Saturday, 31 March 2018
The mortgage landscape has changed dramatically in the last several years, so Jose Luis Pascual Fernandez, Director of Real Estate Originations at BBVA in Houston, offered to clear up misconceptions.
Prequalified vs. pre-approved
MYTH: Prequalified is the same as pre-approved.
FACT: Prequalified and pre-approved have important distinctions.
Fernandez says this confuses a lot of people. A pre-qualified customer has given the what is essentially a financial snapshot to a bank to get a very general understanding of how much he or she can afford. But the pre-qualified customer hasn't been thoroughly vetted or approved for a loan by a lender. Pre-approved buyers have filled out a loan application and the lender has underwritten it — usually before a home has been selected.
“If we get a property that's within that range, that dollar amount that they've been pre-approved for, then we just need the contract to go ahead and continue on with the loan application," says Fernandez.
Owning vs. renting
MYTH: Owning a home is better than renting a home.
FACT: Whether you should buy or rent a home depends on your financial situation.
“If you own a home, every month you make that payment, you're basically creating an asset. You're creating wealth," Fernandez says. Even if you're in a rent-to-own scenario, he says, “in essence, you're actually still creating a down payment where you can purchase."
However, one recent study showed that in some circumstances, renting was more advantageous than buying. In some cities like Dallas-Forth Worth and Indianapolis, it's an easy decision to buy over rent if you can afford it. BBVA has a calculator that can help you figure out your unique circumstances. Of course, the best way to wrestle with this question is to get the help of a financial planner.
MYTH: You need a huge down payment.
FACT: Typically buyers put down 10 to 20 percent, but some loan programs may require as little as 3.5 percent.
Fernandez says the down payment required on a home has varied wildly within the past 10 years. Today, it's somewhere in the middle. “There were programs out there where you put zero down. We're now swinging back to where we were in the early '90s and late '80s where you typically have to put anywhere from 10 to 20 percent down."
However, there are also programs for first-time homebuyers that can help reduce the upfront costs. An FHA (Federal Housing Administration) loan, for example, can be as low as 3.5 percent down. Other programs might require 5 or 10 percent.
“With every one of these programs, anything over 80 percent loan to value, typically requires mortgage insurance. That's where things get tricky," he says. "If you're going to put down 3.5 percent, you're going to be paying 16.5 percent in mortgage insurance. That can actually become expensive for somebody."
BBVA has a down payment calculator to help you determine the best course. The best thing to do is to go over the options with your lender and real estate agent to make sure you're taking the best approach to your down payment.
MYTH: You should pay off your mortgage as soon as possible.
FACT: It depends on your circumstances and overall financial picture.
For most people, this isn't even an option. However, if you think it's something you can afford to do, ask a financial planner about what makes the most sense for you. Conventional financial wisdom says that if you have to make a choice between paying more on your mortgage, or putting more in your retirement account, you should add to your retirement savings. But even paying one extra mortgage payment per year can help cut down the interest, and you'll pay off your home sooner.
MYTH: Fees are negotiable.
FACT: Most fees are fixed because they need to be the same for each customer.
A lender can't charge an application fee, but most will charge a fee for the property appraisal and credit report, which can be around $400-$600, upon the customer's acceptance of the terms of the loan. In some cases of customer hardship, that can be wrapped into the loan, Fernandez says, but understand that you'll pay interest on that, too.
It may be better to do your research and truly understand the full costs of what you're getting into, rather than trying to negotiate after you've already agreed to something. Fernandez says that other fees—document prep, title services and inspections—are typically not negotiated because they need to be the same for each customer. However, the smaller the loan, the smaller those fees usually are.
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