Hardly a day goes by without a question from a client that I need to refer to a mortgage lender. So I reached out to Guild Mortgage’s Stephen Babcock to ask some of the most common questions I get from buyers.
How much money does someone typically need to save to buy their first home in Austin?
“It depends, but for the most part you need about 6 to 7 percent of the purchase price of the house,” Babcock said, and that includes both the down payment and closing costs.
(I’ll help you out, readers. If the purchase price is $300,000, that means saving about $18,000.) There are some special loan programs, Babcock noted, that help pay for your closing costs or offer down payment assistance. And sometimes the sellers, particularly if it is a new home builder, can be coaxed into offering some money to pay for the buyer’s closing costs.
Babcock said that many buyers are under the mistaken belief that they need to save 20 percent of the purchase price. “I have talked to people so many times who say ‘I don’t have the 20 percent saved up right now,’ “ Babcock said. “The reality is you need 3 percent for a conventional loan.”
A lot of first-time homebuyers struggle to come up with enough money for a down payment and closing costs. Particularly with Millennials, how are they coming up with the money?
“About 30 percent of the time it’s a gift from a relative,” Babcock said. That usually means a loan or a gift from Mom and Dad.
But for the most part, Babcock said, “people that come to me have saved up their own money and have about $10,000 to $15,000.”
Now that interest rates are rising, will ARM loans make a comeback?
Quick explainer note to readers: An ARM loan is an adjustable interest rate loan that typically offers a low “teaser” interest rate for a number of years, such as five. After that, it becomes a variable rate loan that is re-adjusted annually (and often at a higher rate than the introductory period).
“If I had to describe, in one word, the problem in 2008, it would be ARM. Part of the problem was the pay structure for lenders. You could apply for a loan and be approved for a regular 30-year fixed-rate, but the lender could often make more money if you chose to take the ARM loan instead,” Babcock said.
“This caused a lot of bad loans to be issued,” he said. “These days, lenders must be paid the same, regardless of the type of loan. And most companies like mine don’t have much of an appetite for ARM loans. We offer them, but the rates are not very good when compared with traditional financing.”
What would cause someone to get rejected for a mortgage loan application?
“While not the most common, the easiest way to have a loan application rejected is to have a missed mortgage payment on your credit report that occurred within the last year,” Babcock said. “Usually, though, it’s because of a very low credit score.”
So what is the minimum credit score needed to get a home loan?
“The minimum credit score needed for a loan can differ somewhat between companies,” Babcock said,” But for the most part, we need you to have a minimum score of between 580 and 620. Most down payment assistance options start at a 640 credit score.”
What’s the biggest misconception people have about mortgage lenders?
Babcock said some borrowers are wary about approaching a mortgage lender and don’t understand you can and should do so well before buying a house.
A good lender can answer general questions about what a borrower might qualify for, as well as run their credit report. “I have some people who call me up a year before they are ready to buy and pull a credit report just to make sure there is nothing fishy going on,” Babcock said.
Lilly Rockwell is a real estate agent and former journalist based in Austin, TX.