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Mortgage

Should I Get a Digital Mortgage?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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It seems so easy: Just download an application on your smartphone, spend 10 to 15 minutes inputting some information, and in minutes you’re pre-approved for a loan to buy a house. Digital mortgage products are coming to a neighborhood near you, but not all digital mortgage platforms are created equal.

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“There’s a mix of lenders right now,” said Tendayi Kapfidze, chief economist at LendingTree. “There are some lenders that have an almost completely digital process, and some lenders who have a partial digital process. But, ultimately, the industry as a whole, from application to underwriting and processing the application, is moving toward a digital structure.”

For some borrowers this could mean a much faster process with fewer documents — but it’s important to understand how the digital loan process works before you decide if you should get a digital mortgage.

What is a digital mortgage?

There is no uniform definition of a digital mortgage. Some lenders have digitized only the initial application process, while others have streamlined the processes to the point where borrowers need to provide little more than an initial application and e-signatures — the rest of the verification is done automatically.

According to a recent survey by Fannie Mae, the primary reason that consumers want a digital mortgage experience is to reduce the amount of paperwork they have to provide. Because mortgages need to verify their borrowers’ income, assets and credit, it’s not uncommon to provide dozens, if not hundreds, of pages of documents to obtain a final approval.

All of the regulatory changes of the past decade have resulted in new mandatory forms that can easily bring the total page count of an initial loan package to 80 pages or more. Being able to e-sign can save printer ink, paper and above all, time and paperwork stress overload.

Here we’ll discuss how the different parts of the loan process have been digitized, and what you can expect from each.

The digital loan process

The digital mortgage approval process is not that different from the standard process of getting pre-approved for a home loan. Your income, credit and assets still need to be verified; the lender still has to determine the market value of the house you are buying; the title officer still needs to review the ownership history to make sure you can take possession of the home without any problems.

What’s different is how much paperwork, if any, you’ll need to provide to complete your loan.

The digital loan application

Most loan officers will be able to give you access to a link to apply for your mortgage online. The lender will be automatically notified by email when the application is finished, and the loan officer can often provide you with an automated approval decision within minutes of the completion of the application.

You may be able to fill out the application from a smartphone, but in most cases it will be easier to complete the loan on a desktop or laptop. Many digital loan application sites will also give you the option to begin uploading initial documents like paystubs, W-2s and bank statements, so the loan officer can give you a solid pre-approval.

A growing number of lenders actually have a dedicated app that you can download to your smartphone to fill out the application quickly. Some of the apps will allow you to access data about the status of your application, so you know what’s going on at every step of the loan process.

Digital disclosure signing

Once you’ve shopped around for your mortgage loan and found a company you want to work with, they’ll send you loan disclosures. These include a loan estimate that outlines the preliminary costs of your loan, as well as the interest rate and monthly payment.

Besides the loan estimate, you will need to review several other federal forms, and there may be disclosures specific to the type of loan you are taking out. Some states have forms as well. You can scroll through and read each document, and once you’re done, e-sign the documents to let the loan officer know you wish to proceed with the full processing of your loan approval.

Digital loan documentation gathering

Once your loan officer has provided you with an automated pre-approval, you’ll need to provide all the documentation that is required. Most often, this will require at least a current paystub and W2, and a current bank statement.

Depending on who you bank with, and how large your employer is, some lenders may be able to access your information through your employer’s automated employment services platform. They might also be able to access your banking information through a digitized platform that gives them access to your bank balances and transaction history.

In a perfect digital world, this could mean that you wouldn’t have to provide any income or asset documentation at all to be approved for a loan.

Digital communications throughout the process

You can expect to be notified by email or text, or both, throughout the process in the digital mortgage lending world. Messages may include correspondence directly from the loan underwriter regarding any items outstanding with your approval, as well as milestone updates on the closing timeline, and any pending deadlines like your contract closing or lock expiration date.

Many of the new digital apps will allow you to check on the status of your loan in real time, with the same access to the loan information that is provided to the loan processor.

Appraising your home the digital way

Fannie Mae and Freddie Mac have re-introduced an option that allows for a loan to be approved without a full appraisal. If your property receives a Fannie Mae property inspection waiver (PIW) or a Freddie Mac automated collateral evaluation (ACE), you may not need to have an appraisal.

That’s great news for a few reasons. First, obviously, is the savings of $350 to $700 on the appraisal fee. Second is not having to wait the 7 to 10 days it can take to complete a traditional appraisal, which requires an inspector to evaluate not just the property you are buying, but comparable properties, while condensing the findings into a 40-page report called a uniform residential appraisal report (URAR).

Title work the digital way

Title insurance is required on any mortgage loan to protect the lender, and ultimately you, from claims against the property you are buying due to claims against a prior owner. Like all of the other digital processes, lenders have begun offering a digital version of title work.

Not all title companies are participating in digital signings, and the title company has to have special authorization to perform extra due diligence since you’ll be signing without being present in person — creating an addition layer of fraud risk for the title company.

The digital closing process

The digital closing disclosure process is very similar to the digital loan estimate disclosure process. The only difference between the loan estimate and the closing disclosure is that the loan costs are finalized, and once you’ve signed a closing disclosure, very few changes can be made.

Once the closing disclosure goes out, most lenders still require you to sign in person at a title company, in front of a notary, and provide a picture identification to an attorney or escrow officer who will witness your signature on the loan documents. Once the package is signed, the lender sends the wire of the loan funds, and the property records into your name and you receive your keys.

The digital closing allows you to sign the entire package electronically. That means you can sign wherever you are with e-signatures, and once the signing is complete, the lender funds the loan and authorizes the recording of the property into your name, and you officially become a homeowner.

When a digital loan makes sense for you

Digital loans hold a lot of promise for borrowers who have simple income, work for a large employer, and keep at least an amount equal to their down payment plus closing costs in the bank. Here are some characteristics of borrowers that will benefit the most from a digital mortgage experience.

Stable salaried or hourly income

If you’ve been on the job for two years and have stable or moderately growing income, the automated system will very likely only require a current pay stub. If you work for an employer that uses a third party employer verification system like “The Work Number,” it’s very possible you won’t have to provide any income documentation at all.

Down payment in the bank for two months

If you keep an average balance in your account that is about equal to what you’ll need for your down payment and closing costs, the automated system may only require a current bank statement. If you use a large national bank, some digital lenders may be able to access your balance and transaction history, and not require you to provide any bank statements at all.

Good credit

The higher your credit score is, the more likely you are to have very few conditions required by the automated underwriting system.

You are buying in a strong real estate market

If values in the area you are buying are steady or increasing, and you are making at least a 20% down payment, it’s very likely you won’t need an appraisal. The automated system can track recent closed sales from public records and if the property you are buying is priced within a reasonable range of those sales, you may be eligible for the appraisal waiver.

You are taking title individually

As long as you aren’t taking title in a trust or some type of business entity like an LLCs, the digital title option should be the simplest possible.

When you shouldn’t get a digital mortgage

If you’ve got income, credit or down payment challenges, lenders may end up having to take a more traditional approach to your loan approval. You’ll probably still be able to e-sign most of your documents, but other parts of your process will require more work and documentation on your part.

Income fluctuations and employment instability

If you’re new on the job, have had more than three jobs in the last two years, or have had large fluctuations in your income, you’ll need to provide extra documentation and explanations in order to obtain a final approval.

The same is true if you are self-employed — more than likely you’ll need to provide tax returns and profit and loss statements to show your income history and how the income is flowing currently. Commission, bonus and fixed income like retirement and Social Security may also require additional documentation.

Large deposits or gifted down payments

If you’ve recently deposited a large sum of money into your account, or are getting a gift for your down payment, the lender will require additional documentation for your approval. This will likely include a letter of explanation for where the funds came from for large deposits, and a paper trail of gift funds including a gift letter, and proof the donor had the funds on hand to gift to you.

Retirement fund liquidations, 401k loans or the sale of a vehicle for a down payment will also require additional documentation.

Credit issues

Low credit scores, or major derogatory events like bankruptcies and foreclosures, will require much more documentation and explanation, and may even require an exception by an underwriter to obtain approval.

Any of the above is likely to trigger a full appraisal requirement

If credit, income or down payment sources are challenging, more than likely the lender will require a full appraisal inspection. The lender will want to make sure the collateral for their loan is more solid, if they are making a loan to a borrower that has a higher risk of defaulting due to weaknesses in other parts of their loan application.

There are also property types that may trigger a full appraisal requirement, such as condominiums, multi-family properties, and any type of fix-up property. Keep in mind if you start off looking at single-family-residence and you are approved for an appraisal waiver, but end up buying a condo or other type of property, you could end up having to pay for an appraisal to finish the loan.

How to have a positive digital mortgage experience

There are a number of tips that will help improve your digital mortgage experience, as long as you’re prepared to do a little more work to fill out the most accurate and complete loan application possible. Although you may need minimal documents to close your loan, there are still a number of checks and balances the lender will make along the way, and any discrepancy from the information you provide could trigger a request for additional documents.

Here are a few things to watch for:

Provide accurate employer information and employment dates

Since digital mortgages are checking information against your employer’s database, you’ll need to make sure you provide accurate contact information, and start and end dates for the last two years of employment.

Be sure to use pre-tax income for your monthly pay — if there is a substantial difference between the pay you list on your application and the amount that is digitally verified, you could end up having to provide more income documentation and explanations for the difference.

Only add banking information for accounts you’ll use for your down payment and costs

If you have other asset accounts that aren’t needed for your down payment or closing costs, don’t list them on the application. Cash value life insurance accounts, IRAs or 401ks are only needed if you will be drawing money from them for your down payment.

Advantages and disadvantages of a digital mortgage

The table below provides a side by side comparison of the advantages and disadvantages based on the different parts of the loan process. Not all lenders are offering a fully digital experience, so use this table as a reference point when you’re talking to lenders about the digital process they currently offer for mortgage lending.

Digital loan processAdvantageDisadvantage
Loan applicationFaster decisions and ability to upload documents with initial applicationMay have compatibility problems with different devices and browser issues as well
Loan shoppingCompletely digital, with quick decisions and fee sheets generated by multiple lendersRequires the same information be input each time — any discrepancies in input could lead to inaccurate rate quotes
Loan documentationMay require little to no documentation, depending on employer and current bankAny variations in income stability or asset balances may trigger additional documentation requirements
Appraisal waiverMay not need an appraisal at allYou don’t get the valuable market information provided by a full appraisal
Digital title preparationAllows for e-signing of closing documentsLimited number of title companies participating means you may lose choice to shop for competitive rates
Closing document preparationStreamlined e-sign process means less signatures and a faster closing processAny changes to program, property, loan amount, price or closing costs could result in a traditional mortgage closing process
Final signing and closingMay allow for e-signing of closing documents, including deed of trust and noteLimited number of companies offer, and potential for identity theft since borrower signatures are not witnessed by someone in person

Final thoughts and conclusions

Although computer algorithms and digital processes can simplify the mortgage approval process, it’s not likely artificial intelligence will replace the value of a human loan officer. There are simply too many different chapters in most people’s financial histories, and although digital mortgages hold promise for a simpler process for the most qualified borrowers, anyone who has had bumps in their financial road will still benefit from a combination of digital improvements and the guidance of a knowledgeable loan officer.

One final caveat about digital mortgage lending: Be sure to check on the credentials of anyone you’re talking to if you’re only looking at online lenders. Applying for a mortgage requires you to provide more personal information than any other loan transaction you will make in your lifetime.

That means that hackers and identity thieves will go to great lengths to get access to your information by advertising themselves as digital lenders or loan officers. You should always verify the license of both the company and any loan officer you are talking to by going to the Nationwide Multistate Licensing System (NMLS) consumer access page — if an online lender contacts you first, ask them for a phone number to call them back, and verify it before you start giving them any financial information.

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.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

How to Recover From Missed Mortgage Payments

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Can you bounce back from a missed mortgage payment or two? The answer is yes, but there’s work involved. After all, your payment history has the greatest impact in determining your credit score.

Falling behind on your mortgage payments can affect your credit and finances, and you could lose your home to foreclosure. It’s critical to be proactive and not wait until it’s too late to get help.

How missed mortgage payments affect your credit

In most cases, mortgage lenders give you a 15-day grace period before charging a fee — often around 5% of the principal and interest portion of your monthly payment — for late payments. But your credit history typically isn’t impacted until you’re at least 30 days behind on a mortgage payment. At this point, your mortgage servicer may report your late mortgage payment to the three major credit reporting bureaus: Equifax, Experian and TransUnion.

Your credit score could drop by 60 to 110 points after a late mortgage payment, depending on where your score started, according to FICO research. Being 90 days late on your loan could lower your score by another 20 points or more.

It can take up to three years to fully recover from a credit score drop after being a month behind on your mortgage, FICO’s research found. Once you’re three months behind on your mortgage, that time can increase to seven years.

Recovering from missed mortgage payments

Falling behind on your mortgage can be a frustrating and scary experience, particularly if you’re facing the threat of foreclosure. Here are some options to help you get back on track after missed mortgage payments:

  • Repayment plan. Your loan servicer agrees to let you spread out your late mortgage payments over the next several months to bring your loan current. When your upcoming payments are due, you’d also pay a portion of the past-due amount until you catch up.
  • Forbearance. Your servicer temporarily reduces or suspends your monthly mortgage payments for a set amount of time. Once the mortgage forbearance period ends, you’ll repay what’s owed by one of three ways: in a lump sum, a repayment plan or by modifying your loan.
  • Modification. A loan modification changes your loan’s original terms by extending your repayment term, lowering your mortgage interest rate or switching you from an adjustable-rate to a fixed-rate mortgage. The goal is to reduce your monthly payment to a more affordable amount.

Be proactive about getting back on track and reaching out to your lender for help instead of waiting until you get late payment notices. If you think you’ll be behind soon or are already a few days behind, make contact now and review your options.

Extra help for homeowners affected by COVID-19

If you’re behind on mortgage payments because of a financial hardship due to the coronavirus pandemic, you may qualify for a mortgage relief program through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Homeowners who have federally backed mortgages, and conventional loans owned by Fannie Mae or Freddie Mac, can request mortgage forbearance for up to 180 days. They can also request an extension for up to an additional 180 days.

Federally backed mortgages include loans insured by the:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Veterans Affairs (VA)

Reach out to your mortgage servicer to request forbearance. Even if your loan isn’t backed by a federal government entity, Fannie Mae or Freddie Mac, your servicer may offer payment relief options. You can find your servicer’s contact information on your most recent mortgage statement.

How many mortgage payments can you miss before foreclosure?

Your lender can begin the foreclosure process as soon as you’re two months behind on your mortgage, though it typically won’t start until you’re at least 120 days late, according to the Consumer Financial Protection Bureau. Still, it’s best to check your local foreclosure laws since they vary by state.

Here’s a timeline of how missed mortgage payments can lead to foreclosure.

30 days late

Your lender or servicer reports a late mortgage payment to the credit bureaus once you’re 30 days behind. Your servicer will also directly contact you no later than 36 days after you’re behind to discuss getting current.

45 days late

You’ll receive a notice of default that gives you a deadline — which must be at least 30 days after the notice date — to pay the past-due amount. If you miss that deadline, your servicer can demand that you repay your outstanding mortgage balance, plus interest, in full.

Your mortgage servicer will also assign a team member to work with you on foreclosure prevention options. This information will be communicated to you in writing.

60 days late

Once you’re 60 days late, expect more mortgage late fees, as you’ve missed two payments. Your servicer will send you another notice by the 36th day after the second missed payment. This same process applies for every month you’re behind.

90 days late

At 90 days late, your servicer may send you a letter telling you to bring your mortgage current within 30 days, or face foreclosure. You’ll likely be charged a third late fee.

120 days late

The foreclosure process typically begins after the 120th day you’re behind. If you live in a state with judicial foreclosures, your loan servicer’s attorney will file a foreclosure lawsuit with your county court to resell the home and recoup the money you owe. The process may speed up in nonjudicial foreclosure states, because your lender doesn’t have to sue to repossess your home.

You’re notified in writing about the sale and given a move-out deadline. There’s still a chance you can keep your home if you pay the amount owed, along with any applicable legal fees, before the foreclosure sale date.

Can you get late mortgage payment forgiveness?

If you’ve otherwise had a good payment history but now have one missed mortgage payment, you could try writing a goodwill adjustment letter to request that your servicer erase the late payment information from your credit reports.

Your letter should include:

  • Your name
  • Your account number
  • Your contact information
  • A callout of your good payment history prior to missing a payment
  • An explanation of what led to the late mortgage payment
  • The steps you’re taking to prevent late payments in the future

End the letter by requesting that your servicer remove the late payment from your credit reports, and thank your servicer for their consideration. Print, sign and mail your letter to your servicer’s address.

The letter is simply a request; your servicer isn’t required to grant late mortgage payment forgiveness. If your servicer agrees to remove the late payment info from your credit reports, your credit scores may eventually increase — so long as you continue to make on-time payments.

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.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

What Is the Minimum Credit Score for a Home Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a home loan gives you a baseline to help decide if it’s time to apply for a mortgage, or take some steps to boost your credit first.

It’s possible to get a mortgage with a score as low as 500 if you can come up with a 10% down payment. Keep reading to learn the minimum credit score requirements for the most common loan programs.

What are the minimum credit scores for home loans?

Your credit score plays a big role in determining whether you qualify for a mortgage and what your interest rate offers will be. A higher credit score means you’ll likely get a lower rate and a lower monthly mortgage payment.

There are four main types of mortgages: conventional loans, and government-backed loans insured by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Conventional loans, which are the most common loan type with guidelines set by Fannie Mae and Freddie Mac, have a credit score minimum of 620. Although some loan programs don’t specify a minimum credit score needed to qualify, the approved lenders who offer them may set their own minimum requirements.

The table below features the minimum credit scores for these home loans, along with minimum down payment amounts and for whom each of the loans is best.

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

Conventional6203%Borrowers with good credit
FHA500-579 with 10% down payment
580 with 3.5% down payment
10% with a score of 500-579
3.5% with a minimum score of 580
Borrowers who have bad credit and are purchasing a home at or below their area FHA loan limits
VANo credit minimum, but 620 recommendedNo down payment requiredActive-duty service members, veterans and eligible spouses with VA entitlement
USDA640No down payment requiredBorrowers in USDA-eligible rural areas with low- to moderate-incomes

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to more attractive rates and loan terms. A good credit score can also provide you with more choices for home loan financing.

  • 740 credit score. You’ll typically get your best interest rates for a conventional mortgage with a 740 (or higher) credit score. If you make less than a 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score. This is the lowest credit score you can have to qualify for an FHA loan, but you must put 10% down to qualify.

Annual percentage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage.

Here’s a glimpse of the annual percentage rates (APRs) and monthly payments lenders may offer to borrowers at different credit score tiers on a $300,000, 30-year fixed loan. APR measures the total cost of borrowing, including the loan’s interest rate and fees.

FICO Score

APR

Monthly Payment

760-8503.011%$1,267
700-7593.233%$1,303
680-6993.410%$1,332
660-6793.624%$1,368
640-6594.054%$1,442
620-6394.6%$1,538
*Based on national average rate data from myFICO.com for a $300,000, 30-year, fixed-rate loan as of May 4, 2020.

As the credit score ranges fall, the interest rates are higher. Borrowers with a score of 760 to 850, the highest range, saw an average monthly payment of $1,267. Borrowers in the lowest credit score tier of 620 to 639 saw their monthly payment jump to $1,538. The extra $271 in monthly payments adds up to an additional $97,560 in interest charges over the life of the loan.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, follow some of these tips that may help boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Pay off balances monthly. Try to pay your entire balance off each month to show you can manage debt responsibly.
  • Keep your credit card balances low. If you do carry a credit card balance, charge 30% or less of the available credit limit on each account.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get your best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

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.