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Understanding Mortgage Terms 101

June 9, 2022
From fixed rates and closing costs to rate locks and down payments, there is a lot of jargon regarding mortgages. First-time homebuyers need not fret! We’ve got the 411 for you. Below is a list of terms curated specifically for those looking to understand more about mortgages. Wait… what is a mortgage? Before diving in, let’s ensure we’re in the right spot. As defined by the Consumer Financial Protection Bureau, a mortgage is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you've borrowed. Adjustable-Rate Mortgage (ARMs)This is a loan with an interest rate that changes. ARMs are typically 30-year loans, meaning you’ll repay the borrowed money over 30 years. To avoid crazy rate hikes, ARM loans come with “rate caps,” which limit the amount your interest rate can rise or drop in a single period and over the loan's lifetime.There are many factors to consider when determining whether to obtain an ARM loan. From how much you want to spend up-front and the current state of the interest rate market to whether you’re getting close to retirement or if this is just a starter home. Amortization This is a fancy way of saying, “paying off a debt over time in equal installments.” Part of each payment goes toward the loan principal (see definition below), and part goes toward interest. With mortgage loan amortization, the amount going toward principal starts out small and gradually grows larger each month.Closing CostsClosing costs include the multitude of fees for the services and expenses required to obtain and finalize a mortgage. Those costs may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. A buyer's average closing costs run between 2% and 5% of the loan amount. Down PaymentA down payment on a house is a large sum of money the buyer pays upfront. The amount paid is usually a percentage of the purchase price and can range from as little as 3% to as much as 20% for a property. The required down payment is usually determined by the type of mortgage you choose, your financial situation, and the type of property you’re buying. In terms of your mortgage, a larger down payment will typically mean smaller monthly mortgage payments. EscrowAn escrow is a legal arrangement in which a third-party temporarily holds money or property until a particular condition has been met (such as fulfilling a purchase agreement). In terms of real estate, escrow can protect both the buyer and the seller throughout the home buying process. Throughout the mortgage term, an escrow account will hold funds for taxes and homeowner’s insurance.Fixed-Rate MortgageA fixed-rate mortgage is an alternative to an adjustable-rate mortgage. As the name implies, a fixed rate is a home loan option with a specific interest rate for the entire term of the loan. Essentially, the interest rate on the mortgage will not change over the loan's lifetime, and the borrower's interest and principal payments will remain the same each month. With this type of mortgage, fluctuations in the market will not impact the rate.InterestMortgage interest is the interest charged on loan used to purchase a piece of property. The amount of interest owed is calculated as a percentage of the total amount of the mortgage issued by the lender. Mortgage interest compounds and may be either fixed or variable.Loan PrincipalThis is the amount you borrow and goes down as you begin to pay it back, while interest is the cost of borrowing the money.th.Rate LockA lock-in or rate lock on a mortgage loan means that your interest rate won’t change between the offer and closing, as long as you close within the specified time frame and there are no changes to your application. The downside to a rate lock may be that it’s expensive to extend if a transaction needs more time.A rate lock may also lock you out of a lower interest rate if rates fall after you get your loan offer. When it comes to buying a home, the terminology can leave you spinning. We hope this guide has served as a solid starting point in your homebuying journey. 
Understanding Mortgage Terms 101

Buying a House? Here’s What You Need to Know About Credit Scores

December 7, 2021
Buying a House? Here’s What You Need to Know About Credit Scores.Credit score worry is incredibly common among first-time home buyers. Is your score good enough to secure a loan? Can you boost your credit score before you buy a home? What’s a “good” number? In this article, we try to answer the most common questions about credit scores to help you understand what you need to do in order to secure a loan.How is my credit score determined?Before we dive into what lenders need, let’s talk about the basics. As in, what is your credit score made up of?There are quite a few factors that go into your credit score, including…• Your payment history, including late payments.• Current credit usage and debt.• The types of accounts you have.• Recently opened credit lines.• How long you’ve had your accounts open (the “age” of your accounts).The good news is each of these factors allows you to improve your credit score. Avoid outstanding late payments, keep accounts open, and try to keep debt low (if possible). More on that below.  Why do lenders need my credit score?Lenders use credit scores to assess risk when considering a loan. Based on how much debt you have, whether you’ve paid off loans consistently, and your current credit status, lenders can predict how likely you are to pay off your home loan. For this reason, your interest rate is also tied to your credit score – buyers with higher scores tend to secure lower interest rates.What’s a “good” credit score?First, it’s important to know mortgage lenders are required to follow rules when reviewing mortgage loan applications. There isn’t one secret number that will guarantee you a loan, nor is there a specific number needed for each type of loan. There are four main loan types – here are the minimum credit scores you need to secure each one:• Conventional Loan (the most common home loan) – 620• FHA Loan (the most inclusive loan type, but it does require a 3.5% down payment) – 580• VA Loan (available for active-duty service members and veterans) – 580• USDA Loan (government-backed mortgages for non-urban homes) – None officially, but 620 is preferred. Each of these loans has other requirements, so you’ll need to weigh your options carefully and make sure you qualify for the type of mortgage loan you’re afterHow can I raise my credit score?Considering how important your credit score is, it’s not always easy to find helpful information on improving your score. But that doesn’t mean it isn’t possible. Here are a few tips to raising your credit score:• Do not miss payments! Pay all your bills on time• Your credit utilization factors into your credit score, so try to minimize your usage before buying a home. Consider temporarily increasing payments to lower this number• Don’t open a new credit line at least six months before beginning the home-buying process Opening new accounts lead to a hard inquiry on your credit report, which can impact your score• Keep old accounts open until after you’ve secured a mortgage loanWhat else will lenders need to know besides my credit score?In addition to your credit score, lenders will ask for additional information to determine the risk level of providing you with a mortgage loan, as well as your ability to pay back a loan. Here are a few other factors lenders will be interested in:• Your income and your partner’s income if you’re jointly purchasing a home• Employment history• Your debt-to-income ratio• The amount you intend to use as a down payment• Your savings funds• Whether you’ve filed for bankruptcy beforeYour credit score allows lenders to understand your financial health. But if your score doesn’t meet the minimum to secure a mortgage loan or a lower interest rate, don’t worry. You can raise your credit score by following the tips above. Just remember to be patient – it can take six months for changes to appear on your credit report. Regularly check in on your score, pay attention to ways you can raise your score, and ask for help when needed, and you’ll be ready to take out a mortgage loan in no time. 

How to Get Approved for a Mortgage When You're Self Employed

May 4, 2021
Working for yourself has many benefits: Flexible hours, more freedom on projects, and no dealing with bosses or co-workers. However, some things are a little more complicated when you’re freelancing… and one of those things is buying a house. But don’t worry! With just a little bit of prep work, you can realize your dream of owning a home.Why is the Home-Buying Process Different for Freelancers?The majority of the home-buying process is the same for everyone. You’ll complete the same applications, get your credit score verified, and disclose debt and assets. What’s different is the process of proving your income.Mortgage lenders need to verify how much a borrower is earning and a history of earnings. For traditionally employed prospective buyers, lenders can contact their employer for these details. Freelancers need to provide this on their own.What Do Freelancers Need to Prove Income?Typically, lenders want to see at least two years of income history. These are a few examples of documents you might need to provide:Employment verification in the form of letters from clients or a licensed CPA, proof of licenses you hold, and evidence of insurance for your business.Income verification through at least two years of tax returns, bank statements, and profit-and-loss forms.How Can Freelancers Improve Their Chance of Being Accepted?Lenders are going to look closely at your credit score, credit history, and current debts. They will also consider savings or assets, which can be used for a down payment and cover closing costs.You can improve the chances of having your mortgage loan accepted by improving your credit score, keeping your debt-to-income ratio low, keep balances on credit cards low, and start saving for your down payment.Tips for Increasing Your Credit ScoreA high credit score can prove to lenders that you’re able to repay a loan. Check your credit score to make sure there aren’t any errors – and correcting them if there are.Make sure you don’t open any new credit lines, including credit cards, car loans, or anything else.Do not close any credit card or other accounts right now! Even if you have a credit card you haven’t used in years, don’t be tempted to close it out. Doing this can affect your credit utilization ratio, which affects your credit history.Owning a Home Isn’t Just a Dream!Don’t be discouraged by the extended process for freelancers to secure a mortgage. As long as you can gather the documentation you need to verify and document your income, you’ll be ready to start the process. If you’re a few years out from starting the process, now’s the time to boost that credit score, get your debt-to-income ratio low, and start saving. Good luck!
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