No matter where a buyer is in the process, if they are financing, chances are they have questions about mortgages. This week, we are going straight to the source to have our favorite mortgage professional Zack Tolmie answer the most common questions we encounter.
1) I have a lot of student debt. That means I can't qualify for a mortgage, right?
Interestingly, banks aren’t concerned about the amount of debt you have. We care instead about your monthly debt payments. As long as you can afford to make your mortgage payment and your student loan payments, the amount of your student debt shouldn’t impact your ability to qualify.
2) I read that the Fed just raised/lowered rates, this means that mortgage rates are going to go up/down, right?
Not necessarily. The Fed forecasts well in advance when they expect to change rates. Banks proactively update their rates based on these forecasts. By the time that the Fed finally makes the change, mortgage rates have already been updated well in advance. During the Fed rate decrease/increase announcement, banks are already thinking ahead to the next anticipated rate change by the Fed.
3) I heard that the housing crash in 2008 was because lots of people did adjustable rate and interest-only loans. These are never a good idea or responsible choice, so I should not consider them, right?
An adjustable rate or an interest-only loan might be worth considering if you know you will not own the property for a long time, or if you know that you’ll pay off the mortgage very quickly. These kinds of loans have lower monthly payments for the first 5-10 years. After that, the payments could increase substantially. Prior to 2008, borrowers weren’t always aware that payments could jump. It ended in disaster when homeowner’s couldn’t afford their new payment. If you know you’ll be long gone by the time the payment adjusts, you might want to discuss one of these options. But if you think there is a good chance that you’ll have the mortgage for a long time, a fixed rate is definitely the safest bet.
4) I shouldn't rate shop or consult with multiple lenders (or go to a lender before I'm ready) because when they pull my credit, it will lower my credit score.
I work for a bank, and I still called a dozen banks before locking my rate for my mortgage. I wanted the lowest rate possible. Having a mortgage lender check your credit has a negligible effect on your credit score (it’s having multiple banks pull your credit for a credit card application that really hurts your score). If you call several mortgage lenders within a short period of time and have them pull your credit, it will only affect your credit score as if one single lender made a credit inquiry. So, get your rate shopping done in the same calendar month. But don’t avoid shopping for the best rate.
5) Do most loans have a prepayment penalty? What happens if I prepay part of my principal at some point?
No, prepayment penalties are incredibly rare. If you make a prepayment (for most loans), your mortgage payment won’t go down. Instead, you’ll pay off the loan faster and shorten the term of the loan. For example, instead of having a payment of $2,000/month for 30 years, you’ll have the same $2,000/month payment for just 20 years. By prepaying, more of your payment each month will be applied toward lowering your principal balance, and less will be spent on interest. You save in time and interest.
Some banks give you an additional option to recast your loan. By recasting, your term stays the same, but your payment goes down. So instead of having the payment of $2,000 for 30 years, you’d have a payment of $1,500 for 30 years. In recasting, you save in cash flow and interest.
6) I already identified my property, put in an application, and got a loan commitment. But my commitment says it expires on X date. What happens if I can't close by then?
Nothing to stress about here. Your paystubs, bank statements, and credit report have a “shelf life” of about four months. After four months, you’ll need to update your paystubs or bank statements, or have your credit pulled again. Once we’ve updated those items, we can update the commitment letter.
Zack Tolmie is a home lending officer at CitiBank, previously vice president of mortgage lending at Guaranteed Rate. Thank you Zack for answering our questions this week!