Mortgage Broker Versus Banks Explained


Buying a house is an important part of life. It is exciting, scary, and stressful all at the same time. There are so many things that you should know when you are preparing to buy a house. When you feel like you do not have all the information, it can be a more stressful time. While there are many details that go along with home buying, there is one that is not talked about much. That detail involves a mortgage broker. You may not even know what a mortgage broker does. Do not worry about that because it will all be explained in the article. Continue reading to find out the differences between a mortgage broker and a bank so you can choose the right one for you.

How Do I Know If I Should Buy A House?

Buying a house is the largest purchase you will make in your life. It is the most expensive and probably the one that will cause you the most headache for years to come. You should make sure you are ready to make the plunge into homeownership before you even start looking at houses. There are a few key items to indicate if you should buy a house now, or maybe wait a little longer. Making sure you are ready for the responsibility is key. While it makes sense to be nervous about taking on a mortgage and the upkeep of a house, if it makes you feel completely unprepared then you may not be ready, yet.

If you have a secure job and believe that you are going to stay where you are for a while, then now may be a good time to buy a house. When you buy a house, it makes you feel a little more stable in your life and community. If you know you want to stay where you are for a while, buying a house may be a good idea. Perhaps you are interested in getting a tax break. If you do not have a mortgage to claim, you are missing out on a tax break and could pay higher taxes. Owning a house also gives you the opportunity to earn equity in something. As you pay the mortgage, the home becomes yours. When you have paid it off completely, you own it and it becomes your largest asset.

What Is A Mortgage?

If you think that you are ready to buy a house, there are some details that you need to understand. A mortgage is an agreement between you and a lender. The lender agrees to allow you to borrow a significant amount of money to purchase a house and property. You promise the lender that you will make a payment each month to repay the loan until the agreed upon time has ended. At the end of that term, the mortgage has been paid and you are now the sole owner of the home and property. If you do not pay back the mortgage, the lender has the right to take your home.

When you borrow money for a mortgage, you are borrowing the cost of the house, but you are also paying interest on the money you borrow. The amount of interest you pay is directly related to your credit. A mortgage broker may be able to help you find a mortgage with a lower interest rate. It is important to note that when you are considering the purchase of a home, you should not only shop for a house, but also do some mortgage loan shopping. Not all mortgages are alike and you have to find the one that is the right fit for you.

Mortgage Broker versus Banks – Which One Is Better For You?

Let’s get to the point and explain one possible dilemma you may have when getting a mortgage. This dilemma is whether you need a mortgage broker or a bank. Read on and find out what are the pros and cons of each, which one is better for you, and more about every option.

What Is A Mortgage Broker?

I would like to be clear here by saying that you do not need a mortgage broker to get a mortgage or to buy a house. However, you may want to consider at least talking to a mortgage broker to see what value he or she can provide to you. Remember, anything you can do to make this experience easier for you, you might want to consider. A mortgage broker is there to help you. Yes, of course, this person wants to get paid to provide you a service, but the service is completely to your benefit.

A mortgage broker is basically the middleman for you. This is the person that finds you the best loan with the best rates for your credit score. This person works for you to find the right fit for you. This is the person that works with the banks and applies for several different loans for which you may qualify. Typically, a mortgage broker has great relationships with the banks and works hard for you while you sit back. They are individually licensed and do not work for a specific bank or lender.

This person handles most of the work for you. He or she gathers all the documentation that you need, pulls your credit report and history, as well as verifies your employment and income. He does this all in a short turnaround time because he is completely dedicated to providing this service. Once you pick the loan that you feel works best for you, the mortgage broker interacts with the underwriter for the lender, your real estate agent, and the closing company to make this transaction as easy and simple for you as possible.

Do I Need One?

You certainly do not need a mortgage broker to buy a home. The real question should be do you want one? A mortgage broker makes the process easier for you, but also takes it all out of your hands. I know some of us like to be in control of every step along the way. If you are that person, you might not find much value in a mortgage broker.

If you someone that stresses easily and finds comfort in someone who is an expert doing the dirty work for you, then a mortgage broker might be the way for you to go. In addition, using a mortgage broker can save time for you. They can save you the time it takes for you to fill out loan applications. Once you get a response from the lenders with loan estimates, you are going to want to do a side by side comparison of those estimates. A mortgage broker can help you with those comparisons. If there is any interaction with the underwriter after you have decided which lender you plan to use, a mortgage broker can handle that for you.

Does It Cost More For A Mortgage Broker?

There are fees associated with using a mortgage broker. If you are considering using a mortgage broker, you should be aware of the fees and how they are paid. There are two basic types of mortgage broker fees. One is lender based compensation and the other is borrow based compensation. The broker decides how he or she collects the fees, so it is important for you to ask before signing a contract with a broker.

Lender based compensation means that the lender pays your broker’s fees. Those fees are passed along to you in your mortgage, so you end up paying the fees for the life of your mortgage. The downside to this type of fee schedule is the broker may decide to go with the loan that pays a higher fee to them. Borrower based compensation means that you pay the fees at the time of closing. This is often in an origination fee, which varies on the state, your broker and the amount of your loan. The downside to this is you have to have this money at the time of closing. The positive side to this is your mortgage payment is not inflated by the cost of your broker’s fees. You also do not have to worry about the broker selecting a lender that pays a higher broker fee.

Keep in mind, no matter what mortgage broker you use, there is always be an additional fee to your residential mortgage. It may be worth it to you to pay that fee for the peace of mind using a broker gives you. If you have the money to bring to closing to pay for a broker, then this may be the best option. Just be sure no matter which choice you make, it is the right one for you at this time.

What Does A Bank Offer?

A bank does not really offer more than a mortgage broker offers to you. If you have a long-standing relationship with a bank, it might make more sense for you to use that bank. Often times, your real estate agent may have a relationship with a lender that you can use for your mortgage. There are always fee associated with buying a house and obtaining a mortgage. Even if you use a mortgage broker, you still need a lender to give you the money. That lender has fees of their own, which they pass along to you, either in your mortgage or at closing. If you utilize the services of a mortgage broker, there are fees on top of the lender’s fees.

The only real benefit to going directly to a bank instead of using a mortgage broker as a middle man is that you do not have to pay additional fees. If you already know which bank you want to use, there is no real reason to use a mortgage broker. You are adding fees that you do not have to pay on top of the lender’s fees.

But, if you still don’t know where to look for a mortgage loan for your new home, maybe Loanry can bring some options to you. The only thing that you need to do is to enter your information and see if you qualify:

Are Bank Fees Different?

The fees that a bank charges are different from the ones a mortgage broker charges. You always have to pay the bank fees when you borrow money, however, you only have to pay broker fees when you use a mortgage broker. So you should be aware of the fees that you will have to pay as part of your mortgage. You will get the total cost that you have to bring with you at closing. And you should have an idea of how much money is expected of you in advance. You may not be given the actual number until a few weeks before closing. That may not be enough time for you to gather the money you need.

Some of the fees that a bank may charge are:

Origination fee – This is a fee that lender charges you for handling all aspects of your loan. This covers their administration costs, application fees, underwriting fees, processing fees and really any other fee that they would like to add. You must bring this money to closing. It does not get included in to your mortgage payments.

Points – This is something that you can negotiate with the lender. You can lower your interest rate by paying points. You must pay for these points at closing. One point will cost you about 1 percent of your mortgage, or about $1,000 for every $100,000 borrowed. Each point you pay can reduce your interest by about .25 percent. This allows you to pay some of your interest up front so it is not attached to your mortgage payments.

Other Fees – There are other fees associated with buying a house. You have to pay for an appraisal and title insurance. You may be able to negotiate the payment of these items. Most of the time you have to pay these fees at closing.

Why Does My Credit Matter?

Your credit matters because your credit score directly impacts the interest rate you receive. Your credit score is a three digit number that appears on your credit report. And your credit report gives you a detailed list of all of your credit activities. It shows your payment history, how much debt you have, and how you use it. And it can also show the age of your credit. It shows all of your late or missed payments and even loans on which you have defaulted. Your credit score is also highlighted on your credit report. Your credit score gives lenders an indication of your credit worthiness.

You should know your credit score before you attempt to get a mortgage. One way you can do that is by pulling a copy of your credit report. You are entitled to a free copy of your credit report every year. When you want to buy a house, it is a good idea to look at your credit score about 4 or 5 months before you apply for a mortgage. You should also begin looking at the mortgage rates. A 740 or above is a great credit score. Anything between 680 to 739 is average. A score between 620 to 679 is fair. Anything between 580 to 619 is poor and a score below 579 is bad.

You should also know that when you apply for a mortgage, the lender looks at your FICO score and the credit score. The difference with a mortgage is the lender pulls a credit report from each of the three credit bureaus. Typically all three scores are a little different. As a result, the lender uses the middle range score. So the way that looks is if your credit scores are 600, 620, and 650, the lender uses 620.

Can I Improve My Credit?

You can still get bad credit mortgage loans, but it is always a good idea to improve your credit score. While it is possible to improve your credit, it does take consistent and hard work. You must be prepared to make some compromises so that you can get your credit score to increase. One of the best ways to improve your credit is to review your credit report for errors. If you find any, you should work to correct them immediately. If you can have errors removed from your credit report, you can increase your credit score.

After that, you should make every effort to reduce your debt as much as you can. The higher your debt is means the lower your credit score is going to be. The lower you can get your debt also means the lower your debt to income ratio is going to be. The lower your debt to income ratio means the higher your credit score. Lenders prefer to see your debt to income ratio below 30 percent. Another way to improve your credit is to increase your income. You may not be able to change your income, you can get a second or side job. This allows you to take all the money you earn from your second job and put it towards paying off your debt. This may help you to cut the amount of time it takes you to pay off your debt in half.

Do I Need A Down Payment?

Yes, you typically always need a down payment. There are some grants or loans that do not require you to have a down payment when you obtain the loan. The down payment is the money you put down on a house. You pay this money at closing. You do not borrow this money from the lender. So you need to provide this money on your own, out of your pocket. This is the amount of the purchase price house for which you pay. This money is supposed to come from your savings account. You can pay it electronically from your bank account, or with a check, or with a credit card. This money is not included in the amount of money you take out for your mortgage.

The higher your down payment that means the less money you borrow from the lender. This also means that your monthly mortgage payment is going to be lower. You may hear many people debate over the correct amount that you should put down with a down payment. You should put down as much money as you can afford for your down payment. Most lenders want you to put down at least 20 percent of the purchase price of the house.

If you do not put down 20 percent, the lender sees you as a bigger risk, so they want you to pay PMI. When you do not pay at least 20 percent down, that means that the bank could allow you to borrow more than the house is worth. PMI is private mortgage insurance that increases your monthly payment. The private mortgage insurance gives an extra layer of protection to the lender. If you default on the loan, the insurance covers the money you owe to the bank.

What Should I Avoid?

When it comes to obtaining a mortgage, there are a few other details that you should consider. You should make sure that you get pre-approved. Most sellers require that you get a pre-approval notice. This proves that you are serious about actually buying a house. It also lets you know how much of a mortgage you qualify to obtain.

Just because a lender approves you for a certain amount, it does not mean that you should actually borrow that amount. Most likely, even though the bank thinks so, you may not be able to afford that amount. You should create a budget to determine how much money you can afford to pay in mortgage payments. There are many mortgage calculators available online that will help you estimate how much your actual mortgage payment may be. Once you have a good estimate of your mortgage payments, and you have a good budget that indicates how much you can afford to pay. Hopefully, the two numbers match. If they do not match, you need to adjust how much you want to spend on a house.

You should avoid not getting an inspection on the house you want to buy. A house inspection can tell you about any problems that might be hidden in the house. It can tell you if there are houses that you might want avoid purchasing because there might be hidden problems. You also want to make sure that you read all the entire mortgage documents. You especially should make sure that you read all of the fine print on all the mortgage documents.

Other Terms I Should Know

There are a few terms that you should understand before you embark on house shopping.

Loan to Value Ratio (LTV) – This is the ratio of the value of the house versus the amount the lender allows you to borrow. The lender wants the LTV to be 80 percent or less. This is where your down payment of 20 percent comes in.

Fixed-Rate Mortgage – This is a mortgage with a fixed interest rate. The rates that the lender gives you at the time of the loan remains the same throughout the life of the mortgage.

Adjustable-Rate Mortgage (ARM) – This is a mortgage with an interest rate that is adjustable. The mortgage starts at one rate, which is usually lower, and it stays there for a set period of time. That set period of time is typically 5 years. After that set time, the rate is adjustable based on the prime rate. You take your chances with an ARM, because it is possible that the interest rate increases your mortgage to a rate that you cannot afford to pay.

Title Insurance Company – This is a company that is a settlement agent that acts during closing. They take the money from the buyer or the lender and make sure that everyone that should get paid during closing gets paid.

Conclusion

I have given you a lot of information about mortgages, mortgage brokers and fees from lenders. It is important that you have a full understanding of all of the fees associated with a mortgage before you apply for one. When you buy a house, you have the option to use a mortgage broker or work directly with a bank. There are additional fees associated with working with a mortgage broker that are applied on top of any fees that the lender applies to your mortgage.

You should also understand if you pay the fees upon closing, or if you pay them as part of your mortgage payments. To understand the fees and how they work, you should be sure to read all of the documents from the lender, including any and all of the fine print. You are responsible for understanding all of the information that the lender gives you.

Your Guide to Understanding the Different Types of Mortgages

When you are buying a home, it’s likely that you will need a residential mortgage. There are different types of mortgages that you may need to consider based on your unique situation. It is important to shop around and make an informed decision. Also, remember, you are not alone in this. You surely have a lot of people around you who can tell you about taking out a mortgage loan from personal experience. Listen to them, but also educate yourself. This will help you make the best choice for your situation.

Statistic: Value of mortgage debt outstanding in the United States from 2001 to 2018 (in trillion U.S. dollars) | Statista

Basic Types of Mortgages

There are different types of mortgages available to everyone based on your credit score and then there are some that are only available to certain groups of people.

Conventional Fixed-Rate Mortgage

Резултат слика за fixed rate mortgage infographic

These mortgages have a fixed rate so they are considered a safe bet due to consistency. The monthly payments won’t change over time and this is the standard mortgage you will likely to be offered if you are a typical candidate. A conventional fixed rate mortgage is available in 10, 15, 20, 30, and 40-year terms. The ones that are the most common are 15 and 30-year terms. For this type of mortgage, you will be required to put down 20% of the home price. If you put down less than this then the lender can require you to have private mortgage insurance (PMI).

There are a lot of pros of these mortgages. These mortgages can be used for a primary or secondary home, along with an investment property. The overall borrowing costs will tend to be lower than with other types of mortgages, even if the interest rate you get is slightly higher. When you have 20% equity in the house, you can ask the lender to stop your PMI. The cons of these loans are that a high credit score is required and there are significant documentation needs in order to establish your employment, assets, and income.

These mortgages are good for a borrower who has an employment history, a stable income, and a strong credit profile. While 20% is required to avoid PMI, as long as you can still put down 3% and have a high credit score you can qualify.

Interest-only Mortgage

When you get an interest only mortgage, you have the option to only pay the interest portion of the payment during the first five to 10 years. You aren’t required to do this because it can slow down your repayment time but this can be useful. After this time period, the rest of the mortgage will be paid off like a conventional fixed rate mortgage.

Adjustable-rate Mortgage

There are many different types of these mortgages. These work with the idea that the interest rate will change over time throughout the life of the loan. The interest rate changes based on the economy and the current cost of borrowing money. A common type of this mortgage is a 5/1 loan. With this option, the interest rate stays the same for the first five years, and then the interest rate will change for the remaining 25 years.

You can enjoy a lower fixed rate for the first few years of homeownership, which saves you a lot of money on interest payments. However, monthly payments can be unaffordable if the interest rates go up higher than you expect. This can result in loan default. Home values can also fall, which will make it harder to sell or refinance your home before the loan resets.

You need to be comfortable with a certain level of risk before you get this type of mortgage. If you don’t plan on staying in your home beyond the first few years then this can be a good way to save on your interest payments. However, if you plan to make this home a more long-term investment you need to think about the future.

FHA Loans

These are different types of mortgages that are backed and guaranteed by the Federal Housing Administration. Since they come with built-in mortgage insurance to protect against the possibility of you not being able to repay the loan, those without the best credit scores and who can only have a smaller down payment can qualify.

A government-backed loan can help you finance a home when you wouldn’t qualify for other options and the credit requirements are more relaxed. The first time and repeat buyers can use these loans. The mortgage insurance premiums may not be able to be canceled on some loans once you reach a certain point of equity.

An FHA loan works with flexible underwriting standards that allow borrowers to not have high incomes or the best credit. Mortgage insurance can still be required. It’s usually required when a borrower puts less than 20% down. There are different types of FHA loans since the FHA will also insure other loan programs that are offered by private lenders.

FHA 203(k) loans will allow a homebuyer to purchase a home and renovate it with a single mortgage. A current homeowner can also use this program to refinance their current mortgage and add the remodeling projects into the new loan. The FHA Energy Efficient Mortgage program allows a homebuyer to purchase a home that is already energy efficient. They can also buy and remodel an older home to be energy efficient and the costs of the updates will roll into the loan without the need for a bigger down payment.

An FHA Section 245(a) Loan is geared toward a borrower whose income will increase over time. With this loan, you will start with smaller monthly payments and then those payments go up over time. There are different plans available with different increasing payments amount. In order to find an FHA loan, you get it from FHA approved lenders. The FHA doesn’t give out loans and instead just insures them.

VA Loans

These loans are for veterans of the U.S. armed forces and occasionally their spouses to buy homes. Many of these loans don’t require a down payment since the Department of Veteran Affairs guarantees them.

VA Loans will usually offer the best terms and flexibility when it comes to the loan options offered to military buyers.

USDA Loans

These different types of mortgages are backed by the U.S. Department of Agriculture and can help rural home buyers with low to moderate incomes qualify. Some of the USDA loan limits are based on the family size and local market conditions. Loans can be used for regular, modular. or manufactured homes that are no more than 2,000 square feet in size.

Piggyback/Combo

If you can’t afford a 20% down payment, you will have to get private mortgage insurance. People try to avoid paying for this insurance by getting a piggyback or combo loan. This means you take out two loans of any type at the same time.

Balloon

With this type of mortgage, you only pay interest for a certain period of time and then the total principal amount will be due after this time period.

Jumbo

A jumbo mortgage refers to one that is too big for the federal government to guarantee. The limit is currently set at $700,000. This means that the borrower is likely not going to get the lower interest rates that are available on smaller loans. These loans are generally more common in higher-cost areas and do require more in-depth documentation to qualify.

A jumbo mortgage means that you can borrow more money to buy a home in an expensive area. The interest rates are still comparable with other types of loans. However, you will need a higher down payment and a high credit score. Many require a score of 700 or higher but you may qualify with a score of 660. You need to have a low debt-to-income ratio and you will need significant assets.

Second Mortgage

If you already have a mortgage and have some equity built up then you are able to take out a home equity loan or a second mortgage. This is another loan that is secured by the equity in the home. These loans can have a higher interest rate than your first mortgage but can be used for funding a home renovation and other necessary expenses. It can make sense to take out a second mortgage when there are low-interest rates available.

Subprime Loan

A subprime loan refers to a loan given to a borrower with a higher risk than those who are referred to as prime. These are bad credit mortgage loans. Prime borrowers offer the lowest risk. A prime borrower has a lower risk because he or she has a high credit score, low debt, and a good income. A subprime borrower can have characteristics such as a lower credit score, higher debt load, and lower-income. There are two different situations where borrowers can be considered subprime. Subprime borrowers will usually have no credit or poor credit.

A person with no credit has never borrowed money before. Borrowing money is the only way to build credit. Those with poor credit may have had problems with repaying debt in the past or have too many loans. Income may also be insufficient to cover any outstanding loans. Subprime loans will affect interest rates. A subprime rate is a higher interest rate for those with bad credit. If you are a bad credit borrower you can expect this.

Understanding Mortgage Terms

To understand the different types of mortgages, it also helps to have an understanding of the terms that come along with them. While there are many mortgage terms, there are some that will be used no matter what type of mortgages you seek.

APR

This abbreviation stands for annual percentage rate and it’s the total effect cost of the extension of credit. This will include the loan interest rate and upfront cost.

Appraisal

This is the written estimate for the current market value of the property. A professional appraiser prepares it.

Points

This is an optional prepaid charge that a borrower can pay in order to lower the interest rate on the loan. These points will affect the cost of the loan. A single point will equal one percent of the interest. These can also be referred to as discounts points.

Closing

This is the meeting at which the involved parties will sign the final loan documents. These documents include the deed, mortgage, statements, and more. The settlement agent, who is usually an attorney, will collect the buyer’s funds from them and pay the transaction fees, including approval fees and document recording fees. The agent will also pay the seller for the net proceeds of the sale. At the time of the closing, the purchase paperwork is recorded. During the closing, there will be closing costs. This is a catchall term that refers to the cost of servicing the loan. It can include the costs of processing and closing the loan. Some fees include attorney fees, credit report fees, termite inspections, and title insurance. The closing cost will apply whether or not a home was financed.

Underwriting

This is the process of either approving or denying a home loan based on the evaluation of the property and the ability of the borrower to pay back the loan.

Qualifying For a Mortgage

Each of the different types of mortgages will have their own requirements for credit scores, debt-to-income ratio, qualifying income, and down payment requirements.

One of the biggest factors in determining whether or not you qualify for a mortgage will be your credit score. If you have good credit then you don’t really have to worry. However, if your credit isn’t that great then it can be more difficult to get approved for a home loan. There will be a set of minimum requirements for credit scores for each loan program. However, lenders don’t necessarily have to follow these requirements and can set their own credit score guidelines.

In order to qualify for a mortgage, not only are there requirements for a credit score but there are also income guidelines. To qualify, you will need to prove your income is consistent and sufficient. If you have a salary then this is easy. If you are self-employed or have a commission-based job, this can be more challenging. You will need to have at least two years of income documentation from the same employer or in the same industry. If you get commissions, you will need to average your income from the last two years of tax returns. Qualifying income can include your salary, income from part-time jobs, income from a second job, bonuses and overtime seasonal jobs, and child support and alimony.

If you want to find out for which loans you are qualified with your credit score, you can fill out the form below and see suggestions from Loanry.


In order to help with the qualification process, you need several documents. It will help to start getting these documents ready for the loan officer. These documents include W2 forms from the past two years, three months worth of pay stubs, bank statements for the last three months, the previous two years of tax returns, a list of assets and debts, and any additional income documentation.

Steps to Getting a Mortgage

With so many factors for qualifying for the different types of mortgages, there are some steps you can take in order to better qualify.

Repair Credit and Increase Your Score

Since the credit score is one of the most important factors, it helps to start paying attention to your score and work on increasing it. Different mortgage lenders require different credit scores but do not think about it. Just think about improving it as much as you can. Things you can do to improve your score quickly include paying down revolving debt, such as auto loans or credit card, using a debit card instead of credit cards for future purchases to stay out of debt, and paying bills on time. You should also correct any errors you see on your credit report.

When you are hoping to qualify for a mortgage, don’t open any new credit accounts. Applying for any new credit will temporarily lower your credit score. Lenders will be afraid that if you have a lot of available credit you will take advantage of it and then it can affect your ability to make your mortgage payments on time.

Get a Higher Paying Job

If your income is what is holding you back from getting a mortgage then you may need to find a higher paying job. Search for a new job in your existing line of work that will allow you to earn more money. Since lenders will want to see a steady employment history, you will need to stay in the same line of work in order to make this work. This can be hard for many borrowers since switching professions may give the best chances for a salary increase.

If switching companies isn’t enough to get you a raise, see what you can do to make yourself more valuable to employers. Is there continuing education you can complete? Getting a part-time job along with your full-time job may not provide what lenders can consider qualifying income. Lenders can view a part-time job as temporary and they want long-term income.

Save As much As You Can

No matter the different types of mortgages you are interested in, saving is important. During the time you are fixing credit scores, work on saving as much as possible. The larger your down payment, the smaller loan you will need. The lower loan-to-value ratio will mean that you are less risky to lenders. This can help you qualify for a better loan. While you may not need to save 20% for a down payment, the more you can put down, the better. If you aren’t using the money you have saved for a down payment, you can use it to make repairs for the home or to furnish it.

Don’t Pay More than the Appraised Value

The bank or a lender won’t lend you more than the property is worth because they will be on the losing end of the deal if you enter foreclosure. A 20% down payment isn’t as valuable if the home is worth 20% less than the purchase price. The collateral value is an important factor for lenders so you need to keep this in mind when making an offer to purchase a home.

Reduce Debt

To different lenders, what will constitute debt isn’t a set number. It’s a total monthly debt number that will be too high for you to be able to afford the monthly mortgage payments you want. When deciding how much of a loan you qualify for, lenders look at the front-end ratio. This is the percentage of your gross monthly income that the home payment takes up. The back-end ratio is the percentage of gross monthly income that will be taken up by other monthly obligations, such as car payments and credit card debt.

The more debt you will need to pay off each month will lower the monthly housing payment a lender will decide you can afford. It doesn’t matter if it is good debt, such as a student loan, or bad debt, such as a credit card. The lender just calculates the total debt number. If you want to be able to afford more home then you will need to decrease your debt.

Your Guide to Understanding the Mortgage Process

Conclusion

There are many different types of mortgages that borrowers need to be aware of when deciding to purchase a home. Some mortgage types will determine how you pay your interest. They also determine how much interest you will be paying over the life of the loan. Other mortgage types make it easier for borrowers with poor credit scores.

In order to improve your credit score, it’s important to pay bills on time and reduce as much debt as you can. There are different mortgage terms you should learn in order to make mortgage loan shopping an easier process. Qualifying for the different types of mortgages will depend on the lender use choose. But it helps to reduce debt as much as possible, save as much as you can, and work to improve your credit score.

Subprime Mortgage Loans For Bad Credit Borrowers

Buying a house does not have to wait for you to earn perfect credit. It also does not have to wait for you to save all the money to buy it outright. You can still obtain bad credit mortgage loans. The financial communities refer to this as a Subprime Mortgage Loan.

Subprime Mortgage Loan For a Low Credit Score

Subprime mortgage loan refers to a loan extended to a borrower with a higher risk than those referred to in the financial term “prime” which refers to the lowest risk borrowers.

A prime borrower provides a low risk because she has a high credit score, a low debt load, and a healthy income. These factors indicate the prime borrower can easily cover the monthly loan payments. A subprime borrower has characteristics such as a lower credit score, a higher debt load and may have a lower income.

A glut of subprime mortgage loans to bad credit borrowers contributed to the mortgage crisis of the mid-2000s. These higher-risk borrowers did default on their loans, creating fiscal issues throughout the finance industry.

This did not stop the finance industry from extending subprime mortgage loans to subprime borrowers, but it did make it tougher to obtain. Even with bad credit or no credit, you can still get a loan for a home, an automobile, a motorcycle, a medical need, education, or another reason. It will simply take more planning and additional time.

A subprime borrower has characteristics such as a lower credit score, a higher debt load and may have a lower income.

Subprime Mortgage Loans and Credit Scores

Two situations apply to those considered subprime borrowers. They either have no credit established yet or they have poor credit.

No Credit

A person who has never borrowed money before has no credit. Quite simply, borrowing money is the only way to build credit. That may not seem fair, but it is typically easy to fix. It is a common situation for high school graduates and college students. The simple fix to establish credit is to take out a small loan or a store or major credit card. Once you charge a small amount, quickly re-pay it within the time provided. Make every payment early or on time. You may only qualify for higher interest rate credit cards, but this will change once you establish credit and develop a credit score. To develop credit, you have to start small with a credit card. Once you establish credit you can move on to the larger items like a home loan.

Poor Credit

A person with poor credit has experienced problems with repaying debt in the past or they have too many loans with not enough available credit, also known as their debt to loan ratio. Another reason is that their income seems insufficient to cover the loans they have outstanding.

Your credit score, also called a FICO score, summarizes all this information into a single three digit number. Any score 640 and above ranks as prime. Any score below 640 ranks as subprime.

Mortgage Loan Basics Spelled Out: Lending 101

That leaves a lot of room since credit scores start at 300. While 640 might sound pretty impressive, they can go all the way up to 900. The perfect score, 900, is pretty tough to obtain, but scores in the 500s to 700s are pretty commonplace.

The credit reporting agencies look at a lot when determining your score. While each credit reporting agency uses a different algorithm, weighting one criteria a little more or less than another, they all look at the same data. They consider the data points:

  • when and how often you made late payments,
  • cases of non-payment,
  • current debt amount,
  • kinds of credit accounts you have,
  • length of your credit history,
  • how many inquiries have been made on your credit report,
  • your overall history of applying for credit,
  • any bad credit behavior, such as evictions or writing bad checks.

How Does Subprime Status Affect Interest Rates?

You’ve probably heard TV commercials talking about the “prime rate” and “subprime rates.” These terms refer to the interest rate the mortgage loan offers. Getting a loan at the prime rate means you got a loan at the lowest rate possible. A subprime rate is a higher interest rate offered to those with poorer credit.

Smart Money Tip!

Since a subprime mortgage loan has a higher interest rate, the monthly payments for it cost the borrower more. This makes it even more important for people to shop around for the right loan with the best interest rate available to them. Taking out a subprime mortgage loan can require the borrower to pay out a significant portion of monthly income in repayment.

Compounding the Problem

This compounds the problem of a poor debt-to-income ratio. Typically, people who already have a poor debt-to-income ratio must take out subprime mortgage loans which have less than desirable terms. This means they are further overextending themselves and spending the majority of their income on monthly payments. This gives them little to no ability to absorb an unexpected expense or reduction or loss of income during the repayment of the subprime mortgage loans.

Costs Associated with Subprime Loans

It is not just the interest rates that cost more on subprime mortgage loans. These loans cost more to take out as a risk reduction measure by financial institutions. The fees for applying for a subprime mortgage loan and for processing it cost more. These loans also commonly include prepayment penalties which means even if you do get ahead and manage to make larger payments, you get penalized for it.

Everyone Takes on Risk

Taking out a subprime mortgage loan does not just mean risk for the bank. It means more risk for the borrower, too. The lender charges more interest and fees since its less likely it will get repaid. For the borrower, the loan proves more risky since it cost more at a time when the borrower is already stretched thin.

Subprime Mortgage Loans: Not Just for Mortgages

A small warning: the subprime crisis that peaked in 2008 will make it tougher to find a mortgage if you have less than ideal credit. It proves much easier to obtain subprime mortgage loans for automobiles, credit cards, education and personal loans. That’s because since the crisis occurred, the government strengthened consumer protection laws. Although it is harder to find them, some pre-crisis loans still exist.

Mortgage Loans
(See Mortgage Rates)

How to Improve Your Loan Chances

Make it easier to whittle down your lender choices by using Loanry.com. This loan mall turns the once arduous process of applying for loans into a process more like picking up a new pair of shoes at the mall. However, keep in mind that they are not lenders, they just do their best to help you find a lender who might fit your needs.

Using Loanry: A Quick How To

Start your mortgage loan shopping at Loanry. Here’s how.

  1. You visit Loanry.
  2. You choose the loan type you need at the top of the screen.
  3. Complete the short form with your basic information.
  4. Loanry through a database of financial institutions.
  5. Loanry either helps you find a lender after completing a form or you can use money tools to click on ads with minimal input.
  6. You complete the lender’s long application on the lender’s site.
  7. Each lender responds to you directly.

Loanry helps you determine which lenders may be suited as the lender only responds to consumers they feel could work for their loan type. That cuts down on the research you have to do. It may even save you the application fee to banks or financial lenders for which you would not have qualified. While Loanry cannot and does not guarantee you will get a loan from these lenders, it does make looking for an appropriate lender quicker.

It also reduces the number of pings to your credit report. These hard hits, or information requests, occur each time you apply for credit. Each one lowers your credit score just a little. If you apply for many credit cards and loans, you will reduce your score, even if you did not take any out or were refused for each one.

Loanry is not a lender. It never loans money. It just makes the process of finding a loan a little easier. It also offers numerous financial educational articles like this one, so you can learn how to manage your credit better, for free.

Here’s a form you can fill out if you want us to start connecting you with lenders right away:


Try a Different Kind of Legitimate Lender

While you shop around for a mortgage loan with a still decent subprime interest rate, look into the new types of legitimate loan opportunities. While a traditional bank or credit union might refuse you, you could score a loan with a peer-to-peer lending service. Online lenders may also prove more amenable to loaning to you. Fully research any lending institution before you apply or submit your social security number. If you do use a non-traditional lender, have a financial and legal expert such as a CPA review the paperwork before you sign the application. This increases in importance if you are a first time home buyer.

Request a Meeting with the Lender

Although many financial institutions offer online applications, they still maintain local branches of their organization. If this is the case, request a loan meeting. Often, you can improve your chances of a “yes” from the bank or credit union by meeting in person with them. Your presentation and demeanor go a long way toward getting them to agree to a loan. So does the information you take with you.

The Paperwork

The Mortgage Loan Process

Your credit score and credit report do not show everything. They only show your repayment of credit cards and loans. It does not reflect your monthly bills, rent or private loans that do not get reported to organizations like Experian, Equifax and TransUnion. It may not list your employer or salary.

Take with you to the meeting, your pay stubs proving you have regular employment and that your employer pays you a steady amount on a regular time cycle, such as weekly or monthly.

Take with you a proof of your savings accounts, Certificate of Deposits, stocks, bonds and/or retirement fund. This shows the financial institution that you can continue payments if your employer reduces your hours or terminates your employment.

Traditionally, subprime borrowers did not have these other resources. Now, however, many people have overextended their lines of credit, but retained their company IRA or still maintain a stock portfolio.
Present this documentation to the financial lender to strengthen your application. You can also take in proof of your timely payment of monthly bills to utilities, your phone company and your landlord. These items show that you pay on time and in full.

Improve Your Credit

The first step to a higher credit score is to check your credit reports. You can do this for free. Check each of the three major credit reporting agencies.

Check each report for errors or inconsistencies. Some agencies have more information than others because they include aspects the others do not in their report. For example, Experian offers individuals the ability to include their utility payments and cell phone payments in the calculation of their score. You must turn this feature on by signing up for it though.

Address any errors or inconsistencies. Report incorrect information to the credit reporting agency. Include proof of payment. If the report shows missed payments, but you actually made the payments, show this. Also, provide dated materials that refute late payments. Correcting these mistakes can result in quick increases in your credit score.

Pay your bills on time. It sounds simple, but it proves quickly effective. Just six months of paying your bills on time can raise your credit score.

One way to do this more easily is to consolidate your loans. You can turn five loans and credit cards into a single due date each month and a single payment. These also result in lower payments.

Increase Your Income

If you have been at your job for a while, request a raise. You’ll need to have been with the company for a decent length of time and produce high-quality work.

You can also obtain a part-time job. Work at it for a few months before applying for the loan. This gives you a few pay stubs to take in with you when you interview. You can either use the money to pay off existing credit lines to reduce your debt-to-loan ratio which raises your credit score or you can save it in a bank account to show that you have means to pay the loan payments for a few months if you lose either job.

You can also start freelancing as a personal assistant, blogger, Lyft or Uber driver or some other pursuit. While you will not have pay stubs, you will be able to build a savings account that lenders can consider as potential repayment monies.

How do you know if you need to bring in more income to take out a loan? Look at your current budget. If adding the mortgage loan to your existing credit and loans, will require more than 30 percent of your monthly income to repay, you need to do one of three things:

  1. pay off existing debts before acquiring the mortgage,
  2. borrow less money on the mortgage,
  3. get an additional job or freelance to add to your income.

Use a Cosigner on the Loan

Okay, so it hearkens back to when you were a teenager buying your first car, but you can still use a consigner. It’s not cheating if it gets you the mortgage and you know you can make all the payments, you simply need the credit worthiness boost. For those without good credit, with no credit or who have not had sufficient income for a long enough time to qualify for a prime loan, a cosigner can make all the difference.
The cosigner refers to a person who applies for the loan with you, essentially providing their awesome credit score to help get the loan. They accept absolute responsibility for loan re-payment if you cannot repay it. This transfers the majority of the risk from the lender to your cosigner.

Put Up Collateral

You can put up collateral for a loan. This provides a guarantee to the bank that you will pay back the loan. Collateral refers to a tangible asset that the bank could claim, then sell, to cover the amount of your loan. Examples include a boat, houseboat, vehicle, land or stocks and bonds.

Watch Out for Rip Off Loans

Let’s just say it straight out – don’t take a loan you can not afford. Use a loan calculator online to determine what loan amount, interest rate, and term length you can afford. Do not exceed that. It is much better to wait, improve your credit score, and obtain a reasonable loan.
Although it sounds a bit like TV, avoid going to a loan shark. They really exist and if that becomes your sole option, you need to wait to improve your credit score, so you can obtain a loan from a standard lender.
Read the Loanry blog to learn about legal interest rates, common rates and how the length of repayment times affects you.

Subprime Mortgage Loans In Depth

There are many costly mistakes that can occur when buying a home. Financial lenders use “risk-based pricing” when determining mortgage terms and rates. A subprime interest rate will be higher than the prime rate, but your credit score decides how much higher, combined with the types of delinquencies on your credit report and the down payment amount.

Subprime mortgage loans typically include a balloon payment penalty or a pre-payment penalty. Sometimes, they include both.

The term pre-payment penalty refers to a charge to the homebuyer for an early loan pay off. If you pay it before the “end of term” you reduce the amount of interest the bank receives. Whether this occurred because you wanted to refinance, you sold the home or you wanted to simply pay if off because you had the money, the bank wants its interest for extending the risk to loan you the money.

The term balloon payment refers to a lump sum payment the borrower must make to the bank after a specified time period has expired, typically about five years. If you cannot make the balloon payment, you must do one of the following:

  • refinance the home,
  • sell the home,
  • lose the home.

Bad Credit Mortgage Alternatives

You do have other alternatives to taking out a subprime mortgage loan due to poor credit. These options also work well for those who can only manage a small down payment.

Federal Housing Administration (FHA) Loans

The FHA offers loans to people with scores below 620. You can obtain an FHA loan with a three percent down-payment.

Veterans Administration (VA) Loans

Obtaining a VA loan can help you afford a mortgage. These very low-cost loans can require no down payment.

2/28 Adjustable Rate Mortgage (ARM) Loan

This type of subprime mortgage loan offers a two-year teaser rate. After the two year period, it adjusts annually. The 2/28 ARM provides a low rate for the first two years, but thereafter goes through a sharp interest rate increase. Many buyers refinance at the two year point. The interest rate increase can cause a significantly higher monthly payment.

Bad Credit Loans

Sometimes, you have no other alternative than to take out a bad credit loan. These will have a subprime interest rate and they can go up to 25 percent which can seem like you put a house on a credit card.
How do you know when a bad credit loan is the only mortgage for which you can qualify?
Let’s say that your credit score sits on the borderline of good credit. The following things will decide whether you will need to apply for a bad credit mortgage loan:

  • bankruptcy during the last 24 months,
  • a foreclosure or loan charge-off during the past 24 months,
  • more than one delinquency of 30 days on an existing mortgage during the past 12 months,
  • one delinquency of 60 days on an existing mortgage during the past 12 months,
  • your debt to income ratio is more than 50 percent,
  • you were late with your rent.

Buying Your Home as a Married Couple

Here’s the deal. Just because you got married does not mean you have to do everything together. The same is true of taking out a mortgage loan. While you might think you have to put both names on the loan application and on the mortgage itself, you do not. This is great news for couples who have partners with divergent credit scores.

In fact, you can land a lower interest rate if only the borrower who has the higher credit score applies for the loan. Rather than applying as joint borrowers, save yourself money. While this means they will only consider the income of the applicant, you will know that you have two incomes and can pay the monthly costs. The loan officer must base the interest rate on the lower of the two FICO scores. The amount you save by applying with one borrower, instead of jointly, can add up to thousands of dollars annually.

Final Thoughts

This really only amounts to the tip of the iceberg of obtaining a subprime mortgage loan. You have a lot of research to do on your own, but you made a great choice getting started on Loanry.com. That’s where to shop for a mortgage. We want you to find just the right loan for you. We also want you to know what you’re getting into when you apply for a loan or sign the loan papers.

You can still obtain a mortgage with a lower credit score. If a FHA or VA loan won’t work for you, you may have to resort to a bad credit loan, also known as a subprime mortgage loan.