Tag Archive for: Credit Score

FICO Score

FICO Score: What It Is & Why It Matters

/0 Comments/in , /by

When you apply for a mortgage, your lender runs a credit report. A key component of the report is your credit score. One of the most commonly used credit scores in the mortgage industry is FICO.

In this article, we describe what FICO is, how it is measured, how it is used when approving you for a mortgage, and steps you can take to maintain and improve your credit score.

What is FICO?

FICO is a credit score created by the Fair Isaac Corporation (FICO). The FICO company specializes in what is known as “predictive analytics,” which means they take information and analyze it to predict what might happen in the future.

In the case of your FICO score, the company looks at your past and current credit usage and assigns a score that predicts how likely you are to pay your bills. Mortgage lenders use the FICO score, along with other details on your credit report, to assess how risky it is to loan you tens or hundreds of thousands of dollars, as well as what interest rate you should pay.

Why is FICO Important?

FICO scores are used in more than 90% of the credit decisions made in the U.S. Having a low FICO score is a deal-breaker with many lenders. There are many different types of credit scores. FICO is the most commonly used score in the mortgage industry.

A lesser-known fact about FICO scores is that some people don’t have them at all. To generate a credit score, a consumer must have a certain amount of available information. To have a FICO score, borrowers should have at least one account that has been open for six or more months and at least one account that has been reported to the credit reporting agencies over the last six months.

FICO Score Ranges

FICO scores range between 300 and 850. A higher number is better. It means you are less risk to a lender.

Scores in the 670-739 range indicate “good” credit history and most lenders will consider this score favorable. Borrowers in the 580-669 range may find it difficult to obtain financing at attractive rates. Less than 580 and it is difficult to get a loan or you may be charged “loan shark” rates.

The best FICO score a consumer can have is 850. Fewer than 1% of consumers have a perfect score. More than two-thirds of consumers have scores that are good or better.

Here’s a breakdown of scoring ranges and what they mean:

  • Score: <580
    Rating: Poor
    What It Means: Well below average; Indicates to lenders that you’re a risky borrower
  • Score: 580-669
    Rating: Fair
    What It Means: Below average; many lenders will approve loans, but many will not
  • Score: 670-739
    Rating: Good
    What It Means: Average or slightly above average; most lenders will approve loans
  • Score: 740-799
    Rating: Very Good
    What It Means: Above average; shows lenders you are a dependable borrower; nearly all lenders will approve you
  • Score: 800+
    Rating: Exceptional
    What It Means: Well above average; shows lenders you are an exceptional borrower; virtually every lender will approve you

                               Source: Experian 

The 5 Components of a FICO Score

A FICO score take into account five areas to determine the creditworthiness of a borrower:

  • Payment History. Payment history identifies whether you pay your credit accounts on time. A credit reports shows when payments were submitted and if any were late. The report identifies late or missing payments, as well as any bankruptcies.
  • Current Indebtedness. This refers to the amount of money you currently owe. Having a lot of debt does not necessarily mean you will have a low credit score. FICO looks at the ratio of money owed to the amount of credit available. For example, if you owe $50,000 but are not close to reaching your overall credit limit, your score can be higher than someone who owes $10,000 but has their lines of credit fully extended.
  • Length of Credit History. The longer you have had credit, the better your score will be. FICO scores take into account how long the oldest account has been open, the age of the newest account, and the overall average.
  • Credit Mix. Credit mix identifies your variety of credit accounts — retail accounts, credit cards, installment loans, vehicle loans, mortgages, etc. More variety gives a higher score.
  • New Credit. New credit refers to recently opened accounts. If you have opened a lot of new accounts in a short period of time, that will lower your score.

How is FICO Calculated?

To determine credit scores, FICO weighs each category differently:

  • Payment history is 35% of the score
  • Current indebtedness is 30%
  • Length of credit history is 15%
  • Credit mix is10%
  • New credit is 10%
Here are some things that FICO says it does not factor into its scores:
  • Participation in a credit counseling program
  • Employment information, including your salary, occupation, title, employer, date employed or employment history
  • Where you live
  • The interest rates on your credit accounts
  • “Soft” inquiries (requests for your credit report), which include requests you make to see your own credit reports or scores
  • Any information that has not been proven to be predictive of future credit performance

Tips for Improving Your FICO Score

Here are tips for maintaining and improving your FICO score. The time it takes to improve your credit score depends on the reason your score needs boosting in the first place.  If your score is low because you don’t have much credit history, your score can be boosted within months. If your score is low for other reasons, boosting it can take longer.

  • Keep Credit Balances Below Limits. Getting a high FICO score requires having a mix of credit accounts and maintaining an excellent payment history. You should keep your credit card balances well below their limits. Maxing out credit cards, paying late, and applying for new credit all the time will lower FICO scores.
  • Dispute Errors. It’s possible to improve your credit score in a matter of weeks. For example, you could successfully dispute errors on your credit report, pay down credit card debt, or pay off collections accounts. These actions could remove negative information from your credit report or add some positive info, either of which may benefit your credit score.
  • Pay Bills On Time. Realistically, here’s what you need to do: pay your monthly bills on time. A single on-time payment won’t do much to improve your score. Paying your bills regularly on-time will.

Here’s how different actions can negatively affect your credit score and for how long:

Action Avg. Recovery Time Credit Score Impact
Applying for Credit 3 months Minor
Closing an Account 3 months Minor
Maxing Out a Credit Card 3 months Moderate
Missed Payment / Default 18 months Significant
Bankruptcy 6+ years Significant
Source: VantageScore

Have questions about FICO or anything else mortgage-related? Give us a call!

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. 

First Time Buyer FAQ

First-Time Buyer FAQ

/0 Comments/in /by

For first-time buyers, the mortgage process raises a lot of questions. In this article, we tackle some of the most common questions we receive from customers.

“How Does a Mortgage Work?”

First Time Buyer FAQTechnically speaking, “A mortgage is a debt instrument secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.” (Investopedia.com)

What does that mean in plain English? It means, when you get a mortgage, you are (1) borrowing money from a lender and (2) committing yourself to paying back the money you borrowed in equal monthly payments for the length of the loan.

Because a house can be expensive, mortgage payments are usually spread over 15 or 30 years, making the cost affordable.

Your mortgage payment will consist of principal and interest portions. The principal portion goes toward reducing the amount of money you originally borrowed. The interest portion goes toward paying off the interest, which you can think of as the fee the lender charges to loan you money.

You can make additional payments, if you want, but at the least you need to make your minimum monthly payment each month.

“What Types of Loans Are There?”

Mortgage lenders offer a wide variety of loans designed to meet the needs of buyers. The most common types of loans obtained by first-time buyers are:

  • Conventional loans. This is the most common type of mortgage loan. Conventional loans can be for as long as 30 years or as short as five years, with options in between. They can be fixed-rate or adjustable rate. Conventional loans are provided by banks as well as private mortgage lenders like Mortgage 1. When most people think about home loans, the conventional loan is the one they are thinking of.
  • 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 State 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).

“How Do I Qualify for a Mortgage?”

Different mortgage types have different specific qualification requirements, but the general process of qualifying for a mortgage is the same.

  1. You submit an application with a lender.
  2. You provide the necessary documentation, which includes paycheck stubs, tax statements, bank and asset statements, and identification.
  3. The lender reviews your information. They look at your income, how much debt you have, and they also pull a credit report.
  4. Based upon your status, the lender determines how much money you can afford for a mortgage as well as what interest rate you should receive.

“What Is the Required Minimum Credit Score?”

An important element of qualifying for a mortgage is your credit score. Your lender pulls a credit report to look at your credit score. Different loan types have different qualifying scores:

  • The minimum qualification score for most conventional loans is 620.
  • For FHA loans, the minimum score is 580.
  • For VA loans, the minimum score is 620.
  • For USDA loans, the minimum score is 640.

In addition to credit score, a lender looks at your debt-to-income ratio to make sure you are not overextended.

“How Much House Can I Afford?”

To determine how much house you can afford, follow the 28/36 rule.

Many financial advisers agree that households should spend no more than 28 percent of their gross combined monthly income on housing expenses and no more than 36 percent on total debt. Total debt includes housing as well as things like student loans, car expenses, and credit card payments.

The 28/36 percent rule is the tried-and-true home affordability rule that establishes a baseline for what you can afford to pay each month.

To calculate how much 28 percent of your income is:

  • Multiply 28 by your monthly income. If your monthly income is $7,000, then multiply that by 28. 7,000 x 28 = 196,000.
  • Divide that total by 100. For example, 196,000 ÷ 100 = 1,960.

Do the same for the 36 percent rule, using 36 in place of 28 in the example above.

Got Questions? We’ve Got Answers

Come back next week for part two of this article. In the meantime, 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. 

A First-Time Buyer’s Guide

A First-Time Buyer’s Guide

/6 Comments/in /by

Next to having a child or getting married, buying a house might be the biggest event in most people’s lives. Purchasing a home is an exhilarating symbol of independence. It is the embodiment of the American Dream.

For first-time buyers, the home buying process can seem daunting. Thankfully, Michigan Mortgage is here to help. We assembled this 10-step home buying guide to help first-timers understand the home-buying process.

  • Buying a homeStep 1: Check Your Credit Score
  • Step 2: Save for a Down Payment
  • Step 3: Calculate What You Can Afford
  • Step 4: Choose a Mortgage Lender
  • Step 5: Get Preapproved
  • Step 6: Find a Real Estate Agent
  • Step 7: Find a House
  • Step 8: Make an Offer
  • Step 9: Get an Inspection
  • Step 10: Closing

Step 1: Check Your Credit Score

Your credit score is critical to determining whether you will be approved for a mortgage, as well as the rate you will pay, so it is worth checking your credit score and taking steps to improve it.  Buyers with higher credit scores usually get better interest rates. To obtain a conventional mortgage, you’ll need a credit score of 620 or higher. For FHA loans, the minimum credit score requirement is 580.

Step 2: Save for a Down Payment

When it comes to a down payment, the general rule of thumb is that the down payment on a mortgage should be 20 percent of the home’s price. Putting 20 percent down helps you avoid extra fees such as mortgage insurance.

If you can’t put 20 percent down, don’t worry. A mortgage down payment can be as low as 10 percent, 5 percent, or even 0 percent for certain types of mortgages, such as VA loans or USDA loans.

In addition to the down payment, you will need to save money for closing costs. These are fees related to the processing of your loan. You can expect closing costs to be 3 and 6 percent of the home purchase price.

Step 3: Calculate What You Can Afford

Your mortgage lender will ultimately tell you how much money you qualify for. But even before you speak with a mortgage lender, you can calculate how much house you can afford to make sure you don’t overextend yourself.

When calculating how much house you can afford, use the 28/36 percent rule, which says:

  • Do not not spend more than 28 percent of your gross monthly income (your salary before taxes) on housing expenses
  • Do not spend more than 36 percent of your gross monthly income on monthly debt payments (mortgage, car payments, subscription services, credit cards, etc.)

The calculations are as follows:

  • Maximum Monthly Housing Expenses = (Gross Monthly Income X 28) / 100
  • Maximum Total Monthly Debt Payments = (Gross Monthly Income X 36) / 100

Step 4: Choose a Mortgage Lender

Just as you choose your own real estate agent, you choose your own mortgage lender. Many buyers use lenders based upon the recommendations of their real estate agents, but you can choose whichever lender you want.

When comparing lenders, each one will provide you a Loan Estimate, which defines the loan terms, expected payments, and closing costs for your mortgage. You will be able to compare the estimates to see the differences between what each lender offers.

Step 5: Get Preapproved

Getting preapproved by a lender can be helpful when you are putting in offers on houses. When you are preapproved, sellers will have more confidence that your offer on their house will pass final approval.

Preapproval involves a lender pulling your credit information and assessing your financial situation. The lender will provide you with a letter that indicates the amount the lender is willing to lend you.

Step 6: Find a Real Estate Agent

Real estate agents take the stress out of the home buying experience. Your agent is your chief advocate, confidante and hand-holder in the process, so you want to find a good fit. Agents provide knowledge of the housing market and they have skills in the negotiation process. A real estate agent will represent you throughout the home buying process to ensure that you find the right home, ask the right questions and make the right offer. Agents have the power to negotiate on your behalf and serve as your buyer. Agents are only paid a commission if you close on a new home. The commission they receive is paid by the seller through the purchasing price of the house.

Step 7: Find a House

As you shop for houses, you’ll find that the more houses you see, the more they all start to blend together. So, try to be organized and make sure that you talk to your agent about your likes and dislikes about each one.

When visiting each listing, pay attention to the neighborhood that the home is in, as well as the home itself. Drive around the area. Consider what your commute will be like. Research the schools your kids would go to and figure out how long it would take them to get there. Find out where the closest grocery store and pharmacy is located. Make sure the area fits your style.

When touring each house, take photos and make notes. Make sure each home meets your needs. Think about the style of the home: Does it fit your lifestyle? Are there enough bedrooms? Enough bathrooms? A big enough garage and yard?

Step 8: Make an Offer

For most buyers, this is when the excitement peaks. Once you’ve found a home you want, your agent will work with you to write a purchase offer. The listing price is only a starting point. Your agent will understand the market and help guide you to make the best offer. Once you’ve submitted the offer, the seller will respond with a yes or no or a counteroffer. If your offer is accepted – congratulations, you are one your way to becoming a homeowner!

Step 9: Get an Inspection

If your offer is accepted, you have the right to have the home inspected. Your real estate agent can recommend a professional home inspector. The home inspection will identify areas where repairs or renovations are needed. If significant repairs are needed, you can request that the seller complete them before the closing. If the seller declines or you feel uncomfortable purchasing the house because of what the inspection found, you can most likely withdraw your offer.

Step 10: Closing

This is the big day. The closing is when you gather around a table with the seller and their agent, your agent, and representatives from the title company. You’ll read and sign a slew of papers that finalize your home purchase. It’s an exciting experience, especially for first-time buyers. Once the closing is done, you are now, officially, a proud homeowner!

At Michigan Mortgage, we specialize in helping first-time buyers navigate the mortgage process. We guide you along the way and work to get you the best rate and terms possible.

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. 

Buying a Home with Zero Down

/0 Comments/in /by

What is a “Zero-Down” Loan?

A zero-down home loan is a no-down-payment mortgage offered by the United States Department of Agriculture (USDA) for eligible rural and suburban home buyers.

You might be thinking, “but I don’t live in a rural area.” That’s OK. While the purpose of the USDA loan program is to boost home ownership in rural areas, the USDA’s definition of “rural” is wide ranging and includes many villages, small towns, suburbs and exurbs of major U.S. cities.

These loans are issued through the USDA Rural Development Guaranteed Housing Loan Program. USDA loans have been available since 2007. They are generally intended for low- or moderate-income borrowers.

What Are the Benefits of a USDA Loan?

USDA loans offer many benefits over traditional mortgage loans.

  • $0 down payment. This is the obvious benefit.
  • Competitive interest rates. USDA loans typically offer some of the lowest interest rates on the market. Interest rates on USDA loans are determined by several contributing factors, however the primary factor is your credit profile, as is the case with all mortgage options. Those with higher credit scores often receive the most competitive rates, although borrowers with less than stellar credit may still qualify for a low rate due to the USDA guarantee.
  • Low monthly mortgage insurance
  • Lenient requirements. USDA loans are designed to provide homebuyers with lenient eligibility requirements that help low-to-moderate income purchasers obtain a home.

USDA Loan Eligibility

At a minimum, USDA loan program guidelines require:

  • U.S. citizenship or permanent residency
  • Ability to prove creditworthiness, typically with a credit score of at least 640
  • Stable and dependable income
  • A willingness to repay the mortgage, as indicated by at least 12 months of no late payments or collections
  • Adjusted household income is equal to or less than 115% of the area median income. See here for income guidelines.

A credit score of 640 or above usually helps eligible borrowers secure the best rates for a guaranteed USDA loan with zero down payment. Such a score also rewards you with a streamlined or automated application process.

You can still qualify for a USDA loan if your credit score falls below the margin or if you have no credit history at all. However, the interest rates may not be as favorable. In addition, applicants with no traditional credit history may still qualify for these loans. However, you’ll need to show a reliable financial standing through evidence like timely utility or tuition payments.

How Do I Apply?

Applying for a USDA loan is pretty straightforward.

The first step is to choose a USDA lender, such as Michigan Mortgage. We specialize in USDA loans. Once you are working with us, we’ll find out what home you are interested in, where it’s located, your asset and debt situation, and how much you need to borrow. We will conduct a credit check to assess your credit score, just as we do with a traditional mortgage.

Once all that is done, we’ll ask you to provide documentation, including:

  • Government-issued ID
  • W-2 statements
  • Recent pay stubs
  • Bank statements

The application process is pretty easy, really. Our loan officers are skilled at making everything go smoothly and helping you navigate the process and get you in your home as soon as possible.

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. 

Analyzing Your Current Financial Situation

/0 Comments/in /by

Long before you make an offer on your dream home, it is important to honestly look at your current financial situation.

Variables such as your credit score, employment history and how much you have saved for a down payment can greatly influence the type of loan that you qualify for. Equally as important, the type of loan you qualify for can impact how viable and attractive your offer is to a potential seller.

It is important for you to analyze your spending habits. If you do not have a budget, you should start one now. This will help you understand you spending habits so that the lifestyle that is important to you will be maintainable as a homeowner.

One of the most important considerations is how comfortable with your monthly payment. For a great app to calculate a payment, click here.

As a rule of thumb, total housing costs should be no more than 25 percent of your net pay. So, if your net monthly household income is $3500 per month, a safe mortgage payment would be $875. No two households have the same expenses, so it is important to honestly look at what your expenditures are when you do a budget.

Note that lenders do not use net income when they calculate your debt to income. They use gross pay.  The formula they use oftentimes (but not always) allows you to borrow more than you may be comfortable with or should spend. I call this giving you enough rope to hang yourself. No one wants to be house poor and feel strapped paying for a mortgage they really can’t afford. That is why knowing your budget, comfort level is so important.

It is also important that you are aware of the expenses prior to closing.

  1. Earnest Money or Good Faith Deposit
  2. Home Inspection
  3. Appraisal Fee
  4. Closing Costs and Pre-Paids

These costs vary and some of them can be paid on your behalf by the seller. Additionally, it is a good idea (and sometimes required by financing) that you have a few months mortgage payments in reserves, any moving costs, furniture, appliances, etc. You can typically estimate how much you will need for these costs by getting pre-approved for a loan by a lender that you trust and is highly recommended to you.

Your credit rating is a primary factor in qualifying for a mortgage.

The type of loan, down payment required and the interest rate you qualify for are all dependent on your credit score. Sometimes you will need funds to pay down credit or pay off derogatory credit.

It is important to  consider all of these variables well in advance of looking for a home to purchase. Make sure you have enlisted a trusted advisor who can guide you through this process so that when the time comes, you will be in tip-top shape to purchase your dream home.

Image showing building blocks

What is debt-to-income ratio?

/0 Comments/in /by

Your debt-to-income (DTI) ratio is the percentage of your income that goes toward paying your monthly debts. DTI can often be overlooked as many people assume that a good credit score and a high income are the only two factors needed to be taken into consideration when seeking to purchase a home.

Image showing building blocksHowever, for many lenders, that’s not enough to be considered a good mortgage candidate. As a borrower, your DTI is utilized in various situations to determine your level of risk. For instance, if your DTI is too high, opportunities to make a big purchase, such as a mortgage, may be limited.

How to Calculate Your DTI Ratio

DTI Ratio = (Monthly expenses ÷ Pre-Tax Income) x 100
Start by adding up your monthly bills such as:

  • Rent or house payment
  • Alimony or child support
  • Student loans
  • Auto payments
  • Other

Next, divide your total sum by your gross monthly income (income before taxes). Multiply by 100. Your result is your DTI ratio.

The goal is to keep your DTI ratio as low as possible. The lower the ratio, the less risky you are to lenders. An adequate DTI ratio is below 36 percent. Typically, having a DTI ratio of 43 percent is the maximum ratio you can have in order to be qualified for a mortgage.

Front-End DTI vs. Back-End DTI

There are two variations of DTI: Front-End and Back-End.

A front-end DTI calculates how much of a person’s gross income is going towards housing costs.
Front-End DTI = (Housing Expenses ÷ Gross Monthly Income) x 100

A back-end DTI calculates the percentage of gross income going toward other types of debt (credit cards, car loans, etc.).
Back-End DTI = (Total monthly debt expense ÷ Gross Monthly Income) x 100

The main difference between Front-End and Back-End DTI ratios is that the front-end ratio only considers the mortgage payment and other housing expenses whereas the back-end ratio considers all other types of debt. Lenders will utilize this ratio in conjunction with the front-end ratio to approve mortgages.

Why is Knowing Your DTI Ratio Important?

Your DTI ratio is utilized by lenders as a measuring tool. Your DTI ratio helps lenders determine your ability to manage your finances, specifically, your monthly payments to repay the money you borrowed. Keep in mind that lenders do not know what you will do with your money in the future, so they refer to historical data to verify your income and debt totals. Moreover, your DTI ratio illustrates that you have a sufficient balance between your income and debt, thus, are more likely to be able to manage your mortgage payments.

If you are considering buying a home or have questions about your DTI ratio, give us a call!

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. 

How to Eliminate Mortgage Insurance

How to Eliminate Mortgage Insurance

/0 Comments/in /by

Most buyers have heard of Mortgage Insurance and know that it is insurance that does not protect them but rather the lender against them defaulting on the home loan.

What most buyers don’t know is how they can avoid or when it can removed from their mortgage.

Mortgage insurance (MI) comes in the form of a few different names but it is essentially the same thing.

How to Eliminate Mortgage InsuranceConventional loans refer to it as PMI (Private Mortgage Insurance) whereas FHA and Rural Development (RD) refer to it as MIP (mortgage insurance premium).  VA does not have it at all but they have a funding fee on most loans that is added to the principal balance. FHA and RD have a similar add on fee that is called upfront mortgage insurance.

Regardless of what it is called and where it is charged, MI is a fee that lenders use to offset the losses that occur when people don’t pay on their loans.  It is charged to many to pay for the sins of a few.

For conventional loans, if you have 20 percent down, you will not be charged MI.

FHA and RD have mortgage insurance as a monthly fee regardless of the equity position, so even if you put 20 percent down on these loans, you will have mortgage insurance.

I am often asked how clients can get rid of mortgage insurance. Obviously, not everyone has enough savings to put 20 percent down but they don’t want to have this fee on their loan forever.

Again, RD and FHA have it no matter how much you put down, but for conventional loans, there are a couple creative ways to get rid of the mortgage insurance.

Option 1: Pay a fee upfront and not have a monthly mortgage insurance at all. While this helps reduce the total monthly payment, it is not always a wise decision. If the borrower will not be in the loan for long enough to recoup charge to remove it, the benefit it is not advisable to buy out of the MI. Similarly, it does not make sense to buy out of MI in an interest-rate environment that seems to be going down. In other words, if the person is likely to refinance or sell in the next 24 -to-36 months, it probably does not make sense to pay a flat fee to get out of the mortgage insurance.

Given enough time in the mortgage, however, you can save up to 50 percent of what you would otherwise eventually pay monthly.  In other words, paying upfront gives you a discount if you stay in the loan long enough.

Option 2: Have the lender pay it for you. This is called lender paid MI. Buyer beware on this tactic. While this sounds great, there is no free lunch; that maneuver will inevitably increase your interest rate.

Option 3: Get a first mortgage and a second mortgage. Assume a buyer had a 10 percent down payment. They would finance 80 percent of the sale price on the first mortgage but then close the loan with a second mortgage for the remaining 10 percent. It sounds like a great idea until you realize that the interest rate on the first mortgage has a substantial price adjustment when you piggyback it with a second mortgage. Additionally, the second mortgage itself is generally a higher interest rate and oftentimes interest only. In the end, this tactic is not usually worth the effort.

If a buyer opts to have normal monthly MI, which many do, the next question is how does one get rid of Mortgage insurance once they have it?

Previously we mention that that on FHA and RD the mortgage insurance stays on for the life of the loan. This means the only way to eliminate the insurance is to refinance.

For conventional loans, mortgage insurance is eliminated in a couple of different ways.

It is automatically removed once a consumer pays 22 percent off of the originally borrowed loan amount. It can also be removed with an appraisal that shows 20 percent equity. A third way to remove the mortgage insurance is with a refinance.

In an environment where there has been a lot of equity, interest rates have been reduced, and the consumer has paid down the loan enough, refinancing is often times very good option.

All of this is to say that the need for a trusted advisor who manages your debt annually is imperative.   Our job is just beginning once you close your loan. We help you build financial wealth with real estate and manage your debt to your advantage. We are here to guide you.

Image of a couple searching for homes online.

Five Reasons You Should Consider Refinancing

/0 Comments/in /by

There are many great reasons to refinance an existing mortgage. Mortgage interest has historically been treated differently than all other debt. In fact, mortgage debt is the only debt eligible for a reduction in federal income taxes.

Done correctly, refinancing can be a good financial move (always consult a financial adviser first, of course). Once you’ve decided to refi, reach out to a Michigan Mortgage professional to get the process going.

Here are 5 reasons to refinance.

Your credit score has improved since the original mortgage closing. Normally just adding a mortgage account that has been paid on time for a year or more can have a significant positive impact on an individual’s credit score. Mortgage rates are discounted for every 20-point increase in borrowers credit score up to 740. Depending on how much higher a consumer’s credit score has improved, the potential savings could be substantial, especially if combined with reason number two.

Your originally purchased with less than 20 percent down and you are paying Private Mortgage Insurance (PMI). Refinancing can be a great way to remove those extra premiums for their monthly payments. Since 1991, home values have increased an average of 3.3 percent each year, according to the Federal Housing Finance Agency’s (FHFA) House Price Index (HPI). Just in the past year, home prices went up an average of 6 percent across the country.

You want to reduce the terms of the loan. When combined with number one and two on this list, a borrower could actually get a similar payment with a big reduction in years left to pay their mortgage. Going from a 30-year to a 15-year mortgage can result in thousands of dollars of interest savings over the life of the loan.

You want to combine high-interest loans to a lower, tax-deductible payment. Student loans, personal loans and auto loans traditionally are secured with higher interest rates than mortgage loans. Refinancing and paying off higher-interest loans can be a great way to simplify the number of payments made each month and reduce overall monthly payments.

You want a low-cost source of cash for home improvements or investments. Home improvements can improve the value of the home and many investments that pay higher than the after-tax cost of can provide a source of income over the cost of a mortgage.

A consumer’s best move to always to sit down with a Michigan Mortgage professional to determine the best course of action and match their mortgage to the consumer’s goals. If you would like to start, just call.

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 showing a family in their new home.

Own a Home with Only 3 Percent Down

/0 Comments/in /by

Can you really own a home with 3 percent down?

Yes, yes you can!

The 3 percent down payment option is similar to existing conventional loan programs with much higher requirements. This program, however, can better serve first-time homebuyers because of the following.

  • The mortgage provides the security of a fixed-rate loan.
  • The property can be a one-unit single family home or condo.
  • At least one borrower has not owned a home in the last 3 years.
  • The property will be the new owner’s primary residence.
  • The loan amount is below $453,101.

According to the National Association of Realtors, the average home price is around $250,000. The 3 percent down conventional loan is a great way to expand homebuyers purchasing power.

According to Fannie Mae’s Loan Level Price Adjustment (LLPA) graph, borrowers can have a score as low as 620 to qualify.

Interest rates can be appealing as well.

These loans include rates only about one-eighth to one-quarter of one percent higher than rates available to borrowers putting 5-10 percent down.

Is it worth it to try and save more? The time it takes to save an extra 2 percent for a larger down payment could mean higher home prices and tougher qualifying conditions in the long run.

Are you ready to find out your options? Contact one of our 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. 

Image of a "Debt Free Zone" sign.

Can you get a mortgage with no credit?

/0 Comments/in /by

Sometimes young clients who have not established credit are interested in getting home financing. Other times, clients who have never taken out any credit and pay cash for everything decide it is time to buy but don’t have enough cash.

How did those folks get into a home loan?

With most sub-prime loans going by the wayside, options for these people are limited but not completely closed.

FHA has a no credit loan when a borrower has no credit score but can prove a 12-month pay history on three lines of non-traditional credit.

For example, if someone has utility bills, car insurance, rent, or even something like Netflix, they may be able to get financing. We simply have to get the pay history from the creditor to show they have been on time for 12 months. Note that if they have any derogatory credit like collections, they can negate this option.

Oftentimes, clients with no score also have no non-tradition credit they can add. These clients will need to establish a score. This is not as difficult as it sounds.

If they cannot get a traditional credit card, they may be able to get a secured credit card. Most banks and credit unions will give a credit card that is secured by cash. There may be a minimum amount required, but usually $300 deposited with the bank can secure a card. The consumer then uses that card just like any other credit card to establish credit. This will take about six months and will be good credit for them as long as the balance is under 30 percent of the high credit limit when credit is pulled.

Pitfalls: Many people think that paying off derogatory credit (like collections) or closing out accounts with late payments is s good thing. While this may be the right thing to do, it may not help their score. Having new activity on a derogatory account can often LOWER the score!

Every situation is unique. That is why a consultation with a knowledgeable advisor is the best course of action. Call us for more details on how to establish credit and what is not advisable given your situation.