10 Unexpected Facts About Mortgages

Amortization: What It Means & How It Affects Your Mortgage

The mortgage industry has evolved significantly since the housing crash a few years ago. Qualifying for a mortgage used to be straightforward — provide some basic information, sign a few papers, and you were set. However, today, obtaining a simple, fixed-rate mortgage through the secondary market can be more challenging. Lenders now scrutinize a wide range of personal financial details before making a credit decision.

Here are 10 surprising facts about mortgages in the current market:

1. Underwriters Don’t Care About Your Assets

While underwriters want to ensure you have enough money for a down payment, they generally don’t care about the amount of money you have in the bank. Your income is what matters most. For example, even if you have a million dollars in the bank but only earn $10 an hour, you won’t qualify for a $300,000 mortgage. The lender focuses on your debt-to-income ratio rather than non-liquid assets.

2. No Credit Score Can Be a Disadvantage

You might think that avoiding credit and paying for everything in cash would be beneficial, but not having a credit score can actually hurt your mortgage application. Lenders want proof that you can handle credit, which comes from a credit report. Without a credit score, you’ll need to find alternative ways to prove your creditworthiness, which can complicate the mortgage process.

3. Self-Employed Borrowers Face More Challenges

Self-employed individuals often find it harder to qualify for a mortgage because they typically write off a significant portion of their income, making it appear lower than it actually is. Lenders rely heavily on tax returns to verify income, so if your returns show minimal income, it will be challenging to get approved for a mortgage.

4. Debt Ratio is Based on Gross Income

Your debt-to-income ratio (DTI) is calculated based on your gross income, not your net income. This means your income is considered before taxes and other deductions. Be mindful of this when determining how much of a mortgage payment you can comfortably afford, rather than relying solely on what the bank says you can borrow.

5. Paying Down Previous Mortgages Doesn’t Matter

Lenders don’t give extra credit for paying down your previous mortgage quickly. They make money from the interest over the life of the loan, so they prefer you take the full term to repay it. Paying down your mortgage principal faster doesn’t improve your chances of getting a new mortgage.

6. Deferred Student Loans Can Be Excluded from Debt Ratio

If your student loans are deferred, they might be excluded from your debt ratio calculation. The assumption is that deferred loans indicate recent graduation and potential future income. However, this isn’t always a reliable indicator of future financial stability.

7. Lenders Make Money in Multiple Ways

Mortgage brokers earn money from both the front and back ends of your loan. The front end includes origination fees, which appear on the good faith estimate. The back end involves making money off the interest rate you receive. Some companies advertise no origination fees but compensate with higher interest rates.

8. You Can Still Get a Loan with Collection Accounts

Unpaid medical collections typically don’t worry underwriters. Even other collections, like old utility bills, may not be a deal-breaker if your credit score is decent. However, this isn’t guaranteed, and a high number of collections should be a red flag.

9. Mortgage Brokers Work Non-Stop

Mortgage brokers often work evenings and weekends because they are primarily commission-based. They must close loans to get paid, so they accommodate borrowers’ schedules, meeting or taking calls during off-hours.

10. Avoid Major Financial Changes Before Closing

Don’t quit your job, finance a new car, or make large credit card purchases before closing on your new home. Lenders recheck your credit and verify employment just before closing, so any significant changes can jeopardize your mortgage approval.

Understanding these facts can help you navigate the mortgage process more effectively and avoid common pitfalls.

Leave a Reply

Your email address will not be published.