Credit scores and mortgage loan approval

Minneapolis / St Paul, MN:  When buying a home, your credit matters. Credit scores and mortgage loan approval go hand in hand, and are one of the most important factors in the loan approval decision.  With places like Credit Karma, and getting your credit score with your credit card statement, most people have a pretty good idea of where they scores average.  But how does that score correlate to mortgage loan approvals, and what credit score do you need for loan approval?

What Credit Scores Mean In Mortgage Approval

Understandably, the better your credit score, the more likely you’ll get approved for a loan, and the more options you’ll have. Also understand that credit score alone does not get you approved like it does in car loans. Mortgage loans still look at many other things, including debt-to-income rations, job stability, size of down payment, past bankruptcies and foreclosures, etc.

Credit score factors

Standard Conventional Loan Scores

  • 740 score and higher = Access to all program options, and the best rates in the market
  • 720 – 739 score = Access to all program options, and maybe a slight increased rate (.125%)
  • 700 – 719 score = Access to most program options, and maybe a slight increased rate (.25%)
  • 680 – 699 score = Some higher risk program options disappear, and a slight increased rate (.375%)
  • 640 – 680 score = All higher risk options go away, and a bigger increase to interest rate (.50%)
  • 620 – 639 score = Very few lenders offer loans in this range
  • 619 or less = Denied

FHA and VA Loan Scores

  • 640 and above = Generally approved, and the best rates available
  • 620 – 639 = Lots of lenders don’t offer below a 620 score, and interest rate slightly higher
  • 580 – 619 = Huge amount of lenders no longer offer FHA or VA loans at this score level, and rates .50% higher
  • 500 – 579 = Very limited number of lenders offer these loans. Very hard to get approved. Minimum down payment jumps to 10% for FHA loans.  Rate easily .50% higher or more.

Other factors also come into play, for example, most down payment assistance programs are not available with credit scores below 640.

Clearly credit is important in the mortgage loan approval process. Always best do work on improving credit before applying for a home loan.

Ready to apply?  For home mortgage loans in MN, WI, and SD, just click here to get started.


Why APR is not the best tool for comparing loans

Minneapolis, MN: I see it all the time. Arm chair financial guru’s always claim that using APR annual percentage rate is the best way to shop for a mortgage loan. While in theory, that is correct, in practice, it could end up giving you the wrong home loan.

The Federal Government requires APR to be disclosed right along side the loans interest rate as a means to help borrowers make an informed loan decision. Everyone understands the interest rate. Lower rates equal better deals and lower payments, but few people understand APR.APR Annual percentage rate

The APR takes the base interest rate, then factors in all of the following, and more; lender fees, discount points, days of interest, points to buy down the rate, and mortgage insurance (if applicable). If two lender quote you the exact same interest rate, the lender with the lower APR is supposed to be a better deal because of less costs and fees. So in theory, the lender quoting you the lower APR is always the better deal, right?

Wrong. The truth is that APR is a very poor way to comparison shop for a mortgage, because it can cause borrowers to make costly bad decisions.

APR was created to provide a way for borrowers to account for closing costs associated with the getting a mortgage loan. This sounds good in theory because it can be very confusing for home buyers to compare loans.

APR calculations are based on bad assumptions.

The first issue is APR assumes zero inflation, and that the value or buying power of a dollar today will be exactly equal to the value of a dollar 10-years,  20-years, or even 30-years from now.

Next, the APR calculation assumes that the mortgage loan will never be pre-paid or paid off early. That means no refinancing or selling the home. This is highly unlikely since the average life of a home mortgage loan is less than seven years.

Just think about your own loans: Is it rare to see the same loan in place for the full term of the loan. You only get the actual APR listed if you carry a loan fully to term.

Mortgage interest is front end loaded, meaning you pay more interest than principal in the beginning years of a loan, while towards the end of the loan, you pay more in principal than interest. So assume you got a APR quote of 4.21%. Your actual APR would only be 4.21% is you carried that loan for the full 30-years, and never pre-paid a dime.  If you sold the home after a much shorter time, your actual effective “APR” could be 15%, or even higher.

The APR calculation also does not consider the time value of the money. So if you spent a few thousand dollars buying down the interest rate with discount points, APR calculation does not give any value to the money if it wasn’t spent on closing costs.

APR does not take tax consequences into consideration. This can be significant, since higher closing costs on the mortgage loan may not be deductible, while the higher interest rate typically is deductible.

Finally, APR can also still be easily manipulated by bad lenders, making it totally worthless for real life comparisons. 

Real World APR Considerations.

I spoke earlier of two lenders giving you the same rate, and comparing APR. But what if two lenders give you different interest rates? Now comparing loans with the APR calculation is totally confusing. The lower rate will always have a lower APR, but what did it take to get the lower rate?

Let us assume a $150,000 loan. Lender A is offering a great low rate of 4.250 percent and $3000 more in points Lender B, who is offering a higher rate of 4.625 percent, but with no points. Which one is better?

The payment difference between the two interest rates is just $34 per month. So is it worth paying $3,000 in points to Lender A in order to save $34 per month? Maybe. Maybe not.

In this example, it will take a little over 7-years to break even on the additional up-front closing costs. If you are going to be in the home less than 7-years, this is a POOR loan choice. You paid more up-front than you ever saved, but you got a lower APR.  If you are going to be in the home 20-years, paying the higher cost for the lower interest rate is a great choice.  You save more in interest than it cost up front.

Many mortgage companies these days quote no origination fee loans. These lower closing costs sound great, but but they don’t really have lower closing costs, and they sure as heck are not working for free. To give you those lower closing costs, they simply INCREASE the interest rate they offer.

There is also the opposite, this is called discount points, where you pay more money up-=front today in exchange for a lower interest rates.

But wait, to make the decision even more complicated (if that’s possible), borrowers rarely take the value of to day’s dollars and cash flow into account. If you are going to be in the home 20+ year, but you don’t really have the additional $3,000 costs, now what?

How about the other direction again. Maybe you know you’ll likely be in the home 20 plus years, but you don’t really have the extra $3000, or don’t want to spend the extra money today to get the lower rate.

Worse yet is on a refinance loan, where they tease you with super low rates, but you end up financing the discount points into the loan itself… Yikes.

APR annual percentage rate

The bottom line is that you should forget APR annual percentage rate by itself to pick a loan. Instead, do simple math in conjunction with an analysis of the cost benefit of lower rate/higher costs, or higher rate/lower costs as it pertains to your individual situation and cash flow.

Any skilled professional Loan Officer can assist you with all of these calculations. We lend in MN, WI, and SD.


The Digital Mortgage Truth

The Digital Mortgage truth is much different than the hype.

Minneapolis, MN: It is 2018. The number of people who physically step into a bank or mortgage lender to do a home loan application is dwindling everyday. The vast majority of complete an online loan application on a desktop computer or iPad, or even apply via a Smartphone.

Digital Mortgage

Technology allows lenders to do more parts of the process electronically that ever before, including electronically signing application documents, secure uploading your documents, and even apps that shows the current status of your application 24/7.

Very cool technology, with this process now commonly referred to as a ‘Digital Mortgage’.

I see many places claiming using a digital mortgage will save you a ton of money. Mainly because somehow this streamlines the process, blah blah blah.

Taking the loan application online is only one small part of the mortgage loan process.

You still need to supply W2’s, pay stubs, bank statements, tax returns, etc. We still need processors, underwriters, and a large number of  back office staff.

While yes, we can now get some  of these documents electronically, I haven’t done a single loan yet without needing the client to supply at least s half of these standard supporting documents themselves.

You still need, and still want to have a conversation with a licensed professional Loan Officer to discuss your wants, needs and goals. To analyze your situation, to determine the correct loan for you, to answer any questions, and walk you through the process.

Yes, you can complete a loan application in 10 minutes on your phone, but that is a long long long way from being fully approved and actually successfully closing a mortgage loan.

There is no fast rocket way to circumvent the bulk of the mortgage process. So don’t be fooled or make a lender choice simply because of a gimmicky claim of a digital mortgage process. That just isn’t reality – yet. It is the largest financial transaction of your life. Don’t entrust it to your cell phone.

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Ready to get started?

It’s easy. Simply complete the Online application.  You’ll be applying directly with me, Joe Metzler, an experienced, multiple award winning Loan officer with over 20-years in the the business. We lend in MN, WI, and SD. Learn more about me HERE.

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Dangers of Dual Agency on real estate transactions

The dangers of dual agency real estate transactions, and using the same real estate agent to buy your home that is also selling the home is a little more troubling than most home buyers are aware.

It’s common to walk into an Open House, look around, and start talking to the real estate agent listing the home.  If you don’t already have your own agent, but love the home, you may be tempted to just use the agent selling the house.  While completely legal, and while it may seem OK on the surface, it is wrought with possible issues.

The first thing to know is that real estate agents commonly refer to this situation as a ‘hogger’. This simply means they get to keep all of the commission the seller is paying for themselves when they represent both the seller and the buyer. Typically when there is a separate buying and selling agent they split the commissions. On a pretty standard 6% listing fee, the listing agent would keep 3.3% of the commission, and pay 2.7% to the buyers agent. If they can double their pay, an agent might be over  incentivized to close a deal no matter what.

Many buyer think that a dual agent will reduce their commissions, saving them money. While they can do this, it rarely even happens.

But the bigger concern element is that the duty of the agent in this situation is to the seller. They have no duty to the buyer. An example would be that the agent knows the seller is willing to take $10,000 less on the house, but the agent has no duty whatsoever to tell share this confidential information with you just because you are using the same agent.

Also, without your own agent, you have no one advising you if the listing price is even reasonable. If you have your own agent, your agent will generally review similar properties to tell you if this one is priced low, about right, or high. The listing agent will likely defend the listing price as it, meaning you could easily over pay for the home.

TIP: Although you may feel like you have to make the decision whether to accept a dual agent on short notice, don’t be tempted. It’s possible to find a buyer’s agent to step into the transaction and assist you in a matter of hours. Best to always have your own buying agent. Someone fighting for YOU!

If I’ve pre-approved you for your mortgage loan, I’ve worked with hundreds of good real estate agents in the Minneapolis / St Paul area, and can easily get a great one to call you right away.

PROHIBITED BY LAW

A much lesser known, but to me more troubling issue is that when you hire a real estate agent to list your home, and the same company represents the buyer, your agent is prohibited by law to negotiate on your behalf?

WTF?

Yes, its true. It is because of a Minnesota law called ‘Dual Agency’, and companies with hundreds or even thousands of real estate agents end up having many ‘in-house’ transactions. This forces sellers to sacrifice their exclusive representation because even though you have two different agents, they work for the same company.

Before entering into any of these types of dual agency agreements, however, you want to understand the legal implications and how it might affect your ability to get the best possible deal in buying or selling a home. You’ll see dual agency notifications in the piles of paperwork you sign when making an offer, but virtually no one buying a home understands what it means.


Use lender credits to pay closing costs

Minneapolis, MN:  The biggest challenge for most home buyers, especially first time home buyers, is coming up with the required down payment.  While most people understand down payment, they are shocked to learn their are mortgage closing costs. Wose yet, is discovering how much closing costs can add up to.

Mortgage loan closing costs cover many items, including appraisal, credit report, state deed taxes, title company costs, title insurance, lender costs, and more.  Plus you also have something known as pre-paid expenses which need to be paid too, including buying your first years home owners insurance policy, and one time pro-rated property taxes, which are based on when property taxes are due, and what month you close on your new home.

While closing costs and pre-paid items are actually separate, it is very common for people to combine both of them together, and simply say ‘closing costs’.

CLOSING COSTS ARE NOT 3%

I hear it day after day after day, that closing costs are around 3% of the purchase price. This generalized statement couldn’t be more wrong!

Closing costs vary based on many factors, including the homes purchase price, state, property taxes, loan program, and the buyers choice of how to pay for them.

This misinformation comes from the fact that conventional loans only allow for a home buyer to roll into the loan closing costs up to 3% of the purchase price.

Many loan closing costs are based on the loan amount, and the rest are the same regardless of the homes price.  For example, standard loan origination costs are 1%.  So 1% of a $100,000 loan is just $1,000, while a $400,000 loan of course equals $4,000.

Items like the appraisal may be the same for both the $100,000 home or the $400,000 home. While the cost is the same for either house, the $400 appraisal fee is 1% of a $40,000 home, but only 0.10% of the $400,000 home.

Another good example are Title Company charges. Standard Title Company closing fee is usually a flat fee, but the required title insurance varies based on purchase price.

HOW TO PAY FOR CLOSING COSTS

Mathmatically, the best way to pay for your loans closing costs will always be to pay cash out-of-pocket. Realistically, especially for first time home buyers, this makes the amount needed out of reach.

Mortgage loan programs always require you bring your down payment, but closing costs can be rolled into the loan a few different way.

  1. Seller paid closing costs
  2. Lender Credit
  3. Combination of both

I dislike the term ‘Seller paid closing costs’, as many people thing the seller is paying it, and therefore it is free. The reality is that while the purchase agreement says the seller is paying, the person actually paying is the buyer. You are just paying over time.

For example, assume the seller has listed the home for $200,000. You make a full priced offer at $200,000, but your offer also asks the seller to pay the maximum conventional loan allowed closing costs of 3% ($6,000).

If the seller says YES, many people think you got closing costs for free. But think about it.  The seller actually netted just $194,000 in their pocket. So you could have made an offer for $194,000 and paid your own closing costs. The seller got $194,000 either way, but you rolled your closing costs into the loan, opting to pay the costs over time, versus up-front today.

Lender credits is another tool. With lender credits, the lender will increase your loans interest rate in exchange for reducing your out-of-pocket closing costs today.  You can choose a small rate increase with a small lender credit, all the way to absolutely no closing costs whatsoever with a much larger rate increase.

You may also see lender credits employed in a different way too.  For example, many lenders will scream things like ‘no lender fee’, or maybe ‘free appraisal’ if you use them. All they are doing is increasing the interest rate a bit to offset normal costs – but not telling you.

The most common one we see is no loan origination options, which will generally increase a 30-year fixed rate loan by 0.25%.

ARE LENDER CREDITS GOOD OR BAD?

Increasing your loans interest rate never sounds good, but does thing make lender credits bad? Think of them as a financing tool, and your personal situation?  Do you have the cash to pay your own closing costs? Maybe you have the money, but would rather use it to improve the home.  Lenders credits might still be a good choice.

Do you not have the money? Then it may be a matter of using lender credits, or not buying the home at all. In this case, a small amount all the way to complete no closing costs via lender credits may be your sole option.

Click here to apply online

We lend in MN, WI, and SD.  Equal housing lender. NMLS 274132

Lender credits


Dispelling VA loan myths

Minneapolis, MN: VA home loans are one of the greatest benefit to our U.S. Military personal that most vets will ever use. Dispelling VA loan myths that prevent them from using their benefits is therefore very important.

VA mortgage loans in Minnesota, Wisconsin, South Dakota. VAMortgageMN.com

VA loan Myth 1):  All veterans are guaranteed a VA loan.

Reality: Veterans are NOT guaranteed a VA loan.   All loans, even VA loans have fairly standard underwriting guidelines that all applicants must meet, including debt-to-income ratios, credit scores, The confusion generally starts with that the Veterans Administration does NOT actually do loans. Instead, the VA guaranty is to the lender that actually makes the loan. If the veteran defaults, the VA guaranty will pay the lender some or all of their a small percentage of the loan that lenders do if the veterans defaults.

Veterans need to provide a VA Certificate of Eligibility to the lender, which tells us how much VA Guaranty you have available, and if your service in the military allows you to be eligible. If you work with us for your VA loan, we are usually able to obtain your certificate for you.

VA loan Myth 2): VA loans do not have a down payment.

Reality: Almost all VA loans have no down payment requirement, but if you are buying a very expensive home that is over the local area conforming loan limit, you may have a down payment requirement. For almost everywhere in the country, the current no down payment limit is $453,100 (as of this article date).  Click here to see how to calculate your minimum VA loan down payment for expensive homes.

VA loan Myth 3): VA loans have no closing costs.

Reality: ALL mortgage loans have closing costs. Appraisal, credit report, state deed taxes, title insurance, first years home owners insurance, and lender related costs. But with a VA loan, just like many loans, you can cover closing costs four ways:

  1. Pay yourself out of pocket
  2. Seller paid closing costs
  3. Increase the interest rate to offset costs
  4. Any combination of the above.

The combination of all the options is generally what happens. So with most of the VA loans I personally do, you are able to buy with very little out-of-pocket. Under $1,000 is extremely common.

VA loan Myth 4): VA loans require excellent credit

Reality: You don’t have to have perfect credit scores for VA loans, but just like all other loans, as your credit scores go down, your odd’s of loan approval go down too.

As I previously mentioned, the Veterans Administration does not actually give you a loan, only authorized VA lenders like Mortgages Unlimited do. The VA actually just insures the loan for the lender. So while the VA guidelines to lenders says you can potentially get a VA loan with no credit scores, or even super low score, virtually few, if any VA lenders actually offer that option.

If your middle credit score is over 640, you are probably OK. Once you drop below 620, expect a lot of no answers UNLESS your overall situation is actually pretty good, but there is some sort of minor fluke item on credit giving you that low score.

Ready to buy a home with the awesome VA Home loans?

Simply contact your local VA loan expect for the best experience, and avoid the large national online VA lenders.

VA lender MN, WI, and SD

For VA loans in MN, WI, and SD – Simply click here to complete the online VA loan application at www.VAMortgageMN.com or call our local Minnesota VA Loan Experts at (651) 552-3681.

Thank you for your service!