Think you can’t get a home loan? Think again! Even if your credit score isn’t perfect, and maybe owning a house feels like a far-off fantasy, you’ll want to tune in.
In this debut episode of the Mortgage Secrets podcast, our host, John Downs of The Downs Group at MVB Mortgage, will discuss the six myths around getting a mortgage. From how much you need to put down to the benefits of buying when the price is right; he’ll share stories from his 19 years of experience in the industry to explain what makes the difference between retiring on bread crumbs and living out your years without financial worry.
Plus, he’ll discuss choosing the type of mortgage that will fit your life, the dangers of “pre-approval letters,” and how buying a house can actually help you pay off your other debts. Any excuse keeping you from jumping into a mortgage? This episode explores what your options might be where you are right now.
Hi, I’m John Downs, a mortgage loan officer with about 19 years of experience in the mortgage industry. It’s the only job I’ve ever had, actually. Every day, I get phone calls from people around the country. They’re calls from “What should I do?” or “How should I do this?” or “My loan officer just said this,” or “I don’t think I can.”
What I noticed is that the industry itself doesn’t really promote deep education of trying to help regular, everyday people just do the right thing. That’s why I created this podcast, to dive into all the little things that people should think about before they jump and make one of the biggest decisions of their life: buying a house. It’s the largest financial transaction that most people have. Over the course of this show, we’re going to get into the weeds about all the little things that you should be thinking of. Many of the things you’ll probably hear will make you say, “Man, I never even thought about that,” but after dealing with us and after listening to this podcast, my goal is that you move forward with great confidence because you’ve thought about everything, it feels good, and it feels right. So, let’s jump into this first episode.
Daily, I get phone calls and hear the same myths over and over and over again, but they’re all different.
“My credit is not good enough.”
“I need to pay off my debt before I buy a home.”
“I think buying a house is a sham.”
I’ve heard it all! Today, we’ll take some time to dive into all those myths and unpack and address it front and center to figure out the truth for you. The reason I say “for you” is because I think many of these myths are specific to the individual. There is no right or wrong. There’s you and what you’re trying to accomplish, and then it all makes sense.
I think it’s framed in a couple of different ways. Some people would say, “I need to put down 20% because I don’t want that PMI. That PMI is crazy, and I don’t want it.” A lot of other people think they just need 20% down, and it’s just not true. There are many different ways you could probably talk about this topic, but I think as the mortgage industry and markets evolve, and you take different points in time, my story probably changes a little because the loans that were available also change.
Generally speaking, if people are able and ready to purchase, they should look at the amount of money they have and see what that allows them to do. I think they should say, “I have this much—what can I do?” Most people that go in and have that conversation and really unpack all of the possibilities come out really excited. They usually say, “Wow, I’m so glad I had this conversation because I really didn’t think I could do this. I thought I could never buy. I thought I needed $50,000 for my down payment but I only have $20,000. I can’t believe this is happening!”
That’s one of the biggest myths that I think holds people back, and there are many studies out there from the Association of Realtors, Mortgage Bankers’ Associations, and countless articles that will say the average down payment per is 17%. Another recent article said the average down payment for Millennial buyers was right around 7%.
Again, back to what I said earlier, it should start with you. What do you have? Where are you in the process of buying a house in life? Then map out the numbers and see if it works for you.
Credit scoring is its own animal. It’s very complicated. There are three different credit bureaus and different scoring models. Consumer model scores for instance, give a lot of false belief. Generally speaking, they are a little higher than what mortgage companies use. Credit scores can go as low as the 400’s, and as high as the low to mid 800s. When you look at lending, it’s somewhat safe to say that a credit score of about 740 gives you best pricing, but loans can be done down to scores of 580.
Depending on the loan that you get, your score may or may not affect your rate. For instance, if you have a government-sponsored loan (think FHA as an example), the rate is kind of the same. You could have the world’s best credit or the world’s worst credit and if you qualify for that FHA loan, you’re both getting the same rate.
On the conventional side, it’s a little different. The government agencies, Fannie Mae and Freddie Mac, have come out with these things called “Loan Level Price Adjustments.” In 2008-2009, when the world started foreclosing, I think the agencies looked at the market and said, “Geez, we were pricing everyone the same (kind of like FHA does it today), but we probably should not have because loans with lower credit scores are defaulting at a much higher rate. Let’s just charge a little bit to make those a touch more expensive.”
A lot of people look at that and say, “Well, if my credit score is lower, that means my rate is going to be higher.” That is true, but everything in housing needs to be looked at in the context of time. Let me explain.
Just prior to the election of 2016, interest rates were 3.5%. Let’s say that person with a slightly lower credit score had something like a 3.875% rate. They might have looked at that and said, “3.875% is higher than 3.5% so I’m going to work on my credit and wait to buy a home.”
But then fast forward to March and April of the following year. Their credit score is higher and they finally feel ready. The best rate that was available was now 4.25%. You could go back and say, “Geez, my credit score six months ago with that slightly higher rate was actually better than right now when I have a higher score! I waited to improve my credit because I wanted a better rate, but the market ran away from me and now I’m paying more.” By waiting, housing prices and mortgage can rise while you are waiting for your credit score to improve!
Again, everyone needs to look at the context of time to figure out what is best for them. They should ask, “What would it look like if I did it today?”
Once you own the home, you can restructure the debt if your credit improves through a refinance. Refinancing is so easy these days and so cost-effective that you might as well get in if it works now and the payment is tolerable. If people just had a real conversation with someone to look at real numbers and ran a few what-if scenarios of life, 6 to 12 months down the road, they would probably make a different decision today?
Myth #3 is a big one. I get this one all the time. Now, if you think about it, I’m a top loan officer in Washington, D.C., the land of the well-educated, super smart attorney. Many of which have mountains of student loans. They’ve just been put through the ringer in studying and schooling.
You can kind of group that in with any other debt. “I need to pay off my car.” “I want to pay off my credit card.” “I’ve got to pay off this other stuff.” Many simply say, “I want to go into buying a home debt-free.”
I’ve seen many people who took this approach. After a great conversation, some just say, “You know, it just feels good to not have the debt, so I’m going to pay it off.” Then they call back two years later, and we start the home buying process. I keep very good notes, and I often look back at the old conversation and this is what I find; mortgage rates and home prices at that time were much lower! But there is even more to the story.
A couple things happen when people wait to buy after paying off all their debt. One is that all of their down payment money went to paying off their debt! As a result, they didn’t have a lot of cash which limited what they could buy. Their income may have been awesome and they’re completely debt free, but now they don’t have the down payment required to buy what they want.
Another is mortgage rates were higher. That home they could get for $2,500 per month is now going to cost them $2,800 just because of rising rates. Now, that doesn’t tell the full story because home prices were 15%-20% more expensive because of the market they were looking in. You need to tack on even more for that!
There are other stories of people who actually went in and said, “OK, I know that debt is there. Obviously, one day it needs to go, but I’m going to buy a home now.” Maybe the mortgage payment was a touch higher. Maybe the it was an FHA loan or something like that, maybe had a little bit of PMI. But just two years later, those same people were able to take a home equity line to consolidate their student loans. Some of them actually sold their house, took the cash, paid off their debts, and then still went out and bought another place.
It’s just amazing to see the amount of wealth that people can create by just buying a home sooner in life. In my opinion, there is good debt and bad debt. Good debt is something that has a tax deduction, and bad debt is everything else, but sometimes that bad debt is there, and taking on some good debt can actually accelerate the pay-off of all the bad stuff. It can kind of be the world’s perfect debt restructuring tool.
You want to pay off your student loans? Go buy a house. It sounds funny, but it’s true!
I hear this from lots of different angles. I hear an agent say, “I’m working with this buyer but they’re pre-approved,” or I have a buyer say, “Hey, I’m just going under contract. I’m pre-approved, but I want to get some interest rates or quotes to get ready for choose my lender.”
First, let’s talk about what a pre-approval letter is. A pre-approval letter is basically a lender saying, “I think you can get a loan.” What you should hear is the “I think” part! “Based on what you’re telling me and what I see, you should be OK, I think”, is what the lender is really saying. It ends being as good as the person who actually wrote it for you.
Sometimes people jump in and take online applications which leads to a credit pull, that then leads to automated underwriting decision. But nobody really looked at anything. They didn’t look at your bank statements or your pay stubs or your tax returns or anything like that, and yet they give you this letter. The letter says, “Yeah, based on everything they gave us, the loan looks good,” but if you think of how automated systems work, it’s taking data, running it through a system, and giving an answer.
Well, what if the data is wrong? That’s quite honestly where I see a lot of problems in the business. Whether the income was miscalculated or put into the system incorrectly, or you went to put in $10,000 of assets, and the system read $100,000. A big myth is “I’m cool because I’ve got this letter, and everything is going to be awesome.”
The reality is that people need to look a little bit deeper into how hard they worked for that approval letter. I’m all about being easy on my clients. In the initial conversation if I’m talking to someone, I can ask some higher-level questions like:
A pre-approval letter can be given based on that. We could pull a credit report and say, “Yep, your debts are right, your score is whatever,” and you could go buy a house. I do believe, for many people, you should take that extra step and go a little further. Work with a lender that looks at your pay stubs or uses some of the new digital technology which allows them to extract it all right from the beginning. There’s new technology out there that allows us to digitally extract income and assets removing all of the confusion that goes with getting pre-approved.
There are also plenty of times that this happens to me. An agent calls me and says, “Hey, John, this client is under contract to purchase my listing. They’re set to close in 10 days, and the lender just said they can’t do the loan. I’m confused because they had a pre-approval letter! Why did they write that pre-approval letter if the loan wasn’t any good?” When I begin to unpack it all, it goes back to laziness up front and a loan officer not asking all the right questions.
Sometimes it’s the buyers fault. They just chose to take the easy path. Maybe the lender wanted to go a little deeper but the buyer said, “No, let’s keep it online. Let’s text each other and send a few emails back and forth.” If people just went a little old school and jumped on the phone, earmarked 30 or 45 minutes to unpack some stuff, uploaded some pay stubs and bank statements, they probably wouldn’t have any of those issues, and all those closing problems that you hear about probably just wouldn’t happen.
For me, a pre-approval letter is much bigger than just this high-level overview. What I think is the pre-approval letter should have deep understanding of all the ins and outs of your income, how you get paid, your assets (not only where they are right now but where they were in the last 60 days and how they’ve all flown back and forth)—everything you can think of.
And that pre-approval letter also leads to the recipe of your contract strategy. With just basic pre-approval letter, an agent can only write a contract so strong. If they have confidence that that approval was done correctly, with a super deep-dive, they can write stronger offers, and when you write a stronger offer, you win. The sooner you win, the more equity you build, and then you’re out of the housing rat race, which in some markets can be crazy!
My personal feeling on this is that you should always choose a mortgage that fits your life—whatever that is. Sometimes that means an adjustable-rate mortgage. You’ll hear lenders call them 5-year, 7-year, 10-year ARM’s (adjustable-rate mortgages). That number you hear is the period of time in which the rate is fixed, and nothing changes. Why would you get a 30-year fixed mortgage at a higher rate if you absolutely knew you were moving in 5 years? There can be legitimate savings.
With every adjustable mortgage you get, you need to measure:
When does the rate change and how predictable are my life actions between now and that point in time? I usually say to take your move point and add 2 years. If you know you’re moving in 5 years, do a 7-year ARM. If you think you’re out of here in 3, a 5-year should be OK.
My personal story is my wife and I did a 5-year ARM on a house in 2006. We swore we were going to move out of this house. We said to ourselves, “there’s no way we’re keeping this place!” We ended up keeping that house until 2017! How exactly did this play out? Was it a disaster?
Adjustable rates turned out to be the secret savior of the housing market. A lot of people don’t know that, but everyone kept saying, “ARM’s are bad, and they’re going to adjust and go crazy.”
My rate was about 3.75% on this 5-year ARM, and it adjusted to 2.5% and stayed that way for three years! We eventually refinanced the in late 2016 when rates dropped because we realized maybe we will be in that house for longer.
The point here is you should choose a mortgage that fits your life, you should understand the risks on the high and low side, and you should be prepared to refinance if things change. That’s my personal story.
Some say “Pay your mortgage off as quickly as possible,” or that you should double up payments or do bi-weekly payments to just pay that mortgage off as fast as you humanly possibly can.
If you pay your mortgage down, you’re saving interest on your mortgage. Let’s say you have a 4.00% mortgage rate. Mortgage Interest is (in most cases) a tax deduction, so the real “cost” is 3.00%. The question is, can you put that same money somewhere else to earn more than 3%? The more you understand the compounding effects of long-term market returns, it really shows that most every person should probably take a long mortgage until they get closer to their retirement years.
A few years ago, I actually did this study. I had a group of people from 65 to early 70’s. I learned a lot from those people because half of them. They all lived life almost the same. They were on the same income trajectory all during life. None of them really inherited buckets of money from relatives, but yet some were worth $3-$5 Million and, in another bucket, were worth just $300,000. It’s a huge difference!
When I really unpacked the lives of these people, I learned their investment styles and habits, and one theme is that the group worth $300,000 to $500,000 just didn’t like debt. Every dollar they made went to paying off debt. They had a mortgage, and they paid it off. They did short-term loans. They were somewhat squeezed in their monthly budgets because they were paying that mortgage off so fast. The other group exercised proper leverage. They kept every house they ever owned. They refinanced strategically. They extracted some equity out of one to help buy another and restructure the debt, so the overall debt load was at a better rate.
I think there’s a powerful story in this. All too often, we look at today, and then we think of the returns next year. When you look at life 30 to 40 years out, and realize that every dollar you save today can be worth 15 times that when you retire, would you just keep that money and invest in other directions?
That wraps up the first episode. Just know that there are many things we’re going to be talking about in this podcast series that’s very important to me and the clients that I serve. Check back between now and visit our website or email us at email@example.com. I hope you’ve enjoyed the show!
Special thanks to everyone who joined us. Until next time! Share your thoughts!
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