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Life Events, Mortgage

Open Credit Report Disputes Can Sabotage Your Chance For a Mortgage

Monday, June 29, 2015

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Kate DoreKate Dore

Purchase agreement for house

After months of searching through listings, you’ve finally found your dream home. Your offer has been accepted and you’ve started daydreaming about future dinner parties, contemporary light fixtures, and planting a backyard herb garden. Just one problem — the financing hasn’t been approved.

The mortgage underwriting process can seemingly last a lifetime when it’s standing between you and your dream home. However, the timeline hasn’t always been such a nail-biter for prospective homebuyers.

The housing bubble leading up to The Great Recession created a hunger from investors for mortgage-backed securities. As a result, borrowing costs were lowered, lending standards were loosened, and many homebuyers were approved for loans they couldn’t afford. When the housing market collapsed, many Americans were in trouble. These predatory lending practices contributed to both the financial crisis and The Great Recession.

A direct response to The Great Recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act or “Dodd-Frank” was signed into law in 2010. This financial reform legislation included the creation of the Consumer Financial Protection Bureau who established the Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act.

These new standards include a much more comprehensive financial verification process for mortgages including a closer look at an applicant’s credit history.

Why Do Credit Scores Matter?

Before you begin the home buying process, it’s smart to review your credit report and have a copy of your FICO score handy. Your FICO score is assigned by the credit reporting agencies based on the information within your credit report. A FICO score also factors into your Ability to Repay qualifications.

Tip: You can request a free credit report once a year from AnnualCreditReport.com.

Credit scores aren’t the only thing mortgage loan officers worry about, but a FICO score can heavily influence the interest rate you are able to secure. The highest scores qualify consumers for the best possible mortgage rates.

It’s critical to arm yourself with this information in advance. Plus, it gives you the opportunity to dispute any inaccuracies you’ve discovered and clean up your report.

What is a Credit Report Dispute?

Credit report inaccuracies are relatively common. Inaccurate information can happen for a variety of reasons — a clerical error, a shared name, or even identity theft. And inaccurate information in your credit report can harm your score. That’s why it’s important to regularly keep track of what’s happening.

Under the Fair Credit Reporting Act (FCRA), consumers have the right to dispute inaccurate information. Fortunately, it’s easier than ever to file a dispute with all three credit reporting agencies online.

The problem is, many disputes can go unresolved for long periods of time. An unresolved dispute can be particularly troublesome for consumers applying for a mortgage. Many applicants don’t realize an open credit report dispute can raise a red flag to lenders, and may even prevent mortgage approval.

[Learn more about Fannie Mae’s Frequently Asked Underwriting Questions here.]

How Open Credit Report Disputes Hurt a Mortgage Application

If open credit report disputes are relatively common, how can they hurt a mortgage application?

When a dispute is filed, credit reporting agencies are required to label the item as “in dispute.” An item being actively disputed can not harm your FICO score. In fact, your score will be temporarily inflated while harmful items are being investigated.

Lenders know credit reports with disputed items are not the most accurate picture of a consumer’s history and many require for this status to be removed before approving a mortgage application. This leaves some consumers with a difficult decision to make — accept costly credit report errors or delay applying for a loan until disputes have been resolved.

Fannie Mae & Freddie Mac

Fannie Mae’s automated underwriting system, Desktop Underwriter (DU), automatically issues the warning message “consumer disputed” when a credit report reveals a 30-day or more delinquency reported within 2 years of the inquiry. The lender must confirm the accuracy and completeness of the borrower’s credit report by obtaining a new report without the dispute or manually underwrite the loan.

Loan Prospector, Freddie Mac’s automated underwriting system, follows a similar process. Gaining access to a new credit report with updated information is not an option for the borrower if the creditor won’t correct the information. And when a consumer files a complaint with the credit reporting agencies (TransUnion, Equifax, and Experian), the agencies will often defer to the creditor.

Last fall, the National Consumer Law Center wrote a letter to the Federal Housing Finance Agency, urging reform for the treatment of consumers with credit report disputes. They believe lenders who reject applicants because they don’t want to manually underwrite the loan are in violation of the Equal Credit Opportunity Act (ECOA).

FHA Approved Mortgages

FHA approved mortgages will approve an application with a disputed credit report, however, the process may still be time consuming.

A couple of years ago, the U.S. Department of Housing and Urban Development decided to look more closely at open disputes and provided new instructions for lenders in a Mortgagee Letter (ML). This ML addresses both derogatory and non-derogatory disputes and requires lenders to more carefully evaluate the risk associated with a consumer.

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What To Do if You’re Still Struggling

Dealing with an unresolved credit report dispute can turn into a consumer nightmare. Even if you’ve followed best practices, like submitting credit report disputes both in writing and online, you may still be unhappy with the results.

Fortunately, you can still submit a complaint to the Consumer Financial Protection Bureau. They will forward your complaint directly to the company in dispute and work to get a response from them. Another option is to seek guidance from a consumer advocate or an attorney. The National Foundation for Credit Counseling may be a helpful place to start.

Because a credit report and FICO score have such a strong influence on lifelong financial health, the best defense is to be proactive. Regularly monitoring your credit report and working to fix inaccuracies before applying for a mortgage is the best way to prevent major problems.

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Kate Dore
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Kate Dore is a writer at MagnifyMoney. You can email Kate at [email protected]

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Mortgage

Guide to Getting the Best Rate on Your Mortgage

Thursday, May 16, 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Crissinda PonderCrissinda Ponder

Guide to Getting the Best Rate on Your Mortgage

When you’re shopping for an affordable place to live, a home’s list price is the first thing most people consider. The median sales price of homes sold across the U.S. is $307,700 according to data from the U.S. Census Bureau and the Department of Housing and Urban Development.

But there’s a lot more that goes into your monthly payment. Equally important is the interest rate you get on your mortgage. And just as you shop for a home, you can shop for the best rate on a mortgage.

How can you get the best rate? You’ll want to improve your credit score, pay down debt and contribute as large of a down payment as possible, but you’ll also want to shop around to ensure you receive a competitive mortgage rate.

In this guide, we’ll cover:

Why your mortgage rate matters so much

The interest rate on your loan can make or break whether that mortgage will be affordable. Let’s look at an example, using LendingTree’s mortgage payment calculator.

We’re assuming a 30-year fixed-rate mortgage on a $200,000 home with 20% down, or a $40,000 down payment. The mortgage payment amounts also include homeowners insurance ($700 per year) and property taxes ($2,500 per year). The taxes and insurance amounts are each divided by 12 and added to the mortgage payments.

 

4.00% Interest Rate

4.50% Interest Rate

5.00% Interest Rate

Total loan amount

$160,000

$160,000

$160,000

Monthly mortgage payment

$1,030.53

$1,077.36

$1,125.58

Total interest amount

$114,991.21

$131,850.74

$149,209.25

A half-percent increase in your mortgage rate could cost you nearly $50 more on your monthly mortgage payment, and close to $17,000 in interest over the life of your loan, while a full-percent difference in your mortgage rate comes with a monthly payment that is $95 higher and a loan that costs another $34,000-plus in interest over a 30-year term.

What factors influence your mortgage rate?

Before you can shop for a mortgage, it’s important to understand the data points that go into the rates that lenders offer you.

Lenders previously relied on a rate sheet when quoting mortgage rates to prospective mortgage borrowers, but now that’s all done online, said John Stearns, a senior mortgage banker with American Fidelity Mortgage Services in Milwaukee. Today, loan officers log into a pricing system and input the borrower’s credit score, loan amount and ZIP code to provide a rate quote.

There are several factors, including the details mentioned above, within your control, giving you the power to help influence the rate you receive.

Credit score

In short: The better your credit scores, the better your rate will be. Improving your credit score is one of the most effective ways to influence your mortgage interest rate. In fact, taking the time to increase your score could mean the difference of more than a full percentage point. Your credit score is arguably the most important factor influencing your rate, said Stearns.

When lenders pull your credit scores from each of the three credit reporting bureaus — Equifax, Experian and TransUnion — they use the middle score of the three to help determine your estimated mortgage rate. That’s why it’s important to ensure you’re improving and maintaining a good credit profile across all three bureaus.

There are minimum required credit scores for several mortgage programs. For example, conventional lenders want to see at least a 620 score and in some cases 640. FHA lenders want to see a 580 score if you’re planning to make the smallest down payment possible, which is 3.5%.

Still, skating by with the absolute minimum score won’t get you the best mortgage rate available. A lower score means a higher mortgage rate, so you’ll potentially save thousands by striving toward a good or excellent credit score. If you want a chance at the lowest mortgage rate possible, ask each lender you gather quotes from what score you’ll need to get the best rate.

“The breaking point for me is 740,” Stearns said, referring to the score cutoff after which mortgage rates don’t go any lower. “After that, it doesn’t matter.”

Down payment

The more money you put down toward your home purchase, the lower your interest rate will typically be. If you’re applying for a conventional mortgage, have good credit and plan to put down at least 5%, you’ll likely qualify for a more competitive rate. There are some conventional loan programs that allow 3% down, but they sometimes come with income limits and homebuyer education requirements.

Don’t confuse a lower interest rate with a lower cost of financing, however.

Most conventional lenders require you to pay for private mortgage insurance (PMI) if you don’t contribute at least a 20% down payment. PMI adds about 0.5% to 1% of your loan amount per year to your mortgage payment and can’t be removed until you’ve built up at least 20% equity in your home. You build equity when your home value increases and you pay down your mortgage balance.

If you’re putting down less than 5%, a FHA loan or VA loan might work better for you. FHA loans require a 3.5% down payment, as well as upfront and annual mortgage insurance premiums (MIP). The upfront MIP is 1.75% of the loan amount. Annual mortgage insurance premiums are divided into 12 installments and paid monthly as part of the mortgage payment. The cost ranges from 0.45% to 1.05%, depending on your loan amount, loan-to-value ratio and loan term. In most cases, you can’t get rid of MIP unless you refinance into a conventional loan.

VA loans are reserved for military personnel and veterans and have competitive rates for people who don’t have a down payment. There is a mandatory upfront financing fee, however. Check the VA loan fee schedule to see if the financing fee is worth it to you.

Loan amount

Interest rates on smaller mortgages tend to be higher than rates on typical mortgage sizes because they are less profitable. Borrowers may need to work with local banks or credit unions or government lending programs to find a smaller loan.

Let’s say you wanted to take out a small mortgage of less than $50,000 to purchase a fixer-upper house. That lower loan amount will likely have a pricey mortgage rate.
You might see a lower mortgage rate on a higher loan amount, however.

“Banks may say, ‘Wow, you’re borrowing $300,000, I’ll give you a little deal on the interest rate,’” Stearns said.

At the other end of the spectrum are jumbo mortgages, or loans that don’t follow conforming loan limits. Banks can’t sell jumbo loans in the secondary market, so they are riskier for the bank compared to other mortgages. Usually, banks compensate for higher risk with higher interest rates, but rates on jumbo loans have been trending lower than conventional loans as of late.

Location

Where you’re buying a house matters — mortgage rates vary from state to state and can even differ within certain areas of a given state.

Buyers looking for a mortgage in a rural area may see higher rates compared to equally qualified buyers in nearby urban areas, which could be attributed to less competition or unfamiliarity with the region. Some larger lenders have less familiarity with lending in rural areas, which could lead to higher rates. In rural settings, you may get the best rates from local banks and credit unions.

States with laws in place that make foreclosure difficult tend to have higher mortgage rates than states with looser foreclosure laws. Likewise, states that require lenders to have a physical presence in the state also raises interest rates.

Loan term

Mortgages with shorter terms typically have lower rates than those with longer terms. Banks consider longer-term loans to be more risky and compensate for the risk by charging higher rates.

The average 15-year fixed-rate mortgage is 3.57%, according to Freddie Mac’s latest Primary Mortgage Market Survey. By contrast, the average rate for a 30-year fixed-rate mortgage is 4.1%.

This doesn’t necessarily mean that a shorter-term loan is always the right choice. Choose the term that fits your needs before you compare rates. That way you’ll get the best interest rate on the right mortgage for you.

Loan type

The loan program you choose may not seem as important as the other factors referenced, but it does have an influence on your rate. Conventional loans tend to have the lowest interest rates. This refers to mortgages that can be purchased by government-sponsored enterprises Fannie Mae and Freddie Mac, the largest purchasers of mortgage loans in the U.S.

As previously mentioned, conventional loans require good credit and at least a 5% down payment in most cases, though there are some loans that allow 3% down. You’ll need to put at least 20% down to avoid paying PMI. Lenders can easily sell these loans to Fannie Mae or Freddie Mac and reinvest the proceeds in making more loans.

FHA loans have more lenient down payment and credit standards, and their average interest rates have been typically less expensive than those of conventional loans. But as of late, FHA loans have had the higher interest rates. However, an FHA loan may be the right option if you only have access to a small down payment and have a lower credit score. The extra costs of the annual and upfront mortgage insurance premiums are other factors to consider when deciding whether an FHA loan is right for you.

VA loans are available to military servicemembers and veterans, and they charge an upfront fee. However, they offer competitive rates for homebuyers.

If you’re taking out a jumbo mortgage, you will likely need to qualify for conventional underwriting. Likewise, condo buyers may need to qualify for a conventional loan. Keep in mind that Fannie Mae and Freddie Mac will not purchase a mortgage if the property is part of an association that has more than 50% renter occupants.

Rate type

Adjustable-rate mortgages put more risk onto borrowers. You’ll initially pay a lower interest rate if you take out an adjustable-rate mortgage, but the rate could increase down the line when your loan enters its adjustment period. By contrast, fixed-rate mortgages don’t increase or decrease over the life of your loan.

If you’re considering an adjustable-rate mortgage, learn when and how the interest rate adjusts. Most loans adjust based on a set index. In a low-interest-rate environment, you can expect rates to increase, but you need to estimate how much. Weigh whether the low rates now are worth a potential high rate in the future.

Discount points

Many lenders offer what are called “discount points,” or money the borrower can pay to lower their mortgage interest rate. One discount point is generally equal to 1% of the loan amount. So, if you’re borrowing a $200,000 loan, one point would cost you $2,000.

In some circumstances, buying discount points makes sense. Dividing the cost of the point by the change in your monthly payment will tell you the number of months it takes for the discount points to pay off in terms of savings. If you have the cash and expect to stay in the house significantly longer than the payoff period, purchasing the points could be worthwhile. Otherwise, keep the higher interest rate.

Special programs

Cities and states often offer special interest rates on loans for homebuyers who meet certain criteria. For example, the Georgia Dream Homeownership Program offers a 4.375% interest rate on 30-year fixed-rate mortgages for eligible homebuyers — plus down payment assistance for some borrowers. In many cases, this is a lower rate than the same borrower would qualify for elsewhere.

Check your city, county and state housing finance websites to see if you qualify for special rate programs. They often have favorable borrowing terms in addition to great rates.
There are also factors you can’t control, such as the movement of the 10-year Treasury bond yield, inflation and the Federal Reserve’s monetary policy decisions, that can impact mortgage rates.

Tips for getting the best rate on your mortgage

When it comes to buying a house, you don’t just need to house hunt; you need to shop for a mortgage. Homebuyers could potentially save more than $37,000 in interest over the life of a 30-year fixed-rate $300,000 loan by comparison shopping, according to research from LendingTree, MagnifyMoney’s parent company.

Your mortgage rate can make or break the affordability of a house, and it’s up to you to find the best one. These are the steps you can take to shop around.

Clean up your credit

Even before shopping for a mortgage, make sure to pay your bills on time and keep your credit usage low. Try to use less than 30% of your total available credit, like your limit on a credit card. Once you’ve started shopping, don’t close old credit accounts or apply for new accounts while you’re in the middle of the process.

Additionally, review each of your credit reports for errors and have any inaccurate information removed or corrected.

For more help with improving your creditworthiness, consider these tips for rebuilding your credit score.

Pay down your existing debt

Along with improving your credit score, lenders want to see how well you’re managing your current debt load. If you’re maxing out credit cards and taking out loans left and right, that’s not likely to work in your favor when applying for a mortgage.

One of the most important factors that lenders consider is your debt-to-income ratio, or the percentage of your gross monthly income that is dedicated to debt payments. Most of the time, lenders will not extend mortgages to borrowers whose monthly debt liabilities eat up more than 43% of their income.

Use a rate comparison tool

The Consumer Financial Protection Bureau offers a tool that allows you to compare the interest rates in your state for various types of loans. Another option is to use a rates comparison tool, such as the one offered on LendingTree’s website. This will give you an idea of the ballpark your interest rate quote should be in.

To use these tools, you need to know your credit score, the amount you intend to borrow, down payment amount, loan term and loan type. By exploring the different options, you’ll get an idea of the rate landscape in your state.

Get a mortgage preapproval from multiple lenders

After you’ve found the mortgage lenders with the best rates, consider applying for a mortgage preapproval. A preapproval is a letter you receive from a lender that gives you an estimated loan amount and interest rate, based on a review of your financial information including bank statements, credit reports, pay stubs and tax returns. Preapprovals are conditional and often last for about 90 days.

You can compare your preapproval offers to see which lender is offering the best combination of rates and fees. Ask for a worksheet that outlines your estimated fees once you have your preapproval.

A preapproval isn’t subject to full underwriting or an appraisal. Rates can change after you get a preapproval, though in some cases you can lock an in interest rate at this point.
Your preapproval letter has the added benefit of giving you something legitimate to submit with an offer on a home. Home sellers like to see preapprovals because it means you’re likely to have access to the financing to close a deal.

Once you’ve been preapproved, you can start shopping for houses, submitting bids and negotiating home prices.

Lock in your mortgage rate

Once a home seller has accepted your offer and you’ve also chosen your mortgage lender, it’s time to speak with that lender about your mortgage rate lock options.

A mortgage rate lock is a feature lenders offer during the homebuying process that allows you to lock in your mortgage rate for a predetermined time period. When you have a rate lock in place, your mortgage rate won’t change from the date the lock takes effect until your closing date, with the caveat that you actually close on your mortgage before the rate lock expires.

Some common rate lock terms include 30, 45 or 60 days. If your mortgage doesn’t close in time, then you’ll need to purchase a rate lock extension, which could cost up to 0.50% of your loan amount.

Determining a budget for your mortgage

Finding a great rate on a loan that you can’t pay back is a sure way to destroy your credit. Before you apply for a loan, establish a realistic budget for your monthly mortgage payment and avoid borrowing more than you can comfortably afford to repay.

No matter how large a loan you can qualify for, you need to be a savvy consumer. Keep your monthly mortgage payment (principal, interest, taxes and insurance) at or below 30% of your gross monthly income.

Before you start shopping for houses, determine how a mortgage will fit into your budget. Don’t succumb to pressures to overextend yourself. A burdensome mortgage has the power to turn a dream house into a nightmare. You can avoid the nightmare by planning ahead.

You’ll also need to determine your non-mortgage-related recurring costs before committing to a new loan. Calculate income taxes, transportation and child care or education costs. If you pay alimony or for out-of-pocket health care, consider those costs as well. Additionally, factor in the costs of home maintenance. Experts recommend setting aside 1% to 3% of your home’s purchase price annually for maintenance and upgrades.

In addition to establishing a budget, you need to understand how to find the right features on a mortgage. A great rate on a bad mortgage could spell financial ruin. When you’re shopping for loans, ask yourself these questions:

How long will you stay in the home?

Some buyers purchase houses with the intention of staying just a few years. Someone who plans to sell in a few years might consider an adjustable-rate mortgage rather than a fixed rate, since interest rates are typically lower in the first few years. However, an adjustable-rate mortgage is risky for someone who intends to live in a home long term.

How risky is your financial situation?

How stable is your income? What about your savings? If you have access to a hefty amount of savings, consider making a larger down payment and choosing a 15-year mortgage over a 30-year mortgage to borrow less and grab a lower interest rate.

People with a moderate income and little savings might feel more comfortable with a smaller down payment and a longer payoff period. This will mean paying mortgage insurance and higher financing costs, but they can be worth it for peace of mind.

What about closing costs?

An advertised interest rate doesn’t account for your total cost to borrow money. Most banks make their real money by charging closing costs. These include loan origination fees, recording fees, title inspection fees, underwriting fees and application fees.

All the financing charges will be disclosed on your Loan Estimate. The document will also provide you with an annual percentage rate (APR), which expresses the total cost of borrowing money, including the financing fees.

Closing costs can range from 2% to 5% of a home’s purchase price, and in some cases can be rolled into the loan. Check with your lender for more information about payment options.

Can you accelerate your payments?

Some borrowers cut their total interest costs by accelerating their mortgage payoff. If you have room in your budget to tackle your mortgage debt more quickly than expected, you can save money in the long run.

Making biweekly mortgage payments works out to an extra mortgage payment every year. This cuts a 30-year mortgage down by more than four years, and can shorten your loan term even more if you frequently pay more than expected.

If you have a conventional loan, making extra payments can help you achieve 20% equity faster, which will allow you to drop PMI payments. For FHA borrowers, building your equity at a faster pace means you can possibly refinance into a conventional loan and drop your mortgage insurance premiums, provided you have a 80% LTV ratio or lower.

Common mortgage lingo

Sometimes the most difficult part about shopping for a mortgage is understanding the terms that lenders use. Below we’ve defined a few of the most common mortgage terms that you should know before you commit to a loan.

  • Interest rate: The amount charged by a lender for a borrower to use the loaned money. This is expressed as a percentage of the total loan amount.
  • APR: The annual percentage rate is the total amount that it costs to borrow money from a lender expressed as a percentage. The APR factors in closing costs and other financing fees.
  • Amortization schedule: A table that shows how much of each payment goes to the principal loan balance versus the interest portion of the loan.
  • Term: A set period of time over which a fixed loan payment will be due (often 15 or 30 years).
  • Fixed-rate mortgage: A mortgage where the interest rate stays the same for the entire term of the loan.
  • Adjustable-rate mortgage: A mortgage where the interest rate changes based on factors outlined in the loan agreement. Adjustable-rate mortgage (ARMs) are considered riskier than fixed-rate mortgages due to the potential volatility of payments. An example of this loan type is the 5/1 ARM, which has a fixed interest rate for the first five years and then increases once each year thereafter for the life of the loan.
  • Interest-only mortgage: A mortgage where a borrower pays only the interest on a loan for a fixed period (usually 5-7 years).
  • PMI: Private mortgage insurance is a product that protects a bank if you default on your mortgage. Lenders often require borrowers with less than 20% equity to purchase PMI.
  • Jumbo mortgage: A mortgage that is larger than the standards for a “conforming loan” set by government-backed agencies. In most parts of the U.S., a jumbo loan must be larger than $484,350. In some of the highest cost of living areas, a jumbo is in excess of $726,525.
  • Fannie Mae: The Federal National Mortgage Association is a government-sponsored enterprise that purchases mortgages that meet certain criteria from banks that issue the mortgages.
  • Freddie Mac: The Federal Home Loan Mortgage Corporation is a government-sponsored enterprise that purchases mortgages that meet certain criteria from banks that issue the mortgages.
  • Conforming loan: A mortgage that meets the funding criteria of Fannie Mae and Freddie Mac. The most stringent criteria is the loan amount.
  • FHA loan: A loan guaranteed by the Federal Housing Administration. Qualifying standards are not as stringent, but the fees are higher. In addition to annual mortgage insurance premiums (similar to PMI), borrowers pay an upfront premium when they take out the loan.
  • VA loan: A mortgage guaranteed by the Department of Veterans Affairs. Servicemembers and veterans can purchase houses with a $0 down payment when using a VA loan, provided they meet other lending criteria.
  • Down payment: The initial payment that a homebuyer supplies when purchasing a home with a mortgage.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Mortgage

Is There an Age Limit for Getting a Mortgage?

Monday, April 29, 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Tamara HolmesTamara Holmes
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Becoming a homeowner is often seen as one of the most universal signs of personal financial achievement, no matter what your age. While, technically, there is no age limit for getting a traditional mortgage, there are some age-related homebuying guidelines you should keep in mind.

How old is too old to get a mortgage?

Because a mortgage is a legally binding contract that allows you to finance the cost of a home over a long period of time, some people might wonder if there are age limits involved. For example, if you’re 75, could a lender refuse to let you take out a 30-year mortgage? After all, the average life expectancy in the United States is 78.6, according to the Centers for Disease Control and Prevention.

The good news for seniors who are looking to buy a house is that it is against the law for a mortgage lender to discriminate against you based on age. The Equal Credit Opportunity Act (ECOA), which came out of the Civil Rights Act of 1964, says lenders cannot deny you credit based on age, as well as other criteria like race, color, religion, national origin, sex or marital status. The Fair Housing Act of 1968 adds even further protections, specifically stating that it’s against the law to discriminate in any residential real estate transaction.

However, there are some instances in which a lender could consider a lendee’s age indirectly. A lender may look at whether you are close to retirement age and make a decision based on your having enough income to handle the loan, according to the Consumer Financial Protection Bureau. But again, in this instance, the disqualifying factor is not your age but rather your ability to manage loan payments.

How young is too young to get a mortgage?

Can age be a discouraging factor when it comes to getting a mortgage if you’re closer to high school graduation age than retirement?

Lenders can’t deny a mortgage application solely because of your age, but states do have laws that determine the age at which a contract can be negotiated. For example, in Virginia, you must be 18 to enter into a legally binding contract, which would include a mortgage.

Your age may also affect your ability to meet other requirements for being approved for a mortgage loan.

  • Lenders evaluate your income to see that you have enough to make the mortgage payments. If you’re under 18 or even in your early 20s, it’s unlikely that you’ll have a job in which you make enough to take on a mortgage.
  • Lenders also typically require you to have a certain credit score. For example, the minimum credit score needed to take out a Federal Housing Administration (FHA) loan is 500. Yet 62 million Americans have what’s known as a thin credit file, meaning they don’t have enough of a credit history to generate a credit score. Young people who haven’t had time to build a credit history by using credit cards or taking out loans are likely to fall in this category. If you don’t have a credit score, it may be very difficult to get approved for a mortgage.
  • Finally, homebuyers typically need to make a down payment. For example, FHA loans require a minimum 3.5% down payment. For a $200,000 house, that’s $7,000. Many young people might find it challenging to come up with that amount or more.

Some people who wouldn’t otherwise qualify for a mortgage look to a cosigner to help them get approved. A cosigner basically agrees to pay the debt if you are unable to pay. Having a cosigner with good credit could increase a young person’s chances of getting a mortgage loan if he or she is old enough to enter into a legally binding contract.

The risks of taking out a mortgage at an older age

Just because you can legally take out a mortgage at any age, doesn’t mean it’s always be the wisest move. A mortgage is a long-term commitment, and you want to make sure you’re ready for it. If you’re a senior and thinking about taking out a mortgage, consider the following risks.

  • Mortgage debt can hamper your day-to-day finances. When people retire, they typically live on a fixed income. There are no more promotions to look forward to, or year-end bonuses to give your finances a boost. Some seniors may find it challenging to make those mortgage payments month after month, along with their other expenses on a fixed income. If a financial crisis hits, they could experience a financial disaster. The Consumer Financial Protection Bureau points out that this did, in fact, happen during the Great Recession of 2007-09. Many older homeowners struggled to pay their mortgages and eventually foreclosed on their homes.
  • Unexpected repairs can throw your budget for a loop. Your mortgage payment isn’t the only thing you’d have to worry about. Most homeowners at some point experience the sticker shock that comes with appliance replacements and major repairs. If you’re living on a fixed income, replacing a roof or buying a new furnace may be too much to handle on top of the regular costs of homeownership. Also keep in mind that if you’re handy around the house and have been able to do your own repairs, you might not be able to do as much physical work as you age. In that case, you’d likely have to pay someone to do the jobs you used to be able to do.
  • You’ll likely have less time to build equity. One reason people buy real estate is so they will have something to pass down to their heirs. If you buy a house at an older age, there’s a higher chance you won’t live in the house long enough to build a lot of equity. In that case, if you die and your house is left to heirs who want to sell it, there may not be much of an inheritance for them to split.

Which mortgage products have age limits?

While age alone can’t stop you from becoming a homeowner, there is one type of mortgage product where age is a qualifying factor: a reverse mortgage. A reverse mortgage allows you to access the equity in your home. Instead of the borrower making a monthly mortgage payment, the interest is added to the amount you borrow. Over time, the balance you owe on the house rises, while the amount of equity you have decreases. You can learn more about how reverse mortgages work here.

Typically, the loan becomes due when the borrower dies, sells the house or moves out permanently. In some cases, the loan may be due sooner if the borrower fails to pay real estate taxes or insurance, or make necessary repairs.

Why would someone want a mortgage product that creates a larger balance over time? Many seniors use them to pay for retirement expenses.

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM). HECMs are backed by the U.S. Department of Housing and Urban Development, and they are federally insured.

Because reverse mortgages are intended to help seniors use their equity to stay in their homes and live better in retirement, there is an age requirement. In order to qualify for an HECM reverse mortgage, at least one borrower must be 62 or older. Other requirements for reverse mortgages include:

  • You must own the house and have equity.
  • The house must be your primary residence.
  • You must have enough income to pay for taxes and insurance on the house.

If you are not 62 but your spouse is, he or she might qualify for a reverse mortgage, but because of your age, you would not be able to qualify as a co-borrower. If that’s the case, you may have to move out if the borrower dies, unless you qualify as an “eligible non-borrowing spouse.” To qualify, you would have to have been married to the borrower when the loan closed, the home must be your principal residence and you must be named a non-borrowing spouse on the loan’s documents.

The bottom line

Age plays a role in many of our biggest decisions. Whether we’re thinking about marriage, starting a business or retirement, we often consider whether the timing is right to pursue these goals. While age can’t legally deter you from buying a house, you should always weigh the pros and cons of buying a house at a particular time in your life. For seniors who are 62 or older, homeownership can present other opportunities, such as the ability to take out a reverse mortgage. Before making any decision, make sure you have a good understanding of all of your options. If you are considering buying a home, you can check your mortgage rates here.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be 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 financial institutions or all products offered available in the marketplace.

Tamara Holmes
Tamara Holmes |

Tamara Holmes is a writer at MagnifyMoney. You can email Tamara here

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