The discussion below is the talk of two real estate experts. Matt Lane and Rich Conlon. Rich Conlon is a mortgage lender in the Northern Virginia DC area.
And today, we're going to go through the Top 5 Mortgage Lending Myths.
The thing that buyers think are true but are actually not true.
Matt Lane:
So, Rich.
Why don't you, um, you take the floor and give us your top 5 lending myths?
Rich Conlon:
All right. Well first, thank you for having thank you, baby. I always appreciate the opportunity, yeah, to do these conversation with you. I think they are terrific. So, diving right in some submits that are out there. The most common that we're hearing right now, oh you know. I don't I'm gonna wait a year or two or longer because I need 20% down, for down payment, right? And quite honestly in the DMV that's just not the norm anymore. We live in a great market, right? Look obviously everyone knows cost of living is super high. When you compared to, you know, the majority of the US. So, the 20% down is just not typical, you know, especially for first-time homebuyers.
The average in this region is typically five to ten percent down. The 20% down? Yeah, you don't need it. It's not necessarily worth it, to waiting, but obviously everyone knows right now, we're experiencing a raising rate environment. So, two or three years from now rates could be, you know, at least one to two percent higher if you
wait and that comes with a higher payment. So, definitely the 20% down is the most common myth that we're seeing with most with most buyers
Matt Lane:
Yeah, I think four out of the past five listings. I just looked it up before here. The buyers did not put down 20%.
It might have been 5%, might have been 0%, might have been 10%. So, definitely seeing a shift there, where the mindset was like, "All right, I have to have 20% down."
Now, it's like, "Okay, well, there's some creative loan programs out there we don't have to do."
Rich Conlon:
Absolutely, you know, Fannie and Freddie and the more in them, you know, the mortgage industry as a whole has recognized this. So, there are a lot more incentive, you know, less than 20% down programs out there. And Fannie and Freddie in particular have adjusted their risk-based pricing models that on some occasions your interest rate could actually be slightly better with less than 20% down than if you put 20% down.
Matt Lane:
Wow!
Rich Conlon:
So, yeah. We have seen that on occasion. It does kind of blow people's minds but it is legitimate
Matt Lane:
Cool. So, that's the number one myth. That's what else you got for us.
Rich Conlon:
Credit pulls. That's the next one. Those are, you know, both are probably pretty close but, you know, obviously, it's encouraged that buyers shop and with that, you know, the buyers are concerned about getting multiple hits on their credit inquiries by multiple lenders the CFPB that you know the Consumer Financial Protection Bureau right around the market right after the market crash. It encourages clients and first-time buyers, or buyers in general to shop for more, you know, multiple lenders, they encourage it. So, it wouldn't make sense to encourage someone to shop, but then hurt their credit scores. So, a common myth now if you are shopping for mortgage, there is only going to be one inquiry, that may be even if you don't have credit issues, it actually, may not, it may not affect your credit score at all, at most three to five points. And that's maybe if you're on the lower credit tier. But, in most cases may not affect your credit at all. And they encourage that. So, they'll recognize you, shopping with multiple lenders, and will not ding you, every time you reach out to a lender, and that individual lender pulls your credit.
Matt Lane:
Yeah, I think that's key. Because everyone is so protective of their credit score as they should be. But at the same time, I also think that there's a lot of misinformation and a lot of noise out there about what actually affects the
credit score and, you know, god forbid it goes down 1 or 2 points.
Rich Conlon:
Where you can probably see, where you may see, like it a 5-2 or more point, you know, adjustment is if you're shopping for different types of credit. So, if you're shopping for a mortgage and you're shopping for a car, all right, and shop for a credit card. That is where you're going to see the significant beatings because, you know, a car and a mortgage are more secured lines of credit. So you're not going to be penalized. But a credit card that's where you're gonna see more of an effect. So, if you're shopping in different industries for different lines of credit that is something that I would be cautious of, and kind of hold off. You know, if you're shopping for a mortgage, don't go open a credit card, don't, maybe not also buy a car at that time, you know, take it in steps, so that your credit is not affected and receiving optimal scores at each time and each period that you are searching for that line of credit.
Matt Lane:
Cool, hard and soft pull. Pulls.
Rich Conlon:
Oh, yeah. Hard and soft pull. So, obviously that initial inquiry is a hard pull. Again, if you're in the top two your credit level it's not gonna affect your score at all. If it won't adjust. In the mortgage process, there are two essentially pulls, a hard and soft. A hard pull in the beginning, that obtains your full credit report with mortgage scores, and then about a week before you go to settlement, and you close on that property, all lenders are required to do a soft pull, which is just simply a refresh. It's not going to affect your scores. It's just checking for any new open lines of credit, that if you did open something new, and it affects your purchase ability, that could be an issue, but it's required by all lenders, that if they did open a new lines that it does not affect their qualifications.
Matt Lane:
God. Cool. What's number 3 on the list?
Rich Conlon:
The 30-year fixed-rate is the best rate or best program that's perfect for everybody. You know, there is some truth to that because it is, you know, most typically the least payment, you know, compared to a 15-year or a 10-year fixed, obviously. You know, since they're shorter turns the payment is higher and so the 30-year fix is obviously the more, you know, attractive option. But that's not always the case. Because not everyone is buying their dream home. Not. You know, most majority of people in nowadays, especially, you know, again reverting back to where our market the DMV region. Most people aren't living in their first or second home for thirty years and usually plan to buy up within five maybe seven years or even shorter than that. So, maybe when you're in that scenario if you know, you're relocating this is your first house, it's a condo, or it's a townhome, and not your dream home, an arm, an adjustable-rate mortgage can certainly be a viable option, just because obviously lower interest rate and, you know, they do the rates do adjust, you know, if it's a five five one arm it's a fixed for the first five years and then it will adjust based on where the market is.
Matt Lane:
Yeah, and I think the goal here is just to keep your options open, because for the longest time, people are thinking, all right, I need to have 20% down and I have to have a fixed rate 30-year mortgage. And while that may be the case you may go through the entire process and rich. It's like, yeah, you need this, that, and the other, and it ends up to be 30 years. There's a lot of opportunities out there. So, you know keep your options open an arm might be a good opportunity.
Rich Conlon:
Yes, absolutely, absolutely. They sometimes go with, you know, a different set of guidelines, make sure your lender, explains that. But again, it's just way to capture a lower interest rate, save for those first couple years, so that you have that down payment ready for your next big dream
Matt Lane:
Oh, cool.
Rich Conlon:
Yeah
Matt Lane:
What do you got next?
Rich Conlon:
The next one is, oh, an online lender always has a lower interest rate. We get quotes sometimes, you know, the big ones that everyone knows, quick and rocket mortgage, some of those quick, you know, two clicks and you're approved, you know, and and you get a little, you know, sheet that says, "Here's your interest rate. we pulled you. Now, we had your credit score. Here's your interest rate."
There is, you know, online lenders, some of those bigger nationwide, yes. Sometimes, you know, they will have a better interest rate than a company such as mine or a local lender or a local credit union, you know, with that though, it kind of goes with, you know, the level of service what you're looking for.
So, it comes down to what are your goals, what are your needs and wants through this process.
The larger, you know, quick and those institutions that may provide us a very low rate, you may have to go through call centers to get somebody, you may be speaking with somebody different each time, and then if you find yourself, you know, again, we're talking about this market, how competitive it is, how competitive a contract we want to make, quick closings you could run into issues on that front. It comes down to what is your goal? What do you want out of the process? Do you want someone that you're going to deal with the same person every time?
A level of communication throughout the process? You're probably going to be more satisfied with a local lender. That may have a slightly higher rate, but, again, if that's what you're seeking, I mean you're not as concerned with just getting the absolute lowest rate and dealing with maybe the potential pitfalls of that process then that may be, you know, it's a matter of satisfaction.
Matt Lane:
And I've heard of some listening agents not even accepting quicken loan pre-approval letters for offers just because when you get that letter, it's so preliminary where you've given such little information that they say, "Yeah, you're pre-approved but you need to do all these like 20 other things." Where it's not like a legitimate letter.
Rich Conlon:
Yes, absolutely. That is something that we've recently heard, you know, from those larger institutions and a client that comes to that. That's already pre-approved and we're happy to, you know, provide a second level, you know, second level opinion, additional resource, but a lot of times, we'll also get the agent that reach out to, you know, reaches out to us. Hey, the sellers in the listing agent would like to also see a secondary lender letter, or speak with another lender in terms of validating the ability to perform on that offer. So, we're always happy to do so, but it is something that, you know, that is a very good point that we've seen recently.
Matt Lane:
Absolutely. Cool. What's number five.
Rich Conlon:
Number five. Making an extra payment on your mortgage is a great way to pay your mortgage quicker. It's something that we saw early on in the year, not so much right now, but is, can I make an extra payment, is it beneficial, you know, instead of just making a monthly payment, you know, 12 per year, for 30 years, you know, should I stick with that, can I make an extra payment, will it be beneficial, some people talked about a large lump sum, so it would it be a reap recast or principal curtailment. That's ultimately gonna be, you know, in terms of a recast or a large lump, you know, principal paid down. That's gonna be largely dependent on your invest our your servicer. So, whoever you're making your current mortgage payments to, always encourage them to reach out every servicer, is a little bit different, and you know, there's a small fee, that's charged with it. There's also minimums. But, when it comes to making one extra payment, maybe a year or couple out of the year, always encouraged. And you don't necessarily, because it's just, it's not such a substantial, you know, it's not going to change your terms, you know, it's not gonna change the rate, it's not gonna change the principle right there. But what it can do is save you interest in shorten the overall term. So, for an example, let's say we have a 30-year fixed, $200,000 - low, that's what your mortgage is. Okay, let's use an interest rate of 5%, okay? So, over the length of the loan, if you're assuming 12 timely payments, no extra payments, so 12 payments every year for the life of the loan, at that interest rate, you're looking at about $186,000 in interest paid below, okay?
Now, let's say that you make one extra payment a year. So you make thirteen payments, all right? There, you know, every year, you're automatically shortening that loan from a 30 year to 26 year fixed. So, you shave off 4 years. You're paying it off 4 years, and then in turn, you're saving yourself over $32,000 an interest paid over the life of the loan. So, $32,000 savings and paying it off 4 years in advance, which I think most of us around here if we can pay something off, early, and have it off our books, worst works daddy.
Matt Lane:
That sounds like a good idea. I've seen some YouTube videos recently in some Facebook ads.
Where it's like learn how to pay off your mortgage in five to seven years and I'm like, "Do I want to do that?"
Like, I feel like there's something, like totally not right about that. Maybe it's by monthly payments or maybe it's an extra payment and maybe you do that, but maybe your money is better spent elsewhere.
Rich Conlon:
Yes. I would, you know, if you're curious about, he can always talk about it, with your lender during the process. It's not something that is going to be, and needs to be decided, before you reach settlement. You know, you proceed through settlement. And it's something that you can reach out to your servicer after. It is not something that there is no, you don't have to do it by your ten or by your five. It's something you just you can set up biweekly. You can, you know, it's again, it just call your loan servicer, talk to them, get the details. But, you don't have to make a decision right then in there, but make sure you do call them, so you get the full scope of details, because, you know, making that extra payment can be beneficial like I said.
Matt Lane:
Yeah
Rich Conlon:
Tons of savings and shortening the life term in the loan.
Matt Lane:
Yeah, guys. There you have the Top 5 Lending Myths from Rich Conlon.
Rich, thanks so much for joining me.
Rich Conlon:
All right. Thank you for having me. Really appreciate it.
Matt Lane:
Until next time. Create a productive day. Take care.
Notes:
- The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company.
- The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a public government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia. Freddie Mac is ranked No. 38 on the 2018 Fortune 500 list of the largest United States corporations by total revenue.