The last few years of the housing market have been, in a word, crazy. As you look at the value of your home, which has almost surely increased, you might thinking about selling and buying a new home and what that looks like and when you should get a mortgage lender involved. Additionally, you have probably heard about some of the various myths surrounding credit and are wondering what am I supposed to do with this information? Well, I recently had a discussion with mortgage lender Sara Bos with United Bank of Michigan on the “A Wing and a Plan Podcast” where we discussed both of these things and more. Today’s blog post will be a summary of our conversation.
Where should I start with the mortgage process?
In our conversation, Sara recommended that getting together with a mortgage lender early in the process is very important. Regardless of whether this is first home or fifth home and regardless of whether you are ready to take the plunge into home ownership yet or not! Starting the conversation early can help you get comfortable with what your monthly payment might look like and what you may be able to afford long before you place an offer on a new home. A mortgage lender can also help you understand your credit score and help suggest ways to improve it prior to applying for a mortgage.
While getting preapproval for a loan is most often the first step in buying a home, Sara doesn’t believe that the process absolutely needs to begin there. As I mentioned above, reviewing preliminary numbers with a mortgage lender can be very helpful for understanding where you are at financially and what you can afford. This is a very non-committal way to get started and to get comfortable with the process!
Sara also acknowledged that there is a tremendous amount of information available to us regarding mortgage lending, much of which is erroneous. Talking to a trusted, knowledgeable professional can help you cut through the noise and debunk some of those myths and inaccuracies.
Credit Score Myths
Recently there has been a lot of buzz going around about proposed legislation that would, in theory, make it beneficial to artificially lower your credit score in order to obtain a lower interest rate during the home buying process. Sara is passionate about educating on this issue as this idea is incredibly widespread even amongst other mortgage lenders. However, Sara says that the myth that a lower credit score could in fact get you a better rate is just that, a myth. “There is no scenario in which someone with a lower credit score is going to get a lower interest rate” Sara explained in our conversation. Lowering your credit score doesn’t just affect your ability to get a mortgage but other debt and financial aspects of your life as well which makes this myth such a pernicious one.
The truth of what is happening is actually quite different and more complicated. The Federal Housing Finance Agency (FHFA) is working on adjusting the pricing framework for calculating an individual’s interest rate. This is the framework used by mortgage lenders, like Sara, to determine what the interest rate should be on your new mortgage. The framework takes into account a variety of factors including your credit score, down payment, and loan-to-value. This framework has not been reviewed by the FHFA in a long time which is a problem because this framework plays a major role in keeping the mortgage industry healthy.
Where this myth came from, according to Sara, is that in the FHFA’s review of the pricing framework they discovered some areas that needed improvement. Specifically, they see necessary changes that need to be made as it relates to the fees being charged for borrowers with lower credit scores. The idea is to make it more affordable for borrowers with lower credit scores and smaller down payments to buy a home by decreasing some of the fees that go into calculating their interest rate. Sara uses the example of an individual who may have a starting interest rate of 6% with .125% in fees relating to their poor credit and other factors. The reforms taking place would seek to decrease that .125% in fees. The bottom line is that intentionally lowering your credit score is not going to result in a lower interest rate for you!
Thanks again to Sara Bos for joining me on the show! To listen to the full episode, check out the “A Wing and a Plan Podcast” on Spotify, Amazon Music, or iHeartRadio.