Getting a Mortgage: 5 Ways to Improve Your Chances

Buying a home is a major financial investment, and, for many people, the largest purchase they will make. To buy a home, you’ll likely need a mortgage for funding that you can pay off over the long-term. However, not everyone will qualify for a mortgage.  Here are a few ways you can improve your chances on being approved right away;

1. Check Your Credit Report

Lenders review your credit report, which is a detailed report of your credit history, to determine whether you qualify for a loan and at what rate.

By law, you are entitled to one free credit report from each of the “big three” credit rating agencies (Equifax, Experian, and TransUnion) every year.

 You can use AnnualCreditReport.com to request your free copy, which you can get immediately in electronic format. Review your credit report for errors and to get an understanding of your credit history, such as if you have a history of late payments or high credit utilization.

2. Fix Any Mistakes

Read your credit report closely to see if there are any mistakes that could negatively affect your credit. Look for potential errors such as:

• Debts that have already been paid (or discharged)
• Information that is not yours due to a mistake (e.g., the creditor confused you with someone else because of similar names and/or addresses, or because of an incorrect Social Security number)
• Information that is not yours due to identity theft
• Information from a former spouse that shouldn’t be there any more
• Out-of-date information
• Incorrect notations for closed accounts (e.g., it shows the creditor closed the account when, in fact, you did)

Consider checking your credit report at least six months before you plan to shop for a mortgage so you have time to find and fix any mistakes.

3. Improve Your Credit Score

A credit score is a three-digit number that lenders use to evaluate your credit risk and determine how likely you are to make timely payments to repay a loan. The most common credit score is the FICO score, which is comprised of different credit data:

• Payment history – 35%
• Amounts owed – 30%
• Length of credit history – 15%
• Credit mix – 10%
• New credit – 10%

In general, the higher the credit score you have, the better the mortgage rate you can get. To improve your score, check your credit report and fix any mistakes, and then work on paying down debt.

Setting up payment reminders so you pay your bills on time, keeping your credit-card and revolving credit balances low, and reducing your debt. Avoid making a major purchase while you are applying for a mortgage.

4. Lower Your Debt-to-Income Ratio

A debt-to-income ratio compares the amount of debt you have to your overall income. It’s calculated by dividing your total recurring monthly debt by your gross monthly income, expressed as a percentage. Lenders look at your debt-to-income ratio to measure your ability to manage the payments you make each month, and to determine how much house you can afford.

Lenders like to see debt-to-income ratios that are 36% or lower, with no more than 28% of that debt going toward mortgage payments (this is called the “front-end ratio”). In most cases, 43% is the highest debt-to-income ratio you can have and still get a qualified mortgage. Above that, most lenders will deny the loan because your monthly expenses are too high compared with your income. 

To lower your debt-to-income ratio, and both are easier said than done:

• Reduce your monthly recurring debt.
• Increase your gross monthly income.

To reduce your monthly recurring debt, first cut back on purchases you make with credit. Look at where your money goes each month, figure out where you can save and make it happen. To increase your income, you can try to find a second job, work extra hours at your primary job, or request a pay increase.

5. Go Large with Your Down Payment

A large down payment can also help increase your chances of getting approved for a mortgage. The more money you put down, the more you reduce the loan-to-value ratio, which also increases your chances of getting the best mortgage interest rates.

The loan-to-value ratio is calculated by dividing the mortgage amount by the purchase price of the home (unless the home appraises for less than you plan to pay, in which case the appraised value is used).

Here’s an example. Say you plan to buy a house for $100,000. You put down $20,000 (20%) and seek a mortgage for $80,000. The loan-to-value ratio would be 80% ($80,000 mortgage divided by $100,000, which equals 0.8, or 80%). If you can put down $40,000 for the same house, the mortgage would now be just $60,000. The loan-to-value ratio would fall to 60% and it will be easier to qualify for the lower loan amount. 

When you're setting your down payment, remember that a 20% or larger down payment will also mean that you won't be subject to a mortgage insurance requirement, all of which can save you money. Source

DRE ID # 01769353

NMLS ID # 394275

What Is Adjustable-Rate Mortgage (ARM)

 

Adjustable-rate mortgages (ARMs) have an interest rate that may change periodically depending on changes in a corresponding financial index that's associated with the loan. Generally speaking, your monthly payment will increase or decrease if the index rate goes up or down.

ARM loans are usually named by the length of time the interest rate remains fixed and how often the interest rate is subject to adjustment thereafter. For example, in a 5y/6m ARM, the 5y stands for an initial 5-year period during which the interest rate remains fixed while the 6m shows that the interest rate is subject to adjustment once every six months thereafter.

When might an adjustable-rate mortgage make sense?

• If you plan to move before the end of the introductory fixed-rate period, so you aren't concerned about possible rate increases
• If you want an initial monthly payment lower than a fixed-rate mortgage usually offers
• If you think interest rates may go down in the future

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DRE ID # 01769353

NMLS ID # 394275

All About Appraisals

An Appraisal is an estimate of a property's fair market value. It's a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an "Appraiser" typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.

Why Get An Appraisal? Obtaining a loan is the most common reason for ordering an Appraisal, however there are other reasons to get one:

• Contesting high property taxes
• Establishing the replacement cost for insurance purposes
• Divorce settlement
• Estate settlement
• Negotiating tool in real estate transactions
• Determining a reasonable price when selling real estate
• Protecting your rights in an eminent domain case
• A government agency requirement
• A lawsuit

There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.

• Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.

• Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.

• Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.

Who Owns The Appraisal? The mortgage company owns the appraisal even though the borrower paid for it. This is because the mortgage company orders the appraisal on the borrower's behalf, and the Appraiser lists that mortgage company on the report. The borrower does have the right to receive a copy; however it's the mortgage company's discretion to give the borrower the original appraisal report.

Who Determines The Market Value Of Your Property ?

The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don't order an appraisal because they want to obtain the highest price for their home and therefore don't want to be bound by the Appraiser's assessment.

The real estate agent receives a percentage of the price as compensation and often represents the seller in the transaction and assists them in setting the sale price. They perform a Comparative Market Analysis (CMA), which real estate agents in most states are allowed to perform without an Appraiser's License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to arrive at a listing price. Typically the agent will suggest a price to the seller based on the CMA however the seller may choose to list their property for a higher price. Source

DRE ID # 01769353

NMLS ID # 394275

What Are Some Mortgage Requirements?

Lenders set minimum mortgage requirements you’ll need to meet to get pre-approved for a home loan;

The higher your credit score, the lower your interest rate will be

A lower interest rate means a lower monthly payment, which makes homeownership more affordable.

The higher your down payment, the lower your monthly payment

A down payment of 20% will help you avoid mortgage insurance if you’re taking out a conventional loan. Mortgage insurance covers the lender’s foreclosure costs if you default on your loan.

The longer the term, the lower your monthly payment

First-time homebuyers typically choose 30-year terms to get the lowest monthly payment.

The less monthly debt you have, the more you can borrow

Clear out those car loans, student loans and credit card balances if you want the most mortgage borrowing power. Source

DRE ID # 01769353

NMLS ID # 394275

How Does Inflation Affect Mortgage Rates?

High inflation often leads to higher mortgage rates by pushing up interest rates, reducing purchasing power and influencing housing demand, ultimately making home loans more expensive overall.

Inflation can affect mortgage rates in a few different ways, both directly and indirectly. When inflation is high, borrowing money becomes more expensive, and that can influence not only the cost of buying a home but also whether it's the right time to do it.

Understanding the relationship between inflation and mortgage rates can help you make informed decisions about homeownership.

What Is Inflation?

Inflation refers to the general increase in prices of goods and services over time, which leads to a decrease in purchasing power. In other words, when inflation rises, each dollar you have buys a little bit less.

The most commonly used measure of inflation is the consumer price index (CPI), which tracks the average change in prices paid by consumers for a basket of goods and services.

How Does Inflation Affect Mortgage Rates?

When inflation rises, mortgage rates tend to follow suit. Here are a few key ways inflation can influence mortgage rates.

Higher Interest Rates

The Federal Reserve often raises the federal funds rate to combat inflation, the idea being that higher rates can help curb consumer and business spending and help bring high inflation down.

While the Fed doesn't set mortgage rates directly, its actions influence them indirectly. More specifically, the Fed's monetary policy decisions play a major role in shaping investor expectations. In turn, those expectations directly influence the yield on the 10-year Treasury note.

Because the 10-year Treasury yield serves as a key benchmark for mortgage rates, changes in Fed policy often ripple into the housing market, pushing mortgage rates up or down accordingly.

Reduced Purchasing Power

When inflation is high, it erodes the value of money. For lenders, this means that the money they get back in the future will be worth less than it is today. To compensate, they may increase mortgage rates to protect their profit margins.

Market Sentiment

When inflation is high, rising prices for everyday goods and services can erode consumer confidence and make potential buyers more hesitant to take on a large, long-term financial commitment like a mortgage loan.

If enough buyers pull back, housing demand drops, which can put downward pressure on home prices and, in some cases, mortgage rates. Additionally, individual lenders may lower rates to attract new borrowers and keep loan volume steady.

Does Inflation Affect Fixed-Rate Mortgages?

Once you lock in a fixed-rate mortgage, your interest rate won't change for the life of the loan, even if inflation continues to rise. However, inflation can affect fixed-rate loans in several indirect ways:

• Higher rates: When inflation is high, fixed mortgage rates are likely to be higher than they would be in a low-inflation environment.
• Reduced affordability: With inflation driving up prices, including interest rates, your monthly payments may be higher than if you had locked in your mortgage during a period of low inflation.
• Opportunity costs: On the flip side, if you already have a fixed-rate mortgage at a lower rate, you're protected from rising rates and your loan becomes more valuable compared to new mortgages.

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Mortgage Contingency

Mortgage contingencies are important clauses in a purchase and sale agreement that can help protect buyers and sellers during the process of buying/selling a home. These contingencies can release either party from the contract if certain criteria aren’t met.

A typical mortgage contingency clause may specify that the buyer is required to secure financing of a certain amount by a certain date before closing.

In other words, the buyer’s commitment to purchase the home depends on securing financing that meets agreed-upon terms. In this example, if the buyer is unable to get approved for said financing, they can walk away without losing their earnest money deposit.

Why It Matters:

• For Buyers: It’s a safety net so they’re not stuck with a mortgage they can’t afford.
• For Sellers: It sets expectations and keeps financing on track with deadlines.

Types of Mortgage Contingency

1. Financing Mortgage Contingency

Financial contingency clauses will vary from contract to contract, but their general format is this: They typically allow the purchase and sale agreement to be canceled if financing cannot be secured in a specific timeframe. This contingency sets a window—perhaps 20 days, perhaps 60—for the buyer to lock in financing.

This contingency also usually states a minimum loan amount needed to complete the purchase. If the lender approves less, the buyer can be released from the agreement without penalty. But if the buyer fails to secure financing at all within the deadline, they may lose their deposit.

This contingency may also specify a maximum interest rate and loan type, such as an FHA or VA loan. If the buyer is unable to get approved for the target rate or below, the buyer can leave the contract.

2. Inspection Contingency

In this instance, the contingency clause could specify that the purchase of the home hinges on the property passing inspection. If the home doesn’t pass, the seller might have to make repairs or bring down the sale price. Otherwise, the buyer might walk away.

3. Appraisal Contingency

This contingency states that the property must be appraised at a certain value or higher. If the appraisal falls below that, the buyer may negotiate the price or leave the agreement. Appraisal contingencies can also include a time limit within which the property must be appraised.

4. Sale of Previous Home Contingency

This contingency could protect buyers who need to sell their current home to finance the new purchase, enabling the buyer to leave the contract if their existing home doesn’t sell within a certain timeframe.

How Mortgage Contingencies Can Protect Buyers and Sellers

Buyers:

• Financial Safety Net: If financing falls through, buyers aren’t forced into a purchase they can’t afford.
• Earnest Money Protection: Buyers usually can keep their deposit if they cancel for valid financing reasons within the contingency period.
• Minimized Property Surprises: Appraisal and inspection contingencies can help ensure the buyer knows exactly what they’re getting for their financing.

Sellers:

• Structured Progress Tracking: Sellers can be assured of financing deadlines, helping them to plan next steps.
• Ability to Terminate if Financing Falls Through: If buyers miss deadlines or are unable to lock in a loan, the contract can be canceled.

What Happens if the Mortgage Contingency Expires?

If a purchase and sale agreement contains a mortgage contingency that specifies a deadline for the buyer to find financing, for instance, and the buyer misses that deadline, the buyer could lose their deposit.

Why It Matters:

• Buyers risk losing deposits or facing legal consequences if financing fails.
• Sellers gain full leverage to enforce the contract or move on to other offers.

Best Practices for a Smooth Financing Process

For Buyers:

• Contact us to get pre-approved* before making an offer. A pre-approval letter shows sellers you’re a serious buyer, and also helps you get a clear idea of how much house you can afford.
• Monitor interest rates and lock in when favorable.
• You have the option to ask for an inspection contingency to help ensure the property is up to par.
• Ask for extensions early if delays arise so you don’t lose your deposit.

For Sellers:

• Verify the buyer has a pre-approval.
• Set realistic contingency deadlines.
• Request regular updates on financing progress and keep open lines of communication.
• Keep backup offers in play just in case.

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How Power of Attorney Applies to Mortgage Borrowers

In times when a homeowner becomes unable to handle tasks related to their mortgage, a Power of Attorney (POA) may come into play. POA is a legal instrument that allows an authorized person to act on behalf of the borrower to manage the home loan.

Understanding Power of Attorney

Power of Attorney allows an authorized individual (the “agent”) to handle mortgage matters for the original borrower (the “principal”). This is especially relevant when the borrower is unavailable, incapacitated, or otherwise unable to handle loan servicing tasks directly.

POA Requirements

In order for someone to assume POA on behalf of a borrower:

• A valid, notarized POA document with clear authority to act on mortgage matters.
• The POA must be specific enough to cover the intended actions (e.g., “authority to manage mortgage obligations”).
• In some cases, a durable POA is required. In contrast to a regular POA, a durable POA retains the power to act on the borrower’s behalf even if the borrower becomes incapacitated.
• We may request verification of the principal’s (borrower’s) status (for instance, proof of incapacity or a death certificate).

Common Uses in Mortgage Servicing

Once someone takes up POA for a borrower and becomes their “agent,” they’re typically able to make decisions related to the mortgage that might include:

• Loan modification requests: Negotiating or submitting documents on behalf of the borrower.
• Payment management: Making payments, setting up auto-pay or resolving any delinquency issues.
• Loss mitigation: In cases of hardship, the agent may initiate forbearance or repayment plans.
• Foreclosure prevention: The agent can respond to notices, request reinstatement quotes or pursue alternatives like short sales.

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