Most of us are aware that home ownership is one of the best ways for Americans to build wealth and secure their financial future through home equity and appreciation in value. With median increases in home prices demonstrating double-digit percentage growth in several Bay Area counties, these gains often come sooner rather than later in many markets. It’s also common knowledge that although mortgage interest rates have recently started to inch up, they are still at historic lows right now, and those with excellent credit will qualify for the best mortgage rates. What many of us do not realize are these surprising mortgage facts, which include a mix of the “need to know” and those that are just plain trivia fun:
The word mortgage literally translated as “death pledge”: The word “mortgage” is derived from Old French and Latin roots “mort” for “death” and “gage” meaning “pledge.” The “death” aspect refers to the concept that the pledge died once the obligation was fulfilled or the property was taken through foreclosure. According to BeBusinessed.com, mortgages are mentioned in English common law documents from as early as 1190 and began to spread throughout the Western world after that time.
Prior to the Great Depression in the U.S, a mortgage required a down payment of 50 percent, had a short maturity of three to five years and ended with a balloon payment. In addition, terms were renegotiated every year. In 1934, the Federal Housing Administration (FHA) initiated a program that lowered down payment requirements and established more oversight of the loan process, which made it possible for a growing number of Americans to own homes.
You may now be able to get a mortgage for 10 percent or less down: For a long time, the standard down payment on a home in the U.S. was 20 percent of its selling price. Contrast that to 2009, when 16 percent of homebuyers financed a home without any down payment. Today, most lenders want to know that you’re willing to incur some of the risks of home ownership with an initial cash outlay, but 20 percent down payments have become much less common, especially among first-time homebuyers. As the Los Angeles Times reports based on 2017 data from the National Association of Realtors (NAR), the typical down payment for 60 percent of first-time homebuyers is 6 percent or less. Among homebuyers in general, the median down payment in 2017 was 10 percent. However, it’s important to keep in mind that requirements for down payments will vary from lender to lender, and will depend on factors such as your income, the type of mortgage for which you’re applying and your credit.
Some conventional mortgages may allow you to pay as little as 3 percent down (though more commonly will require 5 percent or more), and you can get a Federal Housing Administration (FHA) loan with only 3.5 percent down. Looking for clarity on the various types of home loans? Read “FHA vs. Conventional Loans in Plain English” from U.S. News & World Report. Also keep in mind that those who qualify for VA loans or USDA Rural Development loans can get a mortgage without any money down.
Lenders care more about your income than your assets and the money in your account: It’s understandable if you assume that healthy savings and high-value assets would be a top concern for mortgage underwriters, but the truth is that lenders are actually much more focused on your income. More specifically, they weigh your debt-to-income ratio heavily because it tends to reflect your ability to make your monthly payments. Generally, those with higher incomes are perceived by lenders to be lower risk in terms of meeting their financial obligations. But as NerdWallet explains, a high income may not enable you to obtain a favorable interest rate if your expenses are high by comparison. To qualify for most home loans, your total debt-to-income ratio should be 43 percent or lower.
Shopping for mortgage rates doesn’t have to hurt your credit score: While it’s true that hard inquiries on your credit report will temporarily lower your score by a few points, credit scoring models are sophisticated enough to recognize when a person is comparison shopping, and won’t penalize you for multiple inquiries related to your mortgage within a short timeframe. As the Consumer Financial Protection Bureau explains, multiple credit checks from mortgage lenders or brokers are generally counted as just one inquiry if they are made within a 45-day window. For more details about how a credit check for a mortgage impacts your credit score, visit the Consumer Protection Bureau website. However, be aware that this window may only be 14 days for lenders using older credit scoring models, so you’ll be safest by limiting your mortgage rate shopping to a period of two weeks.
You should think twice about a big purchase or opening a new line of credit during the mortgage process: Keep in mind that just before your mortgage closes, your lender will do another check of your credit. This means that if your credit score drops significantly during the process, your application could be sent back through underwriting. To avoid this possibility, don’t make any major purchases (e.g. a car) or apply for a new line of credit until after you’ve closed on your loan. For that matter, it’s also best not to close any old credit lines during this time, because this will raise your credit utilization rate. Simply put, closing an active account will reduce the amount of available credit you have as compared to your credit limits, which will lower your credit score.
Are you ready to explore the possibility of home ownership? SF Police Credit Union has a wide variety of competitive mortgage options to fit your budget and lifestyle goals, from FHA and VA loans to first-time homebuyer programs and jumbo loans. What’s more, we offer competitive rates on both adjustable and fixed-rate mortgages with no hidden fees or pre-payment penalties. For details, visit http://bit.ly/SFPCUHomeLoans.