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Five Mortgage Interest Rate Factors You Control

Did you know that over 30 factors go into selecting a mortgage interest rate? In this post, we look at five things you can improve – and two factors you can’t control at all.

MeetingWhen you’re considering a mortgage, your first thought is probably “Can I afford it?” A mortgage lender asks themselves a similar question: “Will this person be able to repay the loan?” To the lender, giving you a mortgage is a risk, no matter how great your credit history is or how much money you make. To offset some of the risk, lenders charge interest on the mortgage.

A mortgage interest rate is usually calculated as a percentage of your loan amount. It’s added to the amount borrowed; most of your monthly payments go toward the principal, but some go to the interest rate. This rate can be fixed (i.e. the same for the entire loan period) or it can be variable (i.e. the rate rises or lowers at intervals throughout the loan period).

So, what affects the interest rate a lender offers you?

Five Mortgage Interest Rate Factors You (Mostly) Control

As we’ve said before on this blog, mortgage interest rates are not just about the borrower. They’re also about the lender, the market, and the economy as a whole. But there are some things you can control – at least partly:

  • Credit Score. Your credit score is a big factor in determining your creditworthiness, or how much of a risk you represent to the lender. A credit score of under 640 can mean a higher interest rate; a score of 740 or above can get you a lower rate. Here’s how you can improve your credit score.
  • Debt Ratio. The amount and kind of debt you have will impact your credit score, but lenders also look at the debt ratio itself. As a general rule, no more than 43% of your monthly income should go to defraying debt (e.g. car payments, credit cards, etc.). The reason is simple: the more debts you have, the more likely it is that you’ll have a hard time keeping up the payments.
  • Down Payment / Loan Amount. A larger down payment can lower your loan amount, which means you could get a lower interest rate. If, for example, you pay 20% down instead of 10% down, you’ve removed some of the lender’s risk. Your reward: a lower interest rate and a substantial amount of savings.
  • Loan Type.  Different loan types come with different requirements, guidelines, and interest rates. Check out these types of home loans to learn more.
  • Home Location, Price, and Use. Ok, you may not have a lot of wiggle room on your home location or budget – but if you’re looking for value, you may want to shop around. Homes in different areas of the same city can be priced higher or lower according to demand; price impacts the loan amount, which affects the interest rate. And if you’re shopping for your primary residence (as opposed to a second home, vacation home, etc.), you’ll likely get a lower interest rate, too.

Two Mortgage Interest Rate Factors You Can’t Control

No matter who you are or what you make, the following factors are outside of your control. Unfortunately, they still affect your mortgage interest rate:

  • Local Real Estate Market Conditions. If home sales are slow in your area, there’s less demand for mortgages. This means mortgage lenders have to compete a bit for business, which translates into a better deal for you. On the other hand, moving into a hot market means higher prices, higher demand, and higher interest rates.
  • The Economy. During an economic downturn, mortgage rates tend to decline for the same reason as mentioned above: a lack of demand. During an economic upturn, people are more apt to start house shopping again, which drives up demand and interest rates.

So, if you’re shopping for a mortgage with a great interest rate, keep these factors in mind. Maybe you can increase your down payment or reduce your debt. Don’t forget to compare offers from different lenders; that too can help you find a better interest rate. If you’re not sure what your next move should be, talk with one of our mortgage specialists.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1.

home buying tips

Fall 2021 Home Buying and Mortgage Trends

What can home buyers in Michigan expect during Fall 2021? In this post, we’ll look at five home buying trends and what’s causing them.

Are you smitten with the mitten? If you’re looking for a house in Michigan this fall, you’re not alone – the state’s real estate market has been extremely active. In other words, Michigan has become a seller’s market.

Does this mean you should postpone your home-owning dreams? Not at all. Just do your homework before you start searching. To help you, we’ll discuss five key trends in the Fall 2021 Michigan housing market.

home buying tipsMichigan’s Fall 2021 Home Buying & Real Estate Trends

1. Mortgage Rates Are Still Very Low

With mortgage rates around 3 percent, it’s not surprising that many would-be homeowners are taking advantage of this historical low; it makes mortgage payments more affordable. However, the National Association of Realtors forecasts a rise to 3.5% by the end of 2021.

Also, home values are appreciating – i.e. homes are worth more than they were 3 or 5 years ago. This can make getting financing a bit trickier, so make sure you know what you can afford and what your mortgage options are.

2. COVID-19 Inspired Some Changes

Quarantining in place and the uncertainty of renting have moved some people to consider buying their own home. Additionally, after months of restrictions, other potential home buyers are now making appointments to view houses in person. Thus, there’s a burst of activity in Michigan’s real estate market.

3. Home Buying and Lending Are Going Digital

2021 accelerated the trend toward home buying and borrowing. More and more home buyers are relying on digital platforms and apps to shop for homes. More and more borrowers are using apps like Michigan Mortgage’s Pro Snap and Fast Pass to complete their mortgage paperwork and conduct their closings.

4. It’s Not Just Southeastern Michigan

Most of Michigan’s population is in the southern half of the lower peninsula – specifically, in southeastern Michigan (e.g. Ann Arbor, metro Detroit, etc.) and in the Grand Rapids metro area (on the state’s southwest side). These areas have generally had the most active real estate market, thanks to all the amenities on offer.

Now, though, the state’s more rural northern counties are seeing a surge in home buying. This is driven by the availability of remote work, more affordable pricing compared to the southern parts of the state, and a desire to exit crowded cities for open spaces and smaller towns.

5. Homes Are Selling Quickly

With demand booming – and new construction not yet catching up – Michigan homes are selling much faster; a local news station reported that the average house spends 15 fewer days on market and sells in just 19 days. This means that potential buyers have to act quickly if they see a house they love.

Thank you for trusting us to guide you home!

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1.

kitchen

MSHDA First-Time Home Buyer Assistance Programs

If you’re a first-time home buyer, getting enough money for a down payment can seem like a major hurdle. But there’s good news! The Michigan State Housing Development Authority (MSHDA) has a program that helps home buyers afford their down payment by loaning them up to $10,000 towards it.

This is what you need to know.

kitchenWhat Is MSHDA?

The Michigan State Housing Development Authority “provides financial and technical assistance through public and private partnerships to create and preserve safe and decent affordable housing, engage in community economic development activities, develop vibrant cities, towns, and villages, and address homeless issues.” Part of its mission is to make owning a home in Michigan an affordable and realistic goal for as many people as possible. In addition to buying a home, it also offers programs for improving existing properties and dealing with foreclosure.

What Assistance Does MSHDA Offer First-Time Home Buyers?

The MI Home Loan and MI Home Loan Flex programs help first-time buyers with their downpayment. In addition to homebuyer education classes, these MSHDA products provide loans of up to $7,500 statewide. In many areas throughout the state, this amount can be increased to $10,000. (See this ZIP code list or state map to see which areas qualify for larger MI Home Loan amounts.)

Who Qualifies for First-Time MSHDA Home Buyer Assistance?

If this is your first time buying a home, you should look into the MI Home Loan and MI Home Loan Flex programs. To qualify, you must meet the following requirements:

Additionally, only homes that are priced $224,500 or less are eligible for assistance with downpayment.

Is MI Home Loan Only for First-Time Home Buyers?

No – MI Home Flex is available to all home buyers that meet its criteria. And in certain targeted areas, MI Home Loan is available to both new and repeat home buyers.

Should First-Time Home Buyers Choose MSHDA’s MI Home or MI Home Flex?

That depends on your financial and personal circumstances. MI Home Flex is a little more flexible and only requires one adult to apply (i.e. one partner out of a couple). Consult with a loan professional for more details – they will help you determine which best meets your needs.

As Michigan’s top MSHDA lender, Michigan Mortgage is ready to help you understand what Michigan loan programs are right for you. We’ve helped many first-time home buyers navigate MSHDA’s Mi Home and MI Home Flex programs, and we can help you find answers to all your home-buying questions.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Image of a family hanging up an American flag

Military Vets: Get a VA Home Loan

In addition to being one of the country’s leading lenders to first-time home buyers, Michigan Mortgage specializes in helping veterans of the United States military and their families get into their dream homes.

Veterans Affairs (VA) mortgages make it easier for veterans to obtain financing for home ownership. VA loans are available to veterans and active military members. VA loans are guaranteed by the Department of Veterans Affairs and are somewhat easier to qualify for than conventional mortgages.

Image of a family hanging up an American flagVA Home Loan Benefits

VA loans are great because:

  • They can be obtained without any down payment.
  • Mortgage insurance is not required even if you put less than 20% down.
  • The VA does not require a specific credit score for a VA loan.

Although the costs of getting a VA loan are generally lower than they are for other types of low-down-payment mortgages, VA loans do carry a one-time funding fee that varies depending on the down payment and the type of veteran.

According to the VA, veterans who have taken advantage of the program have some of the lowest home ownership default rates, and that the agency also helped 80,000 VA borrowers avoid foreclosure in 2014, saving taxpayers $2.8 billion.

VA Loan Requirements

VA loans are offered to most active duty, reserve or National Guard and veteran service members and even some surviving spouses.

Veterans are able to borrow over $400,000 without any down payment on a principal residence home. According to the VA, almost 90% of VA loans have no down payment.

There’s also no minimum credit score requirement for a VA loan, while most home mortgage loans require a credit score of at least 620 for conventional loans or 580 for most FHA loans. A VA loan can also be used to refinance an existing loan.

VA loans do have specific requirements that most other loans don’t. For instance, all work on the home must be completed before the inspection. Also, there can’t be chipped or peeling paint inside or out, or termites or mold or loose handrails. In other areas, a VA inspection can be a bit more stringent. For example, while most home inspectors merely turn on the home’s furnace to see if it works, the VA requires inspectors to verify that the heat source can keep pipes from freezing.

Are you a vet? Reach out to one of our experienced Loan Officers to learn more. 

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Appraisal Neighborhood

What is an appraisal and why do you need one?

One of the most confusing aspects of obtaining a home can be the appraisal process.

Most people think when you buy a house that the selling price is the value of the home.  The truth is, the value of the home is primarily based on other properties that have already SOLD in the same market area.

Appraisal NeighborhoodA real estate appraisal is the process of assigning an objective value for a home.

The buyer is free to pay whatever they like for the home. If the buyer intends on getting a mortgage, then they are required to get some type of home appraisal. The opinion of value (the appraisal) is based on properties (comparable properties) that have sold in the past.

Why Is a Real Estate Appraisal Needed?

Appraisals are an important part of the home buying process. A real estate appraisal establishes a property’s market value—the likely sales price it would bring if offered in an open and competitive real estate market. Lenders require appraisals when buyers use their new homes as security for their mortgages.

What Is Comparable Property?

It is properties with characteristics that are similar to a subject property.  The appraiser is looking for similar square footage, floor plan, the number of rooms, type of rooms and location to name a few.  The best comparable could be the home next door or a few miles away. The best Comparable would be the house next door with the same floor plan, upgrades, view, everything exactly the same as the subject property that closed the day before the appraisal assignment.

When the home next door is not available the appraiser will attempt to find homes as close as possible and make adjustments.  The adjustments are added or subtracted from the comparable property in an attempt to equal the subject being appraised. If one comparable did not have a 2 car garage like the subject. The appraiser would add the approximate value of the garage to the comparable to bring it up to the subject.  If the comparable had a 3 car garage the appraiser would subtract from the subject the value of the extra garage.

Who Does the Appraisal?

Appraisals must be conducted by a licensed, third-party appraiser who has no connection to the buyer, seller or lender. That way, all parties can be sure the determined market value is fair, unbiased and free of any influence from any party that could benefit.

The lender usually orders the appraisal, but the borrower is the one who usually pays for it. The appraisal fee is an upfront, out-of-pocket expense that will not be refunded if either party fails to move forward with the sale.

What Does the Appraiser Look For?

Appraisers look inside and outside your house. They look at the neighborhood, too.

Externally, here’s what they look for:

  • Neighborhood characteristics (i.e., urban, suburban, rural)
  • Percentage of present land use in the neighborhood (one-unit housing, two- to four-unit housing, multifamily, commercial)
  • Zoning classification
  • Lot size
  • Whether the property has public utilities
  • The type of driveway surface and any car storage.

Internally, they look at things like:

  • The home’s square footage
  • Number of bathrooms and bedrooms
  • Remodeled versus updated kitchen/baths
  • Foundation type
  • Whether there’s a full or partial basement, crawl space, or attic
  • Materials used for the walls, floors, and windows

Get Preapproved First

An appraisal is one of the final steps of buying a home. Your first step should be to contact a lender near you to get the process started.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Spring Welcome Mat

Tips for Buying a Home This Spring

The spring homebuying season is upon us! It’s the most popular time to buy a home, but also the most competitive. What do you need to do to be ready for it?

Given the financial commitment that buying a home represents, it’s amazing how many people wade into the process with minimal preparation. Here are six steps to get you ready to tackle the busy spring market and put you in position to get a good deal on a great home.

#1: Check your credit

Yes, you may be tired of hearing it, but checking your credit is the first step you want to take in buying a home. Even if you’re confident that you’ve got excellent credit, undiscovered errors in your report could drag down your score – and result in a higher interest rate on a mortgage. Your credit score will also affect the mortgage rate you can obtain and the cost of the loan as a result.

You’re entitled to a free copy of your credit report once a year from each of the three major credit reporting companies – Equifax, Experian and Transunion. You can order them through the official site at www.annualcreditreport.com. Once you have them, check for any errors in the payment history or status of your credit accounts and follow the instructions for correcting any that you find.

Your free credit reports don’t include your credit scores, which are what lenders use when evaluating you for a mortgage. For those you typically need to pay, either by purchasing them directly from the three companies or by enrolling in a credit monitoring service that includes your credit scores as a free perk.

Spring Welcome Mat#2: Know what you can afford

This can be a deceptively complex problem – it’s not simply a matter of figuring out how much of a mortgage payment you can handle. You also need to take into account property taxes, homeowner’s insurance and – you’re making less than a 20 percent down payment – mortgage insurance as well. All these are typically billed with your mortgage statement.

Then you also have to consider what kind of down payment you can make, the ongoing costs of home maintenance, monthly utility bills and a reserve for unexpected repairs. You’ll probably also want to have something set aside for buying new furniture or appliances, and other purchases/expenses to make the home your own.

The standard rule of thumb is that lenders don’t want to see you spending more than 28 percent of your gross monthly income on your mortgage payment, and no more than 36 percent on loans of all types (auto, credit cards, etc.) though these are flexible. Just as important though, is how much of your earnings you want to spend on housing – 28 percent may be higher than you want to go.

#3: Consider the down payment

Your down payment isn’t just a matter of what you can put together or trying to hit a certain number. To a certain extent, the size of a down payment is a choice you make depending on how much you’re looking to borrow and the mortgage terms you’re willing to accept.

While a 20 percent down payment is considered the gold standard, it isn’t mandatory. Most lenders view 10 percent down nearly as favorably and many will let you go as low as 5. That allows you to buy a higher-priced home, but you will need to buy private mortgage insurance, which is like paying an extra half a percent or more on your mortgage rate.

If you go the FHA route, you can put as little as 3.5 percent down, which maximizes your homebuying ability but means higher fees both up front and for annual mortgage insurance.

If you’re seeking a jumbo loan or have damaged credit, lenders may require that you put at least 30 percent down in order to be approved.

#4: Do Your Research

Browse the real estate listings to see what sort of homes are being offered in your price range and where. Drive by a few of them to get a sense of the home and neighborhood in real life. Go to a few open houses to get a sense of the market and a feeling for prices. Pay particular note to homes that sell almost immediately after being listed – that’s a sign it was attractively priced, while ones that linger are likely overpriced.

You can also check local assessor’s office records online to see what other homes in the area have sold for recently, or use commercial online listings to do the same thing.

#5: Use a Realtor

A Realtor representing your interests as a buyer can be a big help when house hunting. First, they’ll be tuned into the local housing market and can help you cut through the clutter to find the properties that best match your criteria. They can also alert you when new ones are coming on the market.

#6: Be Ready to Buy

Because the spring housing market can be very competitive, you want to be ready to make an offer as soon as you find the right house. If you wait a day or two to think it over, you may find someone else has beat you to it, particularly if it’s an attractive property.

For this reason, you want to be sure to get preapproved for a mortgage before you being home shopping in earnest. Getting preapproved means choosing a lender and submitting all the financial information you need to be approved for a loan. It’s different from being prequalified, which simply means a lender gives you an estimate of what you can borrow based on unverified information you provide.

When you’re preapproved, you can show that to a seller as evidence you’re ready to buy and have the means to do so. That’s an important thing to be able to do when you may be competing with several other offers.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1. 

Why is my Credit Karma score different than my mortgage credit score?

Credit Karma is a great tool when it comes to credit monitoring and fraud alerts, but using the free tool while applying for a mortgage can sometimes raise confusion.

Why is my Credit Karma score different than the credit score my mortgage Loan Officer is using for financing?

This is one of our most commonly asked questions, so we’d like to offer an explanation.

Most people assume that their Credit Karma score is their universal credit score when applying for a home or auto loan. When their true mortgage credit score is pulled by their Loan Officer, shock and anger typically follow. Why are they different? Did the Loan Officer pull the wrong score?

Credit Synergy said this: “The information that was pulled by Credit Karma is the same that their mortgage loan officer pulled…. the only difference is the algorithm being used. Credit Karma utilizes a Vantage scoring model, while the mortgage industry utilizes three FICO algorithms: Beacon 5.0, Classic04, FICO V2. The Vantage algorithm being used by Credit Karma is typically 50 points or so higher than a mortgage FICO score.”

Mortgage FICO scores analyze your payment history, the number of years you’ve had credit, types of credit accounts you have, and more. These tend to be much more detailed than the reports pulled by Credit Karma and other consumer credit reporting companies.

We know it’s confusing. And some of our customers’ first instinct is to reach out to a second mortgage company to compare their credit score.

Rest assured, it doesn’t matter what mortgage company or what Loan Officer pulls your credit score. The scores will always be the same when you’re applying for a mortgage (and will always be different than your Credit Karma score).

If you have more questions about your credit, or would like to apply for a mortgage with one of our experienced Loan Officers, please reach out. We’re here to help in any way we can.

Thank you for trusting us to guide you home!

MSHDA DPA Program

MSHDA Announces $10,000 Down Payment Assistance Program for Michigan Home Buyers

MSHDA announced a new down payment assistance loan program called MI 10K DPA Loan, which offers $10,000 in assistance to buyers to use towards the required down payment, closing costs and prepaids/escrows. The program is available in 236 Michigan zip codes.

MSHDA DPA ProgramAccording to MSHDA, “This program was created to offer assistance to purchasers within specific geographic areas where the opportunity to purchase a home is high but the rate of homeownership needs improvement. Homebuyers looking to purchase a home within one of these areas will benefit from additional support to help them achieve homeownership.”

The MI 10K DPA Loan program will provide:

  • $10,000 to use towards the required down payment, closing costs and prepaids/escrows; any additional down payment can be used to buy down the first lien.
  • Maximum financing is not required.
  • Must be combined with a MSHDA MI Home Loan first mortgage (FHA, RD Guaranteed, or Conventional).
  • Minimum 1% borrower contribution.
  • Cash assets are restricted to $20,000.
  • 0% interest and no monthly payments.
  • Loan is due when the home is sold, refinanced, the first mortgage is paid in full, homeownership interest is transferred, or the home ceases to be the primary residence.
  • Available in 236 Michigan zip codes.

The program is available in the following Lakeshore zip codes.
Muskegon County: 49440, 49441, 49442, 49444, 49445
Ottawa County: 49417, 49423, 49424, 49428, 49464

For more information about the MI 10K DPA Loan program, reach out to your Michigan Mortgage Loan Officer. Thank you for trusting us to guide you home!

Moving Boxes

10 Facts Home Buyers Should Know

We live in a data-driven society. Numbers tell a story, but not always the full story. In this article, we’ve compiled 10 interesting and insightful home buying and home ownership stats. More importantly, we provide explanations for why the numbers are important and what they tell us. Would-be and existing homeowners can use these insights to make informed buying and borrowing decisions.

Here are 10 facts all home buyers should know.

Moving Boxes#1. On average, buyers spend 10 weeks searching for a home and view an average of 10 houses.

What this tells us: You can’t rush the home buying process. Be patient. Buying a house is a big investment. You may live there 30 years or longer. You will spend a good chunk of money on the home. What does it matter if you look at 10 or even 20 houses, so long as you find that one that’s right for you.

#2. For buyers aged 28 and younger, the median purchase price of a home was $177,000.

What this tells us: Millennials are now the largest home buying segment in America. Buyers aged 22 through 28 are the youngest segment of millennials. To afford a $177,000 house, presuming you put down a 20% down payment ($35,000) on a 4% 30-year fixed-rate mortgage, your annual household income would need to be approximately $30,000.

#3. For buyers aged 29-38, the median purchase price of a home was $274,000.

What this tells us: This data point is proof of the value of owning a home. The median price for this home buying segment is nearly $100,000 higher than the 28 and under age group, meaning that over a ten year span, the average homeowner has accumulated $100,000 in additional wealth, much of it largely attributable to their home.

#4. According to first-time buyers, paying down debt is the number one reason they struggle to afford a home, cited by 26% of home buyers.

What this tells us: Don’t let debt bite you in the butt. When it comes to qualifying for a mortgage, income and debt are the two biggest qualifying criteria. Not enough of one and too much of the other will hurt you. While you cannot directly control how much you make, you can control how much you spend and keep your debt under control.

#5. Median monthly housing costs are $1,566.

What this tells us: This tells us what the median homeowner can expect to pay on a monthly basis for home ownership. These costs include mortgage as well as taxes and insurance. As you begin your home hunting journey, keep this figure in mind to make sure you can afford the home you desire. Using the 28/36 rule, which says you should spend no more than 28% of your monthly income on housing expenses, an annual household income of approximately $67,000 is needed for these expenses.

#6. The average mortgage loan amount in 2019 was $184,700.

What this tells us: Assuming a 20% down payment on a 30-year fixed-rate mortgage at 4%, the monthly payment for this mortgage amount would be $882.

#7. For new, approved, noncommercial mortgages, the average credit score was 732 in 2019.

What this tells us: Credit score matters when it comes to getting a good rate on a mortgage. Do what you can to improve your credit score – pay down debt, pay your bills on time and don’t apply for new credit.

#8. Mortgage rates remain at record lowsBelow 3%.

What this tells us: This tells us there are buying and refinancing opportunities. Mortgage rates continue to be crazy low. Last week, mortgage rates fell to yet another record low, for the eleventh time since the beginning of the year. The average interest rate on a 30-year fixed-rate mortgage fell to 2.8%, according to Freddie Mac. That’s the lowest level in the nearly 50 years of the mortgage giant’s survey. The 15-year fixed-rate mortgage dropped to 2.33%.

#9. The running average annual 15-year mortgage rate for 2020 through Sept. was 2.71%.

What this tells us: Rates on 15-year mortgages are usually lower than 30-year loans. If you can afford the little bit higher monthly payments that come with a 15-year mortgage, you will pay less total interest over the life of the loan and you will pay off your loan faster.

#10. For 2020, housing prices have risen approximately 5%.

What this tells us: Owning a home continues to be a road to prosperity. Home values continue to appreciate. Owning a home can be a valuable contributor to your overall wealth.

Go Beyond the Numbers

Looking for a new home or thinking about refinancing? Go beyond the numbers and get the loan that’s right for you. Connect with a Michigan Mortgage Loan Officer to get the process started using our digital mortgage app. It’s fast and easy! It only takes 15 minutes.

 

 

Sources: 1,2,3: National Association of Realtors, 2019; 4: Coldwell Banker, 2019; 5: US Census Bureau, 2018; 6, 7: Federal Housing Finance Agency, 2019; 8: CNN ; 9: Freddie Mac, 2020; 10: Joint Center for Housing Studies, Harvard University, 2020

 

First-Time Buyer Questions

First-Time Buyer FAQ ⁠— Part 2

First-Time Buyer QuestionsFor first-time buyers, the mortgage process raises a lot of questions. In part two of this series, we tackle some more of the most common questions we receive from customers.

“How Much Should I Save for a Down Payment?“

The exact dollar amount you should save for a down payment depends on the price of the house you are buying. Most down payment requirements are expressed in percentages. A 5% down payment on a $500,000 house is much greater in raw dollars ($25,000) than 5% on a $200,000 house ($10,000).

In terms of the minimum requirements for different loan types:

  • For USDA or VA loans, no down payment is required.
  • For FHA loans, the minimum down payment is 3.5%.
  • For FannieMae HomeReady loans, the down payment is 3%.
  • On a conventional loan, the minimum down payment will be somewhere between 3% and 5% of the purchase price. Be aware, however, that you will have to pay private mortgage insurance (PMI) if your down payment is less than 20% of the purchase price.

“What Will My Monthly Payment Look Like?“

A mortgage payment consists of two components:

  • Principal
  • Interest

The principal portion goes toward paying off the original amount of money you borrowed. The interest portion covers the cost of borrowing.

Your mortgage payment will be the same amount each month. Early in the life of the loan, more money goes toward interest than principal. Over time, the principal portion will match and then exceed the interest amount. For example, on a 30-year $200,000 mortgage at 4%, your monthly payment is $955. For the first payment, $288 goes toward principal and $667 goes toward interest. It isn’t until the 153rd payment that the interest and principal are roughly equal. Thereafter, more of the monthly payment goes toward principal until, on the very last payment of the schedule, $952 goes to principal and $3 to interest.

Your lender will provide you with an amortization schedule that shows a month-by-month P&I (principal and interest) breakdown for your loan.

For convenience, many people include property tax and insurance payments in their monthly mortgage payment. Technically, these aren’t part of the loan, but the loan servicer can put this money into an escrow account, where it is saved until the taxes and insurance are due. They then make the payments for you. You are not required to include escrow in your monthly payments. If you choose not to, you will just pay your property taxes and insurance annually on your own.

“Which Loans Are Best for First-Time Buyers?

Along with conventional loans, the following loans offer distinct advantages for first-time buyers.

  • FHA loans. A Federal Housing Administration (FHA) loan is a mortgage that is insured by the Federal Housing Administration (FHA) and issued by an FHA-approved lender such as Mortgage 1. FHA loans are designed for low-to-moderate-income borrowers; they require a lower minimum down payment and lower credit scores than many conventional loans.
  • VA loans. VA loans are offered through the Department of Veterans Affairs. They are available to active and veteran service personnel and their families. VA loans are backed by the federal government and issued through private lenders like Mortgage 1. VA loans have favorable terms, such as no down payment, no mortgage insurance, no-prepayment penalties, and limited closing costs.
  • USDA loans. Rural Development home loans are low-interest, fixed-rate loans provided by the United States Department of Agriculture. The loans do not require a down payment. The loans are financed by the USDA and obtained through private lenders, such as Mortgage 1, and are meant to promote and support home ownership in underserved areas.
  • MSHDA loans. The Michigan State Housing Development Authority (MSHDA) offers down payment assistance to people with no monthly payments. The down payment program offers assistance up to $7,500 (or 4% of the purchase price, whichever is less).

“Can I Complete the Mortgage Process Online?“

Yes! Every Michigan Mortgage loan officer has a Home Snap digital application that allows you to complete the application process online. You can get approved in as little as 15 minutes. The app lets you submit your information, communicate with your loan officer, and track the status of your loan. In these times of COVID and social distancing, Home Snap is the perfect solution.

“What is PMI?“

Private Mortgage Insurance (PMI) is an insurance policy that protects a mortgage lender or title holder if a borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage. If you pay 20% or more as a down payment on a conventional loan, you do not need PMI. Once you start paying PMI, it goes away in two ways: (1) once your mortgage balance reaches 78% of the original purchase price; (2) at the halfway point of your amortization schedule. For example, if you have a 30-year loan, the midpoint would be 15 years. At the point, the lender must cancel the PMI then, even if your mortgage balance hasn’t yet reached 78% of the home’s original value. PMI is typically between 0.5% to 1% of the entire loan amount.

“What Do I Need to Bring to Closing?

Closing is when you sign the many documents that finalize your purchase. The closing is usually held at a title company’s office. The seller will be there, as will your agent. In terms of what you should bring:

  • Photo ID: The closing agent has to verify that you are who you say you are. A driver’s license or current passport will do.
  • Cashier’s or certified check: This is to cover any down payment and closing costs you owe. Do not bring personal check or cash. Your lender will tell you how much the check should be and who it should be made out to.
  • Proof of insurance: The closing agent needs to see proof that you have the insurance in effect on closing day and a receipt showing you’ve paid the policy for a year. They may have already collected that, but it doesn’t hurt to bring your own copy just to ensure things go smoothly.
  • Final purchase and sales contract: Just in case you need to double-check anything against the actual closing costs.

“What Happens If My Appraisal is Low?

When determining the size of your loan, lenders use a formula called loan-to-value (LTV). When your mortgage contract is initially written, LTV is calculated using the purchase price. But the final contract is based upon the official appraised value of the house. What happens if the appraised value comes in lower? You have several options.

  • Boost the amount of your down payment. This will allow you to meet the LTV and down payment minimums.
  • The seller can lower the price. The seller can agree to drop the sales price of the house to match the appraised value. This will allow you to meet LTV.
  • Dispute the appraisal and ask for a new one. If you think the appraiser undervalued the house, you can ask for a new appraisal.
  • Cancel the purchase. If a compromise can’t be reached, you can cancel the home purchase agreement.

“What Will Mortgage Rates Be Next Year?

Ah, if only we had a crystal ball. We can’t predict what mortgage rates will be in a year, but we can say that rates today are near historic lows. The Federal Reserve announced recently that they will be holding short-term interest rates steady for the foreseeable future. While mortgage rates aren’t tied specifically to short-term interest rates, the two generally track closely together. So, while we can’t predict what rates will be in a year, we can say with certainty that today’s rates are at historic lows.

Got Questions? We’ve Got Answers

If you have questions, let us know. At Michigan Mortgage, we specialize in helping first-time buyers understand the mortgage process.

This blog post was written by experts at Mortgage 1 and originally appeared on www.mortgageone.com. Michigan Mortgage is a DBA of Mortgage 1.