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Mortgage Secrets Revealed: Things I’ve Learned As A Lender That I Wish I Knew As An Agent

As a 17-year veteran of the Chicago real estate industry, I’ve had the privilege of working closely with hundreds of homebuyers, guiding them through the purchase process and helping them achieve their dream of homeownership. 

I was an agent and a broker for a decade and a half and became a very competent real estate professional. I was constantly learning and developing as a resource and consultant to my clients. 

When I changed hats and became a mortgage loan originator, my eyes were newly opened to valuable lessons that I wish I’d known back when I was a broker. I’d like to share some insights and unveil some hidden truths of the mortgage industry that can empower you to navigate the complexities of the mortgage process with confidence.

The 20% Myth – The Best Mortgage Rates?

One of the most tenacious bits of real estate conventional wisdom amongst prospective buyers is that you must make at least a 20% down payment to get the best deal. One of the common misconceptions that understandably remains amongst real estate professionals is that a 20% down payment will give you the best rate. 

You probably already knew that the former was false. But, did you know that 20% down will NOT guarantee your clients the best possible rate?  

The median buyer makes a down payment of just 14%, with that dropping to 8% for buyers under age 32. Some mortgage products require as little as 3% or even zero down.

If one plans to buy a home using a conventional loan, they’ll need to acquire private mortgage insurance (PMI) if they make a down payment of less than 20%. This policy protects the lender in case of default, and the cost varies, depending on credit score and loan-to-value ratio (LTV).

In some cases, a smaller down payment may actually yield a better rate. This is a relatively new development in the industry and has to do with the two primary rule-making agencies striving to make homeownership more accessible to many. In this instance, the PMI is a benefit, despite being an extra cost (sometimes a small one.) Remember that rates are best on the risk to the lender, and PMI adds an additional layer of protection – after all, it is insurance!

PMI payments were once tax deductible, but they no longer are. Depending on your financial situation, it may be more beneficial to get a piggyback second mortgage for your down payment and closing costs. This is a home equity loan or home equity line of credit (HELOC) that’s issued at the same time as your main mortgage that allows buyers with a lower down payment to avoid the necessity of PMI. Your lender can help you decide if this is the right course.

On the other hand, if you’ve got the funds, making a 25% down payment can help you receive a lower interest rate, particularly on a condominium purchase, and escape a loan-level pricing adjustment (LLPA) — a risk-based fee determined by your LTV, risk profile, and other factors.

It’s All About Your Credit Score

When a homebuyer applies for a mortgage, their credit score plays a vital role in whether they qualify. This three-digit number has a huge impact on one’s financial life, as the higher the score, the easier it is to make large purchases like cars and houses.

If your score could use some work, don’t despair. Recent changes in the way they’re calculated mean many hopeful homeowners may see their scores rise by up to 20 points. There are also a few simple things one can do to build and improve their credit.

When applying for a loan, the lender will pull a “hard” credit report, which is good for 120 days. If that data is “locked in” and the loan is closed within that time frame, then the score won’t suffer from repeated checks.

Underwriters can do a soft or hard inquiry into creditworthiness. A “soft pull” generates a significant amount of data regarding liabilities and the inquiry doesn’t impact the score. A hard inquiry is required by the lending institution to fully approve a loan and a note of the inquiry stays on the consumer’s report for about 2 years. It may also impact a credit score by an average of 5 points, an impact that wanes over time. 

Maintaining a healthy credit score and lowering your debt-to-income (DTI) ratio is a key part of increasing your financial stability and improving your chances of securing a favorable mortgage. It’s also important to refrain from certain actions during the home loan process, such as changing jobs, buying a car, applying for credit cards, or closing any bank accounts.

Crunching Numbers With AI

Mortgage lenders rely heavily on automated underwriting systems (AUS) to streamline their processes and manage risk. New technologies help eliminate the waiting game that can be highly stressful for prospective homebuyers.

This sophisticated software can require less documentation than the old way of doing things, but an AUS still needs a human for data entry, accuracy, and final approval. In the past, getting approved for a mortgage could take weeks. Already widely used in other financial sectors like investment banking, AI enables lenders to assess eligibility dramatically faster. 

Rulemaker Fannie Mae (one of two government-sponsored enterprises that set guidelines for conventional lending) utilizes a tool called Desktop Underwriter (DU), which analyzes the data from Form 1003, removes factors like race and gender, and makes decisions solely based on logic and algorithms. In a competitive market like Chicago, having a DU approval can give your offer an advantage over other buyers and help you avoid disappointment. 

Freddie Mac, the other entity that writes guidelines for conventional lending uses a comparable tool known as Loan Product Advisor, or “LP”.

Communication and Education Are Key

It’s crucial to understand the intricacies of the mortgage process and do your due diligence when it comes to the current housing market, your financial situation, your needs and wants, and finding a real estate team and a mortgage lender who will make you a priority. 

Many hopeful homeowners are unaware of the demand for an appraisal gap waiver in a seller-friendly market. This tool removes a contingency in the purchase contract and assures the seller you’ll cover the difference between the appraised value of the property and the asking price (often limited by a cap.) A savvy real estate team can help you determine if that is the best way to reach your goals, or if it’s smarter to walk away.

Clear and effective communication between all parties involved in a mortgage transaction is essential for ensuring a smooth process, especially in today’s economic landscape. The real estate industry has its own terminology and lingo, and it’s easy for buyers to feel overwhelmed.
Working with an experienced mortgage lender who knows the ropes offers many benefits to potential homeowners and budding real estate investors. Buying property can help you build wealth, provide a secure home for your family, and expand your financial horizons. I’m here to answer your every question — reach out today!

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