the Loan Estimate for most types of loans.

The whole idea behind the GFE aka the Loan Estimate is to help consumers understand all the costs associated with their home loan, from the length of the loan to settlement fees you’ll have to pay at closing. It was also designed to inform consumers of which charges could change and when they could change for closing purposes.

With all of this information provided in a standardized format, the aim was to encourage borrowers to shop around for the best loan and loan terms for their home loan.

Before standardized estimate templates came on the scene, the average Joe consumer had a heck of a time deciphering all the loan “mumbo-jumbo” because there were many ways to state (and maybe even hide) fees associated with obtaining a home loan. Based on all the ways lending costs and fees could be itemized and stated, it became difficult to truly compare rates and get the very best rate for these home loan products.

Though the GFE was a great improvement over prior mortgage estimate methods, there were still more strides to be made in the usability and clarity. In other words, extensive testing showed that the average consumer still needed help with identifying key information pertinent to their loan terms. Enter the Loan Estimate.

GFE vs Loan Estimate: What are the differences?

GFEs were replaced with Loan Estimates after the CFPB initiated the Know Before You Owe mortgage disclosure rule. That effectively replaced Good Faith Estimates with the new Loan Estimate document. You’ll most likely see a loan estimate document when you apply for a traditional mortgage. Loan Estimates do not apply for reverse mortgages, HELOCs, and a handful of other real estate transactions.

According to the CFPB, the main objectives of the Loan Estimate form include helping consumers:

  • Understand their loan options
  • Shop for the mortgage that’s best for them
  • Avoid costly surprises at the closing table

There are some differences in design and usability that make the Loan Estimates different from the GFE in a few ways.

Easier to understand

The Loan Estimate form is designed to help you better identify loan risk factors, such as potential interest rate changes and negative amortization features. In addition, you should be able to see the overall cost of your home loan over both the short and long term. Finally, you should be able to understand, very clearly, what your monthly loan payments will be.

Better comparison shopping

A great thing about the Loan Estimate is that it’s easier to compare offers from competing lenders with a table that is clearly labeled for the sole purpose of comparison. Also, there’s a section on the Loan Estimate clearly labeled “Services You Can Shop For” and “Services You Cannot Shop For” in case there are other areas you can save money in the loan process.

Avoiding costly surprises at the closing table

Jonathan Dyer is a loan originator at Neighborhood Lending Services. He explains how the Loan Estimate further enforces provisions that started with the GFE and its similar predecessors. The Loan Estimate provides additional protections against last minute changes in loan terms and fees.

“Often, some fees [as stated in the disclosure] would be subject to change and would increase at the final hour [before closing],” he told MagnifyMoney. “Regulatory agencies have now prohibited any increase of disclosed fees without a significant change in the loan purpose or loan amount.”

Because of this, there are strict rules around what loan terms can and cannot change at closing. Another plus is that there are provisions that give you the chance to compare your Loan Estimate against your final Closing Disclosure at least three days before you come to the closing table.

Less paperwork

Another improvement with the Loan Estimate came with reducing the number pages consumers receive during the loan application process.The Loan Estimate effectively replaces both the GFE along with the Initial Truth In Lending (TIL) Disclosure and consolidates this into one, shorter form.

You can see example templates of each form before and after to get an idea of the differences (click images below to access to the PDFs). From the thumbnail view, we can see pretty easily that the form is shorter and potentially less confusing for loan applicants.

When do I get a loan estimate?

Now that you know about how the estimate process and documentation have improved for loan applicants, you should know about what starts the clock on when you should have your Loan Estimate in hand.

Loan Estimates must be provided to consumers within three business days of submitting a loan application providing six pieces of information to a lender:

  • Name
  • Income
  • Social security number (for credit reporting)
  • Property address
  • Market value of the property (normally the sale price)
  • Loan amount

According to federal regulations, this is not an optional step. Lenders must provide this document to loan applicants and it has to be within three business days, or they could be in violation of the law.

Key terms to understand

Once you receive your Loan Estimates, pay attention to key terms and make sure you are comfortable with the impact these obligations will have on your overall finances.

  • Loan amount. The amount you are borrowing from the bank. Your loan should be reduced by the amount of your down payment.
  • Rate lock. Explains if your interest rate is locked in or could change before closing.
  • Interest rate. How much interest you will pay the bank as a percentage of your loan. You should also pay attention to if this rate is fixed or variable (Note: Also pay close attention to the APR, which is discussed in the ‘Comparisons’ section below).
  • Monthly principal and interest. This how much you will pay on your home loan each month that will cover the principal loan amount and bank interest.
  • Estimated total monthly payments. This is how much you’ll pay each month for your loan. At minimum, your payment will Include loan principal and interest, but can also include property taxes, insurance, and possibly other fees like HOA dues.
  • Estimated taxes, insurance and assessments. It’s possible that these items will not be in escrow and therefore, not included in your payment. In this case, you will have to pay these fees yourself, aside from your monthly loan payment.
  • Estimated cash to close. This is the amount of money you’ll need to bring at the time of closing.

These are just a few key terms you should understand to start. If you want to understand all sections and terms on your Loan Estimate use the CFPB’s interactive tool called the Loan Estimate Explainer. This tool allows you to hover over sections of the document to get clear explanations of any sections or terms you don’t understand.

How to compare estimates from multiple lenders

Perhaps one of the best things about the Loan Estimate is the ability to compare estimates from multiple lenders. The template’s language is clear and uniform so you can quickly and easily identify areas where you should be comparing rates and terms.

Before you compare your Loan Estimates, make sure you are getting estimates for the same kind of loan from each lender. For example, if you ask one lender for rates and terms on a 15-year mortgage and another for a 30-year mortgage, you won’t be comparing apples to apples.

Next, there are certain sections you should examine to make sure you are getting the best deal from your lender:

Comparisons

On page 3 of your Loan Estimate, you’ll find a section labeled “Comparisons.” It contains a simple table with figures that you’ll want to use for comparing estimates. Once you get Loan Estimates from all the lenders you’re considering, put each lender’s comparison table side by side.

First up, you’ll see a section labeled “In 5 years,” showing how much you’ll pay for your home in the first five years. The first number in this box tells you the total you would have paid in principal, interest, mortgage insurance, and loan costs over the first five years of your home loan. Right below this number, you’ll see the amount of principal you would have paid off as well.

Next in the table, you’ll see the annual percentage rate (APR.) This figure is key because it takes into account all the fees you’ll pay for to purchase your home. Think of it as the bank’s interest rate plus any points, mortgage broker fees, and other charges that you might pay for your loan.

Finally, at the bottom of the table, you’ll see total interest percentage (TIP) will be right under the APR section. It represents the total amount of interest you’ll pay over the lifetime of your loan.

Closing

Under the “Costs at Closing” table on page 2, you’ll see a section labeled “Estimated Cash to Close.” For more details on how these numbers were calculated, look at “Calculating Cash to Close” at the bottom of page 3.

This section goes over the cash needed to settle up at the closing table i.e. what you need to bring to closing. Remember, this figure should be not changed drastically from the Loan Estimate once you get the final closing disclosure.

Fees that cannot change at closing include lender fees, other service fees, transfer taxes, and commission fees due to mortgage brokers or affiliates. Fees that can change 10 percent in either direction are recorder fees or service fees related to third-party providers.

If closing costs changed substantially, you may be eligible for a refund of costs that go beyond the allowable limits.

The smartest way to buying a home comes down to understanding your options and choosing the best one. You may feel tempted to go with the nicest lender, or the one with the most brand recognition, or where you already bank.

However, if you don’t compare actual loan terms, you could be forgoing the best possible outcome for your home purchase. Use the Loan Estimate for what it was designed for: comparison shopping to get the best deal on a home loan.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Aja McClanahan
Aja McClanahan |

Aja McClanahan is a writer at MagnifyMoney. You can email Aja here

TAGS: , , ,

Advertiser Disclosure

Mortgage

How to Budget for Closing Costs and Fees on a Mortgage

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iStock

When you buy a home, in addition to your down payment, you need to budget for closing costs. Closing costs are the fees paid to third parties that help facilitate the sale of a home. The amount you’ll pay depends on several factors including the price of your home, your lender’s requirements, and the location of the property. We’ve put together this guide to help you get a sense of what to expect.

What costs to expect when closing on a mortgage

The type and amount of fees you’ll pay vary widely based on the lender you work with, the loan you choose, and your location. Here are some common fees to expect when closing on a home loan:

Fee

Description

Appraisal fee

Paid to a professional who gives the lender an estimate of the home's market value.

Attorney fees

In some states, an attorney may be required to represent the interest of the buyer and/or lender. This fee is paid to the attorney to prepare and review all closing documents.

Credit report

Some lenders charge a fee for accessing your credit information.

Flood determination

Paid to a third party to determine whether the property is located in a flood zone. If your property is in a flood zone, your lender may require you to purchase flood insurance in addition to homeowners insurance.

Home warranty fees

If you choose to purchase a home warranty on the property, the annual premium may be included in your closing costs.

Homeowners association (HOA) fees

If your home is located within a homeowners association, the association may charge a fee to help pay for services and capital improvements. You may also need to prepay a portion of your annual dues at closing.

Homeowners insurance

The first year's premium for your homeowner's insurance is typically paid in full at closing.

Inspection fees

Paid to a home inspector to evaluate the home and tell you whether the property you want to buy is in good condition. You may also have a separate pest inspection to check for termites and other pest infestations.

Land survey

Your lender may require that a surveyor conduct a property survey.

Origination charges

Upfront charges from your lender for making the loan. This may include an application fee and underwriting fees.

Notary fees

The cost of having a licensed notary public certify that the persons named in the documents did, in fact, sign them.

Points

An upfront fee paid to the lender in exchange for a lower interest rate.

Prepaid interest

If you close on your loan in the middle of the month, your lender will collect interest on your loan from the closing date until the end of the month.

Private mortgage insurance premium

Depending on the type of loan you choose and how much money you put down, you may have to pay mortgage insurance – a policy that protects the lender against losses from loan defaults. Some lenders require an upfront premium, some collect it in monthly installments, and some do both.

Property taxes

Six months of property taxes are typically paid at closing.

Recording fees

State and local governments typically charge a fee to record your deed and other mortgage documents.

Real estate broker or agent fee

Fees paid to seller's real estate broker for listing the property and to the buyer's broker for bringing the buyer to the sale. The seller of the property typically pays these fees.

Title insurance

Provides protection if someone later sues and says they have a claim against your home, either from a previous owner's delinquent property taxes or contractors were not paid for work done on the home before you purchased it.

Title search

A fee paid to the title company to search the public records of the property you are purchasing.

Transfer taxes

Taxes imposed by the state, county, or municipality on the transfer of property. They may also be called conveyance taxes, stamp taxes, or property transfer taxes.

The amount you’ll pay depends largely on your location. A 2017 survey from ClosingCorp, a provider of residential real estate closing cost data, found that the national average closing costs totaled $4,876. That figure is based on closing cost data reported to more than 20,000 real estate service providers across the country. ClosingCorp compiled the average closing costs in each state, and based on the average purchase price in each state, average closing costs ranged from about 1% to about 4% of the purchase price. (The actual closing costs you pay could be higher or lower — a general rule of thumb says to expect paying about 2 to 7% of your home’s purchase price in closing costs.)

States with the highest average closing costs were:

  • District of Columbia: $12,573 (2.01% of average purchase price)
  • New York: $9,341 (2.60%)
  • Delaware: $8,663 (3.36%)
  • Maryland: $7,211 (2.28%)

But based on percentage of average purchase price, these states had the highest average closing costs:

  • Pennsylvania: $6,633 (3.50%)
  • Delaware: $8,663 (3.36%)
  • Vermont: $6,839 (2.99%)
  • New York: $9,341 (2.60%)

States with the lowest average closing costs were:

  • Missouri: $2,905 (1.63%)
  • Indiana: $2,934 (1.89%)
  • South Dakota: $2,996 (1.48%)
  • Iowa: $3,138 (1.70%)

And by percentage:

  • Hawaii: $5,528 (0.84%)
  • Colorado: $3,994 (1.09%)
  • Massachusetts $4,273 (1.14%)
  • California: $6,288 (1.20%)

In areas where home prices are high, closing costs will typically be high as well because many closing costs are calculated as a percentage of the home’s purchase price. In other areas, the ClosingCorp report pointed to high county transfer taxes as the principal reason certain areas have such closing costs.

Fortunately, there are steps to you can take to save on closing costs.

How to save on closing costs

Step 1: Choose your location

The location has a lot to do with the total closing costs you’ll pay. Factors that affect closing costs include:

  • Home price. Since many costs are calculated as a percentage of the home’s purchase price, buying a less expensive home can lower your closing costs.
  • Property taxes. You may have to prepay six months of property (or real estate) taxes at closing, so buying a home in a state with high-property tax rates can significantly impact your closing costs. The Tax Foundation publishes a list of the property tax rates by state. New Jersey is the highest with an effective tax rate of 2.11%, and Hawaii is the lowest at 0.28%.
  • Laws and customs governing the closing process. Some states require an attorney to handle closings, resulting in higher legal fees at closing. In other states, closing costs are lower because closings are handled by a title or escrow company.
  • Real estate transfer taxes. Transfer taxes are imposed by state and local government entities and can vary widely by locale. The National Conference of State Legislatures publishes a list of real estate transfer taxes by state. Some states, such as Alaska and Louisiana, have none as of 2017. In some localities in Colorado, the rates can be as high as 4%.

Ask your lender or real estate agent about closing costs in your area. If you’re not determined to live in a particular area, you could save thousands in closing costs by buying in a neighboring state or county.

Step 2: Shop around

A crucial step to saving on closing costs is to shop around. Home loans are available from many different types of lenders, and different lenders may quote you different rates and fees, even of the same type of loan. You should contact several lenders for quotes.

When you receive a quote, don’t just get the interest rate, APR, or monthly payment amount. The lender should provide you with a Loan Estimate that discloses the loan terms, amounts, interest rate, total monthly principal and interest, and whether the item can increase after closing. It also communicates which closing costs you can shop around for and which are fixed no matter which lender you choose.

Also, take a look at the homeowners insurance premium listed on Page 2 of the Loan Estimate. The lender will estimate an amount for the Loan Estimate, but your homeowner’s insurance premium is set by the insurance company, not the lender, and insurance rates can vary drastically by company. Comparison shopping for insurance can have a significant impact on your closing costs, as you’ll typically pay the first year’s premium at closing.

Step 3: Negotiate

Jeffrey Miller, co-founder of AE Home Group in Baltimore, Md., says knowing whether closing costs are negotiable or non-negotiable depends on whether or not they’re being charged for the mortgage company’s labor or to an outside service. “Line items like origination fee can be negotiated lower, whereas line items like the county recording fee are set by an outside third party and are non-negotiable,” Miller said.

Page 2 of your Loan Estimate will list the services you cannot shop for and the services you can shop for. The services you cannot shop for may be set by a government program or a third party rather than the lender. Your lender may provide you with a list of approved vendors for the services you can shop for.

Miller says in his experience, the line item with the most potential savings is the survey. “As a buyer, you have the right to select the survey company that is used,” Miller said. “We’ve seen this price range anywhere from $120 to $600. If this amount is on the high side, then it may be advisable to select a new survey company.”

Step 4: Ask the seller to pay closing costs

Many loans, including FHA loans, allow sellers to contribute a percentage of the sales price to the buyer as a closing costs credit. This is especially useful for buyers who are short on cash for the down payment and closing costs but can handle a slightly higher loan balance.

For instance, say the seller is asking $200,000 for the home. The buyer can offer $204,000 but asks the seller to cover up to two percent of the original asking price in closing costs ($200,000 x 2% = $4,000). The seller is able to get the same net profit on the sale, and the buyer reduces his closing costs by $4,000.

Keep in mind that lenders may have restrictions on how much the seller can credit to the buyer at closing. For instance, FHA loans limit the seller concession to 6% of the home’s sales price. There may also be restrictions on the types of closing costs that can be covered by the seller credit. For instance, they may restrict the seller credit to covering non-recurring items like the title insurance and loan origination fees.

Step 5: Time your closing

Part of your closing costs consists of prepaid interest charges for the time between your closing date and the end of the month. The earlier in the month you close, the more you’ll pay in prepaid interest. To reduce the amount you’ll need out of pocket, you can consider closing at the end of the month. The difference may be small, but if you’re really strapped for cash to close, this could help. However, timing your closing at the end of the month doesn’t actually save you any money in the long term. It just impacts the amount you’ll need to come up with at closing.

Step 6: Sign in person

Kevin Miller, Director of Growth with Open Listings, an online house-hunting service based in Los Angeles, says you may be able to reduce the costs you’ll pay at closing simply by asking your escrow company. “You should contact them at the beginning of the process to discuss the fees they charge you,” he said. “If you agree to use electronic documents and sign in-person, you may be able to avoid fees for a mobile notary, printing, and mailing.”

Should I get a no-closing cost mortgage?

While shopping around for a mortgage, you may have come across a “no-closing cost mortgage” and wondered if it’s the right deal for you.

A no-closing-cost mortgage is worth looking into, but “no closing costs” doesn’t actually mean you won’t have to come up with any cash for closing. Instead, it means that the lender doesn’t charge any lender fees. However, they may charge a higher interest rate to cover the costs of making the loan or add the closing costs to your loan amount.

Either way, you won’t need to come up with as much cash to close, but you’ll typically have a higher monthly payment.

Also, keep in mind that you may still have to pay costs at closing, such as title insurance and appraisal fees. Before you get locked into a no-closing-cost mortgage, ask the lender for a Loan Estimate and take a look at the interest rate, APR, monthly payment and the amount you’ll need at closing. Consider whether reducing the cash you need to close is worth paying more in the long run with a higher interest rate or larger loan amount.

The bottom line

When you’re in the market for a mortgage, it pays to shop around. Review your paperwork carefully. Ask your lender about any costs and fees you aren’t familiar with, or anything that changes from your Loan Estimate to the closing documents. Negotiating can be intimidating for many people, but your home is a big investment. The more you can save on closing costs, the more cash you’ll keep in your pocket for moving, buying furniture, and making your new place feel like home.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

TAGS: , ,

Advertiser Disclosure

Mortgage

How The Simple Act of Negotiating Helped Us Save $40,000

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iStock

You don't have to be an expert negotiator to leverage the power of persuasion — and ultimately save big. Alison Fragale, negotiation expert and professor of organizational behavior at the University of North Carolina, tells MagnifyMoney that a little preparation can go a long way.

"Any time you have goals you need to achieve, and you need someone else's cooperation to make those goals happen, that's a negotiation," she said, adding that coming to the conversation prepared is often a game changer.

We caught up with a handful of folks who did just that. From talking down debt, to negotiating salary increases, these everyday people successfully haggled their way to some big financial wins — to the tune of $40,000 worth of savings.

Here's how they did it.

I shaved $7,400+ off my student loan balance.

As of 2014, the average college graduate wrapped up their studies with nearly $29,000 in student loan debt, according to The Institute for College Access & Success. But your balances aren't always set in stone.

Danielle Scott, a 30-year-old public relations professional in New York City, used some persuasive bargaining skills to save thousands on her private loans. The inspiration? After several years of just paying the minimum monthly payment and calling it a day, she was discouraged to see that her principal balance was relatively unchanged, thanks to super high interest rates.

"One was as high as 15 percent, and my total loan balance was about $80,000,” Scott told MagnifyMoney.

She called her loan provider, Navient, and cut a deal — if they agreed to lower the interest rate on her loans, she'd up her monthly payments from $400 to $1,500. They agreed, lowering her rate to 1% on one of her two loans, and Scott put everything she had into paying down the debt over the next five years. She paid much more in the short term, but she saved big over the long haul since she was shortening the life of the debt and putting way more toward the principal balance.

Earlier this year, when her balance had gone down to $15,000, her loan servicer reached out to her with a deal of their own. They were willing to reduce her balance to $9,000 if she could pay it off in two lump payments. Scott countered.

"I asked them how low they could go if I agreed to pay it all off in one payment," she recalls. "At first, they said no, but after pushing back a little, and being put on hold for 20 minutes, they came back with $7,600 as their final offer, but I had to make the payment that day."

Scott dipped into her savings to pay it and, just like that, was debt-free.

While you might have some wiggle room negotiating private student loan debt, federal student loans are a different story. If you've defaulted on federal loans and they've been sent to collections, you can use one of the following standard settlements to make good with the U.S. Department of Education, according to student loan expert Mark Kantrowitz:

  • Pay off the current principal balance plus any unpaid interest; collection fees are waived.
  • Pay off the current principal balance plus 50 percent of any unpaid interest.
  • Pay off a minimum of 90 percent of the current principal balance and interest.

Just keep in mind that settlements are generally due in full within 90 days. (FYI: There's also a chance you'll have to pay taxes on whatever is forgiven.)

I talked my way out of $20,000 of medical debt.

In 2010, Robin, a Tampa, Fla., lawyer, was involved in a major car accident that almost cost her her life. The road to recovery was a long one and included multiple surgeries and hospital stays. Despite having health insurance, her bills eventually reached a whopping $197,000. But it wasn't until she really pored over the statements that she noticed some major errors.

"A mix of in-network and out-of-network medical providers were billing me for whatever my insurance company wasn't paying, even after I'd met my deductible," Robin, 57, told MagnifyMoney.  She requested that we not use her full name because she’s still negotiating down her debts.

In many cases, she was getting treated by in-network hospitals, but by medical providers who, she later learned, were out of network. This led to tons of surprise bills; a phenomenon known as balance billing, which isn't always legal in her home state.

"I called each and every medical provider, in some cases threatening to report them to the attorney general," she recalled. "Some bills were forgiven more easily than others; some took years to resolve, but nothing was ever sent to collections."

All in all, Robin has wiped out about $20,000 of her medical debt by directly challenging providers — a wise move considering that the Consumer Financial Protection Bureau reported that medical bills make up over half of all debt on credit reports.

I negotiated a $15,000 raise and promotion.

When it comes to nailing down a raise, getting a pay bump of 2 percent per year is the average, according to the U.S. Department of Labor. But you might be able to get more if you're willing to negotiate.

Ariel Gonzalez, a 33-year-old front end development engineer in Orlando, Fla., has successfully negotiated multiple pay raises over the years. The latest got him a $15,000 pay bump and promotion after a year of working in a junior position.

"My demeanor is typically calm and confident, but firm," he told MagnifyMoney. "I hate talking about money, but I know what I bring to the table as an employee."

Gonzalez is a big believer in coming to salary negotiations as prepared as possible, researching comparable salaries on sites like Salary.com and Glassdoor. Referencing positive client testimonials in past negotiations has also proved fruitful. He landed his last raise in 2016 by showing up to the meeting with an air of respect and transparency.

"I came to my boss with my number, hat in hand, and said that it was what I needed to be comfortable and that I didn't want to do the whole back-and-forth thing," Gonzalez said, adding that the promotion and raise he was asking for were in line with his performance and proven results as an employee.

The preparation and confidence paid off; his boss had no problem granting his request. The takeaway? Do your homework ahead of time and ask for what you deserve.

Some expert negotiation tips to follow

Whether you're looking to score a raise or buy a new car, Fragale suggests pinpointing the following three terms before beginning any negotiation:

1) What are you trying to achieve? This should be a clear aspiration that's grounded in reality, given your circumstances.

2) What's your walk-away point? Before going in, clarify the point at which you'll abandon the deal. Fragale said knowing this beforehand is empowering because it discourages an "I'll take what I can get" mentality.

3) What's the alternative? In other words, if you don't get what you want out of this deal, what's going to happen? If the stakes are high and your alternative is terrible, you'll be more inclined to settle for less than what you want. (Case in point: You're more likely to settle for a low salary if your alternative is unemployment.)

"If you have the luxury, try and make your alternative as good as possible before negotiating," says Fragale. "That tends to lift the whole boat."

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

TAGS: ,

Advertiser Disclosure

Mortgage

Condo, House or Townhouse: Which Is Best for You?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iStock

The decision to buy a home can be complicated whether you are a first-time homebuyer or are looking for a second home, especially if you are shopping for property in an urban area. What kind of residence can you afford? Should you buy a house in a suburb or a historic downtown? What about a condo within walking distance of a train station? Or a townhouse in a new urban infill community?

Choosing between a townhouse, condominium or house involves questions of location, maintenance, lifestyle and price. These housing styles also have a lot of overlap, so choosing one over the others may involve less sacrifice than you might expect.

What is a condominium?

A condominium, called a “condo” for short, is actually a kind of ownership, while the terms “townhouse” and “house” (a standalone structure most people would think of as a traditional single-family home) refer to physical structure styles.

As such, condos can come in a variety of shapes in sizes, though they are often similar in size and appearance to an apartment. At the same time, some condos can be quite expansive. Condos typically are private residences that are part of a building or multiple-unit communities, although some detached condominiums are available. They are privately owned and occupied by an individual or a family.

Condos comes in many configurations beyond apartment-style buildings, said Mark Swets, executive director of the Association of Condominium, Townhouse, and Homeowners Associations. “Condos have less restrictions,” he said. “They can be converted from old office buildings or loft space.”

Regardless of their location or size, condo owners all share in the ownership of common areas and facilities that are maintained by a board that is comprised of members elected from the condo community. The board collects dues from the community’s condo owners and uses the money to maintain and operate common areas and amenities such a community pool, gym, and landscaping.

Condos often are found in urban areas where land for construction is scarce.

What is a townhouse?

A townhouse typically is a vertical, single-family structure that has at least two floors and shares at least one ground-to-roof wall with a residence next door.

Townhouses, which are individually owned, can be lined up on a row or arranged in a different configuration. Owners buy both the structure, including its interior and exterior, and the piece of land that the townhome is built on, which may include a small yard.

"A townhome is not a kind of ownership, but refers more to the physical structure,” Swets said, referring to the vertical design. “From an ownership perspective, some townhomes are classified as condos while others aren’t. It all depends upon what’s listed in the declaration and bylaws for each association."

Should I buy a house, townhouse or condo?

Here are some factors to consider when deciding what kind of residence to buy:

Maintenance

Are you good at home repairs, or do you prefer to have a handyman on speed dial? While a single-family house gives you freedom to fix up or renovate as you please, you also are responsible for all repairs and maintenance. The monthly fee you pay to a board or association if you own a condo may take care of maintenance such as mowing, exterior repairs and snow shoveling. Townhouse homeowners association fees may care of maintenance of the community’s common areas, such as a shared backyard or playground, but it’s not guaranteed.

“If I were to look at a condo, it would be because I didn’t want to worry about the maintenance outside,” said Lori Doerfler, the 2018 president of the Arizona Association of Realtors. “If I wanted to have a piece of land but not a lot of yard, a townhome would be a good choice.”

Location and lifestyle

Condos, townhomes and standalone houses can offer a wide range of lifestyles and locations. Homebuyers should think through whether they’re interested in an urban, walkable lifestyle, a suburban neighborhood, or something in between. Where you live also will determine your commute to work and proximity to family and friends.

Restrictions on ownership

While condos can offer convenience and amenities, they also come with monthly dues, occasional assessment fees for special community projects and property rules, which can be strict. Single-family homes, especially those in neighborhoods without a homeowners association, have few or no restrictions.

Buyers should always check the community’s bylaws to understand the rules.

“I always want to get the covenants, conditions and restrictions to the buyer,” Doerfler said. “They describe the requirements and limitations of what you can do with your home as well as the grounds.”

Monthly fees

Any type of dwelling may come with a monthly fee to help pay for upkeep of the community’s amenities. Owners of a standalone single-family house in a neighborhood with a homeowners association will pay monthly or annual HOA fees, and condo and townhouse owners will pay fees every month to the community board or association.

When factoring your monthly mortgage payment, be sure to add in the HOA or condo association fees to determine how much you’ll pay to live in the dwelling. Fees could significantly increase your cost, putting a seemingly affordable dwelling out of reach.

Lending and price

Where you live will determine the price that you’ll pay for your home. Homes in desirable areas, such as downtowns and good school districts, can cost significantly more that homes with a long commute to a city.

Interest rates also vary by state and by lender, so it’s important to research loan terms from several lenders before making a decision.

Condo vs. townhouse

Benefits: Again, condos and townhouses aren’t mutually exclusive, but their potentially different physical attributes and homeownership structures make them worth comparing in some ways. Both offer less maintenance than a house, the opportunity to get to know neighbors and build a strong community, and walkable amenities such as a pool or community gathering space. Condos may offer a variety of amenities, and with new developments providing over-the-top extras such as rooftop bars, doormen and catering kitchens.

Risks: Condo and HOA fees can be expensive, and you are trusting the HOA or condo association to provide satisfactory upkeep to the property. Condo fees tend to be higher than townhouse HOA fees because condo associations typically provide more maintenance and amenities, and condo associations can enact special assessments to pay for one-time facilities expenses.

House vs. condo

Benefits: While condos offer a range of amenities and maintenance for exterior property, owning a single-family home provides owners with freedom from the rules and restrictions of condominium ownership. Buyers looking for privacy, a rural or suburban lifestyle or a larger property also will have more options with a single-family house.

Risks: Owning a single-family home means that the homeowner must pay for damage and upkeep to the interior and exterior property that isn’t covered by insurance. Condo associations are liable for exterior property and, if stated in the bylaws, “common elements” such as the roof and windows.

Townhouse vs. house

Benefits: Single-family house and townhouse owners both own their entire units, giving them freedom to renovate and change them as they see fit within any guidelines for exterior changes set by HOAs.

Risks: Single-family homeowners assume responsibility for the entirety of their property, which townhome owners may not be liable for repairs, upkeep, or incidents that occur outside of their unit and the land it sits on, depending on their homeowner’s association.

Which is best for you?

Your decision in buying a home vs. a condo vs. a townhouse should depend on what you can afford, how much maintenance you want to do, where you want to live and the type of community you want to live in. Young families, for example, may want a yard and a house near a good school, while a single professional may be more interested in a downtown condo that is within walking distance to nightlife and the office.

As you consider what kind of dwelling to buy, be sure to include the costs of condo or HOA fees into your budget to be sure that your new home fits your lifestyle and your budget.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

TAGS: , , ,

Advertiser Disclosure

Mortgage

How Much Does It Cost to Build a House?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Factors that dictate cost

While the average costs to build a house can give you a general idea of how much you’ll pay for a new build, it’s important to note that the costs of building any home can vary dramatically. Where you live, for example, can play a huge role in not only the costs of land but the price of the permits and fees you’ll need to cover.

Of course, there are other factors that will dictate how much you pay, from the type of home you select to what you choose to do inside. Other factors that can dictate the costs of your home include:

  • Your lot: The NAHB reports that the average price for a lot of land worked out to $4.20 per square foot in 2015 (the most recent data available), bringing the total for an average size lot (20,129 square feet) to $84,541.80. However, this cost can vary depending on the lot you buy, the size of the lot and the local real estate market where you buy.
  • Home size: The larger the home, the more construction costs you’ll encounter, says Frank Nieuwkoop, sales and marketing director of new-home builder Valecraft Homes Ltd. Larger homes also require more materials (more flooring, more lighting, more fixtures, etc.), he says, which can lead to higher costs in a hurry.
  • Upgrades: If you opt for fancy upgrades, you’ll pay more for a new home, says Nieuwkoop. Granite or marble, upgraded fixtures, and custom woodwork can make any home considerably more expensive. This is one area where you can also save on the costs of building, however. Where laminate countertops may cost just $10 per square foot installed, you’ll pay more like $60 to $120 per square foot for concrete or recycled glass, according to Consumer Reports. If you multiply those savings across all the rooms that need counters in your home (kitchen and baths), it’s easy to see how you could pay more or less depending on what you choose.
  • Home design: The design of the home can also play a factor in cost, says Nieuwkoop. If you build a home that is standard in design, you may pay less than if you build a custom home with unique design or special features. If you design a truly custom home, you may also need to hire an architect to draft a design. Hiring an architect can add another 15 or even 20 percent of costs to your total project.
  • Siding: What you choose to cover the exterior of your home can play a big role in your total price. If you choose a custom stone exterior, you may pay more than you would if you choose vinyl siding instead.
  • Landscaping: Will you opt for an elaborate outdoor landscaping scheme or some simple greenery? Your landscaping choices will play a role in the costs of your home as well as ongoing outdoor maintenance. You’ll also pay more for a fenced yard.

Building vs. buying

Building a home comes with pros and cons that are entirely different from the factors that lead people to purchase an existing home. Before you choose to build or shop among homes already in your area, make sure to consider the advantages and disadvantages of both scenarios.

Pros of building your own home

  • Less competition: According to the National Association of Realtors, existing homes stayed on the market for an average of 34 days nationwide before being sold in October 2017. In “hot areas” of the country such as San Francisco, San Diego, Boston, and San Jose, however, houses — especially those in an affordable price range — tend to go under contract in less than a week, it notes. By selecting your own lot and building a home, you can avoid stiff competition for existing properties and still get the home you want.
  • Everything is new: “Many people love the idea that everything in their house will be brand new when they build,” says Nieuwkoop. Having new fixtures, a new roof, new appliances and a new HVAC system may also mean you’ll have fewer repair bills during the first few years of homeownership.
  • Choose the location of your home: Building a new home on a lot you choose puts you in the unique position of selecting exactly where you’ll live. This can be advantageous if you hope to live near work or near public transportation, or if you want a lot with a certain type of view. “Do you want to back up to a lake or woods?” asks Nieuwkoop. “When you build, you get to decide.”
  • Select your own floor plan and finishes: Whether you build a custom home or select a floor plan through a builder, you get to choose how your new home is set up — including your floor plan. You may even be able to select your own finishes including your paint color, countertops, flooring and cabinets.

Cons of building your own house

  • Moving delays: Building a home often means longer delays when it comes to moving, says Nieuwkoop. “Building a home can take as little as two months all the way up to a year,” he says. If you want to move quickly, this can be a deal-breaker.
  • Building surprises: Especially if you design a custom home, you may not know exactly how the floor plan flows until your home is already built, notes the expert. “With a custom home especially, you may end up with something different than you envisioned.” Fortunately, this isn’t typically a problem with larger builders and developers since they often have model homes you can walk through, he says.
  • Pricing surprises: With custom homes especially, pricing can easily surge — especially if you make changes as the plan moves along, says Nieuwkoop. Plus, there are added costs that come with building that many people forget. Adding window blinds and treatments can add up, as can new décor, shelving and other interior fixtures that don’t come in the home price. Builders rarely put a fence in the yard, so that’s another expense to consider if you want one.
  • Less negotiation power: You may be able to negotiate the price on an existing home if a buyer is motivated to sell, but there may be less wiggle room on the price of a new home.
  • Construction traffic: If you’re building in a new neighborhood, you may deal with ongoing construction traffic for months or even years.

Pros of buying an existing home

  • Save money with existing features: Existing homes tend to have a lot of additions and upgrades made already, says Nieuwkoop. You may already have mini blinds, a privacy fence and appliances, for example, which can help you save money.
  • Move in quicker: “Although it can take a few months to close on an existing home and be able to move in, the timeline until move day is still faster with an existing home,” says Nieuwkoop. If you need to move quickly, you can typically do so faster if you buy instead of build.
  • Property maturity: Existing homes tend to have more mature trees and landscaping, which could be advantageous if you don’t like the idea of growing new grass on your own.
  • No construction zone: If you’re buying a home in a mature neighborhood, you may not have to deal with ongoing construction issues like you would with a new build in a new neighborhood.

Cons of buying an existing home

  • Lack of customization: You don’t get to pick out the floor plan or fixtures when you buy an existing home. You get exactly what is there already, which may or may not be what you want.
  • Costs to upgrade: If you buy an existing home that is out-of-date, you may need to spend considerable sums of money to make important updates or replace out-of-date fixtures.
  • Hidden problems: Existing homes may have problems you don’t see, says Nieuwkoop, adding that home inspectors don’t always find every issue. “If there was a water leak in the home and the seller replaced the drywall without actually fixing the issue, you may not find out you need costly repairs until after you move in.”

Who it’s best for

According to Nieuwkoop, building is best for individuals and couples who are very detailed and know exactly what they want. Building is also ideal for people who don’t care as much about cost as long as they get a brand-new home and the ability to pick and choose every finish and feature.

“Building is also best for buyers who are patient and willing to endure some bumps along the road,” says the builder. “If you’re high stress and don’t want to deal with any issues, you may be better off buying a newer existing home.”

5 steps to building a house

While the process of building a house can vary slightly depending on whether you design your own custom home or work with a developer, the main steps to completing the process are the same. Fortunately, Nieuwkoop helped us outline the five steps to building a house from beginning to end.

Step 1: Create a budget.

Before you decide to build or buy a home, it’s crucial to know how much you can afford to spend. The best way to come up with a housing budget is to see a mortgage broker or apply for a mortgage online, to see how much you can afford to borrow. You should also get pre-approved for a mortgage, says Nieuwkoop. That way, you’ll be ready to work with a builder when you decide what you want. You can compare mortgage offers online with LendingTree, MagnifyMoney’s parent company.

Step 2: Purchase land or select a lot.

Once you know what you can afford (house and land included), it’s time to find a lot in an existing community or buy land you plan to build on. Keep in mind that the price of the land you buy will need to be included in your mortgage amount unless you plan to buy the land in cash separately. If you’re choosing a piece of land that hasn’t been developed, you should also ask your builder about the costs of adding utilities to the property, cutting down trees, or leveling the land.

If you’re buying from a developer or builder who is overseeing the construction of a new neighborhood, it’s possible the price of your chosen lot will be built into the price of the floor plan and home you select, says Nieuwkoop. Either way, now is the time to talk through land costs with a builder and decide where you want your new home to be.

Step 3: Develop floor plans and designs.

If you’re working with a builder, chances are good they’ll offer a range of floor plans and new home designs you can choose from. If you’re building a custom home, on the other hand, you’ll likely need to hire an architect to create a realistic housing design that encompasses all the features you want.

Either way, you need to nail down your ideal floor plan and design at this stage. Decide how many bedrooms and bathrooms you want, along with the general layout of your home. From there, you can select or design a housing plan that fits your budget and style.

Step 4: Select finishes, features, and appliances.

Once you’ve chosen the layout of your home, you still need to choose what goes inside. Work with your builder to decide on the interior finishes in your home, from the cabinets in your kitchen to your light fixtures, plumbing fixtures, flooring, and paint colors.

Step 5: Watch your home being built.

Once your home is commissioned and ready to be built, you can watch as the process takes place over the weeks and months. Nieuwkoop says that, ideally, your builder will let you walk through the home during various stages of the process. By walking through, you may be able to discover and point out issues that need to be fixed, such as incorrect fixtures or design problems.

How to finance the build

According to mortgage advisor Jeremy Schachter of Pinnacle Capital Mortgage, the process for financing a new build is similar to the process of buying an existing home.

When you build a home, it’s crucial to get pre-qualified with a bank or lender. During this process, the lender will take a look at your credit score, income, assets and debts, then use those factors to determine how much you can borrow.

The biggest difference with a new build, says Schachter, is that you’ll likely need to get pre-approved for a mortgage once and then start a portion of the process over again. “You’ll need to submit financial statements, a credit report, and pay stubs to get approved to build a house, but you’ll likely need to resubmit all this information again if the process takes several months,” he says. Schachter was clear that the final home closing doesn’t take place until the house is completed, and that this is when you’ll start making mortgage payments.

Fortunately, Schachter says, many lenders will let you lock in the interest rate on your home loan for up to a year when you’re building a home. But you should always check and ask about your APR to make sure you’re not stuck with a higher interest rate if your new build takes several months and rates surge during that time, he says.

What type of home loans can you use?

Schachter notes that consumers can use any type of home loan to build a property that they could use to buy a traditional home. For example:

  • VA loans: To qualify for a VA loan, you must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) based on your level of service. You must also plan to live in the home full-time.
  • FHA loans: You can apply for an FHA construction loan to finance a new build. To qualify for an FHA loan, you’ll need at least 3.5 percent as a down payment, a credit score of 580 or higher, and proof of income. You may qualify for an FHA loan with a credit score lower than 580, but you’ll need to make a larger down payment. Lenders will also look at your debt-to-income ratio — a figure determined by taking all your debt payments and dividing them by your gross monthly income. If you have $3,000 in bills each month and your gross monthly income is $5,000, your debt-to-income ratio is 60 percent. Generally speaking, lenders want you to keep your debt-to-income ratio under 43 percent, including all housing payments.
  • Conventional home loan: Requirements for a conventional mortgage can vary, although you typically need a good credit score (FICO score of about 740 or higher) to qualify for a loan with the best APR. Lenders also look at your employment history, income and debt-to-income ratio.
  • Construction loans: Schachter notes that individuals building a custom home may need to get a special “construction loan from a lender or bank.” These loans cover the initial costs of building a house, including the lot, building materials and architect fees. Schachter notes that construction loans are typically short-term loans with variable interest rates that are good for less than a year. Ultimately, construction loans are converted to permanent home loans once the construction process is complete.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

TAGS: , , ,

Advertiser Disclosure

Mortgage

What it’s Really Like to Get a Mortgage Completely Online

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

getting a mortgage online

Drew and April Olanoff had great jobs in Silicon Valley, but even they were discouraged by the house hunting process in the San Francisco Bay Area: all-cash offers, bidding wars, two-bedroom condos listed for $1.5 million. They quickly decided to move their search to Drew’s hometown of Philadelphia — and they conducted the whole process online, from settling on a home to nailing down a mortgage.

The Olanoffs are just two of a growing number of homeowners who obtain a mortgage completely online, uploading documents and e-signing forms with no in-person meetings required. Online direct lenders — that means companies like SoFi, Better Mortgage and Rocket Mortgage by Quicken Loans — typically eschew costs like origination and applications fees. And they focus on speedier processes, which can lead to quicker closing times compared with more traditional mortgages. (Disclosure: MagnifyMoney’s parent company, LendingTree, offers homebuyers an online tool they can use to compare quotes from mortgage lenders.)

These upstart players are pushing the mortgage industry to innovate and become more transparent, experts say. But, they add, a fully online experience isn’t for everyone — and online lenders may not necessarily offer a homeowner a better rate than a traditional lender would.

“I can’t even imagine going into an office, dropping off paperwork, seeing people, and not getting the house at the end of the day,”

In the Olanoffs’ case, they even selected their home unconventionally, at a distance. From the West Coast, they directed a ReMax real estate agent to visit about 10 homes, shoot video and upload the footage to YouTube. They chose their 1916-built South Philadelphia home based on these videos.

Then their agent directed them to GuaranteedRate, one of the largest mortgage lenders in the U.S., which offered them a fully online experience, with the ability to upload and digitally sign documents. The Olanoffs were approved for an Federal Housing Administration (FHA) loan for about $260,000 in July 2016, and closed on the home that September.

“It was way less stressful doing it online,” says Drew, 38, vice president of communications at venture equity firm Scaleworks.

“I can't even imagine going into an office, dropping off paperwork, seeing people, and not getting the house at the end of the day,” he adds. “The process leading up to and bidding on a home is so stressful, it's almost like we were automatically removed from the intensity of it by doing it online. And we knew if we got outbid, all of our paperwork would still be there ready to go, which is genius.”

That ease and transparency is attractive not only to smartphone-loving millennials, but to homebuyers of all ages who are tired of complex and confusing mortgage-application processes, says Keith Gumbinger, vice president of the independent consumer-loan site HSH.com.

“The push to online has been underway for years, and it’s finally coming to the forefront with consumers’ widespread adoption of technology,” Gumbinger says.
“The market has now grown into it, too. You don’t think about it as a homebuyer, but there are lots of backend processes and entities involved in a mortgage. The industry has worked to come up with standards and it’s finally gotten there.”

Here’s a look at three of the major online mortgage players, all of which are direct lenders and can complete 100 percent of the process online.

SoFi

SoFi’s mission and advantages: “SoFi’s target market is high-earner, not-rich-yet,” says Helen Huang, its senior director of product marketing. That reflects SoFi’s unique applicant-assessment philosophy: The company looks beyond the traditional factors like credit report and savings, taking into account the borrower’s earning potential.

SoFi gives a lot of weight to job history and career prospects. So a high-demand software engineer who has restricted stock units at Facebook and her choice of Silicon Valley jobs might be more attractive to SoFi, compared with the person with good money saved for a down payment. (It’s no surprise, then, that Huang says a “significant” portion of SoFi customers work in the technology industry.)

SoFi has another edge over traditional lenders: The company requires only a 10 percent down payment with no private mortgage insurance requirement. Most lenders require 20 percent down to skip over PMI. SoFi issues mortgages up to $3 million, and the company has originated $2.2 billion in mortgages since 2014.

SoFi is short for Social Finance — the company offers lots of other services, like student loan refinancing and wealth management — and it lives up to its name with its SoFi Members Facebook page. The group is extremely active, with SoFi customers frequently posting to solicit advice and tips from fellow borrowers or SoFi’s customer service team.

Potential cons: SoFi won’t originate loans below $100,000, so it’s not a good choice for customers in areas where real estate is relatively inexpensive. Borrowers must put down a minimum of 10 percent for new loans. And it takes 72 hours to receive a decision from SoFi, which — while quick — isn’t as speedy as some competitors.

SoFi mortgages also aren’t available nationwide. The company only originates mortgages in 29 states: Alabama, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Maryland, Minnesota, Montana, Nevada, New Jersey, New York, North Carolina, North Dakota, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, Washington, Wisconsin, Wyoming and Washington, D.C.

SoFi’s mortgage application, step by step

getting a sofi mortgage
Screenshot of SoFi mortgage application.

Get started: First, you’ll set up a SoFi account by entering your name, state of residence, email and a password. Next comes the “Basic Info” screen: your mailing address, phone number, date of birth, citizenship and current living situation.

Next is School Info, where you’ll fill out information about post-high-school degrees. (SoFi notes on the screen that a “college degree is not required to qualify for a mortgage. While education is not used in mortgage underwriting, this info helps SoFi better understand our members.”) Then it’s time to add Employment Info: your employer name, job title, start date and annual income. For now, you’ll do this just for your current employer, and at the bottom of the page, select your total years of professional work experience.

Mortgage eligibility: Here you’ll complete several questions about what you’re looking for: Do you need a mortgage for a new property, a refinance, a student loan cash-out refinance or a cash-out refinance? You’ll also enter information about where you are in the buying process, and information about your desired area or specific property. You can also add information on this screen about your marital status and whether you have a co-applicant. Check the box to grant SoFi the right to do a soft credit pull to preapprove you for a mortgage. Remember: A soft pull won’t harm your credit score.

Get your rate: Hopefully, the next screen will announce: “Congratulations! You’ve pre-qualified for a SoFi mortgage.” If so, you can calculate your loan amount by entering the home’s price and your down payment. Then you can choose loan terms: 30-year fixed, 15-year fixed, or adjustable rate. To move forward, click “continue with pre-approval.”

Next you’ll fill out employment information for any previous jobs you may have held in the past two years, and if you currently hold two or more jobs you’ll add that information too. Then itemize any non job-related income, like Social Security or rental properties, and finally add any assets you want SoFi to consider in your application (checking, savings, brokerage or retirement accounts; second homes; etc.) and click “continue.”

Get approved: Finish up by answering a series of yes-or-no “declarations,” like whether or not you’re involved in a lawsuit. Finally, add your Social Security number and consent to SoFi’s credit disclosure. The final screen will confirm that SoFi is reviewing your application, and it will ask you to upload income validation documents (two most recent years’ W-2s or the last two years’ year-end paystubs), as well as your two most recent paystubs. You’re done; SoFi says applicants can expect to receive their application decision within 72 hours.

Rocket Mortgage by Quicken Loans

Rocket’s mission and advantages: As the online lender arm of Quicken Loans, Rocket is like a startup backed by a long-established, well-known parent. The company is named for its speed (its 2016 Super Bowl ad used the now-defunct, controversial tagline “Push button, get mortgage”).

One of the reasons for that speed is a unique, refreshing lack of paperwork. Rocket pulls from private and public sources to automatically fill in information like employment history and income, as well as financial statements (from the “vast majority” of institutions) — drastically cutting down on the need for uploaded documents or line-by-line typing of information. It’s somewhat similar to how budgeting apps like Mint pull your financial data from several institutions at once.

“Whether it’s car rides or takeout, these days we expect everything to happen immediately with the push of a button,” says Regis Hadiaris, Rocket’s product lead. “The mortgage industry has to catch up to that.”

On average, 60 percent of people using Rocket are doing so on a mobile device, Hadiaris says. Rocket originated $7 billion in loans in its first year, and the company now has nearly two million user accounts. Unlike many of its competitors, Rocket originates loans in all 50 states.

Potential cons: While mortgage consultants are available to help, including via phone or online chat, Rocket is clearly designed more for customers who want a fully digitized experience.

Rocket’s application process isn’t quite as streamlined as some of its competitors. Once you move past the preapproval process, you’ll be directed to Quicken Loans’ MyQL site to complete any needed tasks to purchase the loan, and to download your approval letter. On the plus side, Rocket says that starting in mid to late December 2017, users will be able to complete all possible digital steps within the same application.

Rocket Mortgage application, step by step

getting mortgage with rocket mortgage by quicken
Screenshot of Rocket Mortgage application.

Start by creating an account with your name, username and password. Then you’ll answer questions about your current situation: where you live now, when you started living there, and how much you pay in rent or mortgage. Next, provide information about the home you want to buy, or your desired location. Add information for anyone else who will be a co-signer on the loan, if applicable.

The next section is where Rocket’s automatic filling of information comes in. The system asks for assets and income, which you can choose to type in manually – or you can click “Find My Account” to add the data automatically. Quicken/Rocket connects with the majority of financial institutions, but double check to make sure everything is complete and accurate.

Below that, it’s a similar process for employment data and income: Either add it manually, or let Rocket fill it automatically. The company’s primary source for this employment information is third-party verifier The Work Number, and Hadiaris says it covers just over half of Americans – so again, this is one you’ll want to double check.

Finish up by answering government questions like whether you’re a U.S. citizen, and authorize a soft credit check by entering your birth date, Social Security number and phone number. A countdown clock pops up (“T-Minus 00:06 Seconds”) and then you’ll be sent to a screen with your mortgage options.

Mess around with loan terms and down payment percentages to get different choices, and Rocket will categorize them by lowers monthly payment, lowest upfront costs and balanced costs and payments. You’ll be directed to MyQL.com to complete any needed tasks to purchase the loan, and to download your approval letter.

Better Mortgage

Better’s mission and advantages: Better’s tagline is “The status quo is broken.” The mortgage industry operates as if the Internet doesn’t exist, the company argues, with opaque and overly lengthy practices. So Better’s goal is to provide transparency during every step of the loan process — from crystal-clear FAQs and online resources to a streamlined application and speedy approval.

“We don't want to just disintermediate for the sake of it,” says Taylor Salditch, Better’s vice president of marketing. “We really are trying to tackle the whole process and rebuild it in a holistic way.”

Better offers a single application platform that borrowers can access anytime to e-sign documents, link bank accounts and securely upload files from any device.

Borrowers can work on the application for a bit, then save their progress and come back later to finish up. It takes three minutes to receive a basic preapproval confirmation, and 24 hours for a “cash-competitive” verified preapproval letter. The entire process is personalized to each user, with different questions popping up based on responses. The company has funded nearly $1 billion in mortgages.

Customers can chat with a loan consultant as early in the process as they would like, to ask questions or get more information even before they begin. Once borrowers are approved for a loan, they are assigned to a “Loan Ranger” who serves as their point of contact.

Better offers home purchase loans for as little as 3% down, as well as a variety of loan types. Borrowers can play around with different fees and discount points to see how it affects their rate. Better also guarantees its loan estimate will be at least $1,000 less in closing costs compared with a competitor offering the same rate and loan terms — or they’ll pay you $1,000.

Potential cons: Better originates mortgages in only Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, North Carolina, New Jersey, Oregon, Pennsylvania and Washington, plus Washington, D.C. The company says it’s working to expand into more states soon. Better won’t offer loans for manufactured mobile homes, cooperatives or multifamily units.

Also, Better doesn’t service mortgages. As a direct lender the company processes the application and underwrites, closes and funds your loan. Once the loan is funded, however, Better’s servicing partner LoanCare services the loan for a temporary period of about 30 days. Then it’s transferred to a “reputable, quality investor that provides the right type of loan and servicing for your situation.”

Better’s application, step by step

getting a mortgage with better mortgage
Screenshot of the Better Mortgage application.

Better’s super-simple preapproval questionnaire is designed to help even customers who might be interested in buying a home sometime soon but don’t know where to start. First, Better asks if you already have an accepted purchase offer. If you do, you’ll enter the address and then Better will prompt you to create an account.

If you don’t have an accepted offer, then you’ll share the zip code where you’re looking and when you plan to make an offer (there’s an option to say “not sure”). Next, select which type of home you’re interested in — primary residence, second home or investment — and the property type (single family or condo/townhouse). At this point Better will ask you to create an account.

Then you’ll give Better permission to do a soft credit check that won’t affect your score, providing your name, current address, phone number and Social Security number. After a moment, Better will present your credit score from TransUnion and ask for a few more details: how you earn money, whether anyone else will be on the home’s title, if you’re working with a real estate agent, whether you currently pay rent or own properties, other assets available and the estimated purchase price of your home plus your maximum down payment percentage.

You’ll find out in a few moments whether you’re preapproved. If you are, you can look at rate options — terms include 30-, 20- and 15-year fixed, as well as a variety of adjustable rates — and select the one you like. Better says that basic preapproval takes about three minutes, and you can receive a verified preapproval letter within 24 hours.

Better wasn’t able to provide a demo after this point, because the rest of the process to loan purchase is a “personalized Q&A” that changes depending on the answers you provide. But Better says you can expect to need two years’ worth of the following documents: personal tax returns, business tax returns (if you own more than a quarter of the business) and W-2s or 1099s; plus two months of bank statements and proof of any alimony or child support payments.

Should you get an online mortgage?

A fully online mortgage process is great for buyers like the Olanoffs, and people who don’t want the hassle of meetings and phone calls. But other homebuyers might be unsettled by a “low-touch experience,” says Gumbinger, the HSH.com vice president.

A recent survey of about 2,000 U.S. adults conducted on behalf of the American Bankers Association showed that 60 percent use the Internet to research their home loans but would rather apply for a mortgage in person.

It’s important to ask yourself which of those groups you fall into. Are you a high- or low-touch shopper? Can you get your financial paperwork in order, or is it much more attractive to you to choose a lender who can automatically fill in that information? Is the ease and speed of the online process more valuable to you than the ability to have in-person meetings with a loan officer?

Whatever you do, shop around first

Even if your comfort level with a fully online experience is high, it’s paramount to do your homework when it comes to a decision as major as a mortgage. Compare experiences between both traditional and online lenders, be honest with yourself about your personal needs — and, though it goes without saying, we’ll say it anyway: Always shop around for rates. You can ask individual lenders for quotes (so long as you do them over a short period of time they should only count as one hard inquiry on your credit account) one at a time, or you can compare mortgage rates online from many lenders at once on sites like LendingTree.

“Just because someone has an electronic platform that’s easy and nice-looking, it doesn't mean you’ll get the best possible price,” Gumbinger says. “On the flip side, the mortgage lender your aunt recommended may not have the best price, either. The fact of the matter is, you always need take a cross-cut of the marketplace to find where you can get the best deal for you.”

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Julianne Pepitone
Julianne Pepitone |

Julianne Pepitone is a writer at MagnifyMoney. You can email Julianne here

TAGS: , , ,

Advertiser Disclosure

Mortgage

APR vs Interest Rate: Understanding the Difference

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

When you’re shopping for a loan, don’t let your research end with a comparison of lenders’ interest rates. While a low interest rate is appealing, it’s important to also look at each loan’s annual percentage rate (APR), which will provide a clearer picture of how much the loan will cost you when fees and other costs are factored in.

APR vs Interest Rate: Understanding the differences

The difference between APR and interest rate is that APR will give borrowers a truer picture of how much the loan will cost them. While APR is expressed as an interest rate, it is not related to the monthly payment, which is calculated using only the interest rate. Instead, APR reflects the interest rate along with fees and other one-time costs a borrower will pay for a loan.

“You can find a mortgage that has a 4-percent interest rate, but with a bunch of fees, that APR may be 4.6 or 4.7 percent,” said Todd Nelson, senior vice president-business development officer with online lender Lightstream. “With all of those fees baked in, they are going to swing the interest rate.”

For example, one lender may charge no fees, so the loan’s APR and interest rate are the same. The second lender may charge a 5 percent origination fee, which will increase the APR on that loan.

How the APR is calculated

Lenders calculate APR by adding fees and costs to the loan’s interest rate and creating a new price for the loan. Here’s an example that shows how APR is calculated using LendingTree’s loan calculator.

A lender approves a $100,000 at a 4.5 percent interest rate. The borrower decides to buy one point, a fee paid to the lender in exchange for a reduced rate, for $1,000. The loan also includes $900 in fees.

With these fees and costs added to the loan, the adjusted balance being borrowed is $101,900. The monthly payment is then $516.31 with the 4.5 percent interest rate, compared with $506.69 if the balance had remained at $100,000.

To find the APR, the lender returns to the original loan amount of $100,000 and calculates the interest rate that would create a monthly payment of $516.31. In this example, that APR would be 4.661 percent.

APRs will vary from lender to lender because different lenders charge different fees. Some may offer competitive interest rates but then tack on expensive fees and costs. Lenders with the same interest rate and APR are not charging any fees on that loan, and lenders that offer APR and interest rates that are the closest will charge the least-substantial amount of fees and extra costs.

What can impact my APR?

While APR will change as interest rates fluctuate, lenders’ fees and costs will have the greatest impact on APR. Here are some of the fees that will affect the APR.

Discount points: Buying points to lower a loan’s interest rate can have a significant impact on APR. Lenders allow buyers to purchase “points” in return for a lower interest rate. A point is equal to one percent of the mortgage loan amount. For example, a buyer approved for a $100,000 loan could buy three points, at $1,000 each, to lower the interest rate from 4.5 to 4.15.

Loan origination fees: Loan origination fees typically range between 1 and 6 percent, according to Nelson. This can be especially significant for larger loans.

Loan processing: This fee, which some lenders will negotiate, pays for the cost of processing a mortgage application.

Underwriting: These fees cover an underwriter’s review of a loan application, including the borrower’s income, credit history, assets and liabilities, and property appraisal, to determine whether the lender should approve the loan application and what terms should be applied to the loan.

Appraisal review: Some lenders pay an outside reviewer to make sure an appraisal meets underwriting standards and that the appraiser has submitted an accurate report of the home’s value.

Document drawing: Lenders often charge a fee for creating mortgage documents for a loan.

Commonly not included in APR are notary fees, credit report costs, title insurance and escrow services, the appraisal, home inspection, attorney fees, document preparation and recording fees.

Because APR includes a loan’s interest rate, rising interest rates will increase APR for mortgages, auto loans and other types of loans and credit.

Interest rate vs APR: What should I focus on when shopping for a mortgage?

While lenders often push their low interest rates when they advertise loans, Nelson said it’s vital that consumers check loans’ APR when shopping around and pay attention to how loan advertisements are worded.

“Look for a lender that’s transparent about disclosing all of those fees,” he said. Lenders may advertise “no hidden fees,” he said, but that might mean there are other fees that simply aren’t hidden.

Here’s how two loans for the same amount can have different APRs.

Loan amount

Fees and costs

Fixed interest rate

APR

$200,000

$1,700

4.5%

4.572%

$200,000

$2,600

4.5%

4.61%

The Truth in Lending Act requires lenders to disclose APR in advertising so that consumers can make an equivalent comparison between loans. If two loan offers have similar APRs, request a Good Faith Estimate (GFE) or Loan Estimate from each lender.

Lenders are required to provide this document, which shows all expenses associated with the mortgage, within three business days of the loan application date. Some lenders may be willing to supply a loan estimate for consumers who are shopping for a loan.

APRs on Adjustable Rate Mortgages (ARMs): What to know

It’s important to remember that the APR on ARMs will not apply for the life of the loan, as the payment on the loan will change as the economy fluctuates. APR on ARMs is calculated for the interest rate during the loan’s introductory period, and no one can predict how much the rate will increase in years to come.

A loan with a 7/1 ARM, for example, will have a fixed rate for the first seven years that is determined by the current economic conditions on the day the loan was approved. After seven years, the lender will begin to adjust the rate based on movement of the economic index, which likely will not be the same as it was when the loan was approved. Rates fluctuate daily, and no economic forecaster can predict where the index will be in 20 or 25 years.

Understanding mortgage interest rates

A mortgage rate is another term for interest rate, which is the rate that a lender uses to determine how much to charge a customer for borrowing money. Mortgage rates can be either fixed or adjustable.

Fixed mortgage rates do not change over the life of a loan. For example, if you take out a 30-year loan at a 4.25 percent interest rate, that rate will stay the same regardless of changes in the economy and market index, through the entire lifetime of the loan.

Adjustable rate mortgages (ARM), on the other hand, will change as the market changes after an introductory period, often set at five or seven years. That means your interest rate could go up or down depending on economic conditions, which will in turn raise or lower your payments.

ARMs, which are a common type of mortgage loan with an adjustable rate, often start with a lower interest rate than a fixed mortgage — but only for that introductory period. After that, the rate could go up as it adjusts to market conditions, which could raise your payment accordingly.

If you are considering an ARM, it’s important to talk to your lender first about what the adjustable rate could mean for your loan payment after the introductory period. The federal government’s Consumer Financial Protection Bureau (CFPB) recommends researching:

  • Whether your ARM has a cap on how high or low your interest rate can go.
  • How often your rate will be adjusted.
  • How much your monthly payment and interest rate can increase with each adjustment.
  • Whether you can still afford the loan if the interest rate and monthly payment reach their maximum under your loan contract.

How is your mortgage rate calculated?

Don’t be surprised if a lender offers you a mortgage interest rate that is higher than what is advertised. Each loan’s interest rate is primarily determined by market conditions and by the borrower’s financial health. Lenders take into account:

  • Your credit score: Borrowers with higher credit scores generally receive better interest rates.
  • The terms of the loan: The number of months you agree to pay back the loan can make a difference. Generally, a shorter term loan will have a lower rate than a longer term loan but higher monthly payments.
  • The location of the property you are purchasing: Interest rates are different in rural and urban areas, and sometimes they can vary by county.
  • The amount of the loan: Interest rates can be different for loan amounts that are unusually large or small.
  • Down payment: Lenders may offer a lower rate to borrowers who can make a larger down payment, which often is an indicator that the borrower is financially secure and more likely to pay back the loan.
  • Type of loan: While many borrowers apply for conventional mortgages, the federal government offers loan programs through the FHA, USDA, and VA that often offer lower interest rates.

How often do mortgage rates change?

Mortgage rates fluctuate on a daily basis. Because the market changes so often, lenders typically give borrowers the opportunity to lock in or float your interest rate for 30, 45, or 60 days from the day your lender approves your loan. That way you won’t get burned if rates rise soon after you secure a loan.

If you choose to lock in your rate, lenders will honor that rate within the agreed-upon time period before closing regardless of market fluctuations. Floating your rate will allow you to secure a lower interest rate before closing, should rates drop during that period.

How do mortgage rate changes impact the cost of borrowing?

Small differences in the interest rate can cost a borrower thousands of dollars over the life of the loan. Here’s an example for a 30-year, fixed-rate mortgage using our parent company LendingTree’s online mortgage calculator tool:

Mortgage (30-year)

Fixed interest rate

Monthly payment

Total borrowing cost

$200,000

3.65%

$914.92

$129,371.20

$200,000

3.85%

$937.62

$137,543.20

$200,000

4.25%

$983.88

$154,196.80

What’s a good rate on a mortgage?

While mortgage rates change daily, Nelson noted that mortgage rates have stayed low for several years now and don’t show signs that they will increase drastically in the nearly future.

LendingTree’s LoanExplorer tool recently showed interest rates for a 30-year, fixed-rate mortgage as low as 3.625% for borrowers with excellent credit.

Shop wisely

When shopping for loans, you can best compare loans by getting mortgage quotes from lenders at the same day on the same time. Online marketplaces such as LendingTree also can provide real-time loan offers from multiple lenders, which makes it easier to compare mortgage APR vs. interest rates.

Don’t be dazzled by low interest rates. If the loan’s APR matches its low interest rate, you likely have a good deal. Otherwise, investigate the costs and fees behind a loan’s APR to best determine which loan offer is the best deal.

Learn more about how you can compare quotes from lenders at LendingTree.com.

LEARN MORE

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

TAGS: