Have you been hunting for a mortgage, but not sure what will work best for you? Not many lenders give insight on what actions to take when trying to get the best deal on your mortgage! We have compiled 5 different methods to help you get the best or a better deal on your mortgage.
1. Reach for that next credit score threshold!
Most people looking to apply for a mortgage these days know their credit score may affect the interest rate they are offered. What they may not know, is that their credit score can also affect their PMI rate on a Conventional loan. Another aspect of credit scoring that borrowers may not know is that sometimes just one point in a score can make a difference! Both mortgage rates and PMI rates are based on a borrowers credit score falling within certain ranges. For example, a score ranging from 620-639 might be the bottom range for Conventional financing, but the borrower may get a better interest rate & PMI rate for a score between 640-679, then again between 680-720, and so on. If you are in the pre-approval stage of the mortgage process, it is important to be working with an experienced loan officer who is looking out for your best interest (pun intended). A good loan officer will not only take note if you are only off a few points of reaching the next tier for rate improvement but then, make recommendations on what steps you can take to obtain that next best credit score range.
2. Consider FHA, VA or USDA-RD financing.
For Buyer’s with credit scores under 620, government-backed mortgages such as FHA, VA & USDA-RD loans may be the only option for approval. But, even Buyers with credit scores under 680, may stand to benefit with a government-backed loan compared to a Conventional loan. This is because conventional financing is much more sensitive to credit scoring than government-backed loans. For example, a Buyer with a 655 credit score is going to receive a much better interest rate with an FHA, VA or USDA-RD loan. Furthermore, a 5% down conventional Buyer with a 655 credit score is going to have a much higher monthly PMI escrow included in their monthly payment than they would if they financed FHA, VA or USDA-RD. To repeat, this is predicated on the fact that PMI rates are based on LTV (Loan-to-Value or percentage of down payment) and credit score. In contrast, the mortgage insurance for FHA, VA & USDA-RD loans are the same for everyone; regardless of whether the borrower has an 820 credit score, or a 580 credit score. Getting back to the 655 credit score example, a 5% down conventional buyer will not only have to put more money down than they would on an FHA, VA or USDA-RD mortgage but will most likely, have a monthly payment that would be approximately 10% higher with the conventional financing. It is true that PMI can eventually come off a Conventional loan. However, the extra monthly cost in the PMI, combined with the higher interest rate for a 5% down payment/lower credit score conventional buyer, may not make up for the eventual elimination of the PMI. This is especially true if the Buyer has to pay another $500 for an appraisal to eliminate their PMI, and if they are going to pay off the mortgage within 7-9 years anyway. Surprisingly, the average mortgage pays off in 5-7 years as a result of homeowner’s either refinancing or selling their home to move up to the next one.
3. Consider MSHDA Financing.
Even if you’re a 50% down Conventional Buyer, you can still get MSHDA financing! For those who qualify, there are at least 3 essential factors on why it is important to consider MSHDA financing:
1. The MSHDA rate is a below-market mortgage rate, and the rate is the same for everyone who qualifies. This is true regardless of whether a credit score is the 640 minimum score required by MSHDA, or if it’s in the 800’s. Keep in mind that someone with a 655 credit score will get a lower 30 year fixed interest rate than they would if they had a 780 credit score and went with a traditional 30 year fixed rate.
2. MSHDA loans have lower PMI rates than typical Fannie Mae or Freddie Mac mortgages. Not only does the borrower get a lower interest rate with MSHDA, they enjoy a lower PMI rate as well.
3. A borrower can put 20% down or more and still obtain a low, fixed MSHDA rate. With the exception of the MSHDA Down Payment Assistance (DPA) mortgage, there is no asset restriction in order to qualify for the below market rate available through the MSHDA MI home loan.
4. When financing Conventionally, pay down to the next 5% (5-percentile) if possible.
There is little benefit to a borrower by putting 6%, 7%, 8%, or 9% down on a Conventional mortgage. For every thousand dollars a borrower puts down on a 30-year mortgage, all they can expect to save is between $5-$7 per month depending on PMI. Instead of putting 6% – 9% down, that extra money may be better used to pay off other consumer debt. On the other hand, if the Buyer can pay down to that next five percentile, and go from a 5% down Conventional loan, to a 10% down loan, they will reduce their PMI rate. Likewise, there are substantial savings for 15% down payments on PMI for all credit scores; and subsequently, the Buyer is that much closer to the 80% LTV they will need later to eliminate their PMI altogether. Finally, when a Buyer is investing 25% down instead of 20% down, they can usually get a slightly better offer on costs charged by the lender for the rate offered.
5. Waive your Escrow account after closing.
Some borrowers do not wish to have an escrow account for taxes and insurance in their monthly payment, and there are some good reasons for that. Most lenders will allow a borrower to “waive” having an escrow account if they have 20% equity or more. Unfortunately, most lenders routinely charge the customer for a type of “escrow waiver fee”. Over the years, this fee may be a standard cost of 0.25% of the loan amount, and this fee is charged to the lender in the secondary market. This cost is, in turn, passed along to the borrower in many instances. This is not cheap, for example, a $200,000 mortgage x 0.25% charge = $500 extra fees at closing. If a borrower was to set up an escrow account from the beginning and make payments over a 12 month period, they are very likely to not incur this type of fee when requesting an escrow waiver from their mortgage provider at a later point in time.
It is important to note that these are all suggestions, and these suggestions may not necessarily be the recommended course for every Buyer. Furthermore, in a tight “Seller’s Market”, a Buyer in some cases may stand a much better chance of getting an offer accepted if it is made with Conventional financing, opposed to FHA, VA or USDA-RD financing.
Each market is different, and each listed property is different. Assuming a Buyer has options for different ways to finance a home, they should not only rely on the recommendations of their Loan Officer, but also seek guidance from a CPA and financial planner. Also, relying heavily on the advice of a Realtor can be the best way to negotiate terms of the financing they will be seeking.