27
Mar
By Mike Pfefferman
Mortgage

Temporary and Permanent Mortgage Buydowns: How They Work

When securing a mortgage, borrowers have the option to reduce their interest rate through a mortgage buydown. This strategy can help lower monthly payments, either temporarily or permanently, depending on the type of buydown chosen.

1. Temporary Mortgage Buydown

A temporary buydown allows the borrower to pay a lower interest rate for the initial years of the mortgage, with the rate gradually increasing to the original agreed-upon rate.

  • Common Structures: A 2-1 buydown reduces the interest rate by 2% in the first year and 1% in the second year before returning to the full rate in the third year.
  • How It Works: The difference in interest payments is covered by a lump sum payment from the borrower, seller, or builder, which is placed in an escrow account and used to subsidize the monthly payments.
  • Benefits: Helps ease the financial burden during the early years of homeownership, allowing borrowers to adjust to new expenses.

2. Permanent Mortgage Buydown

A permanent buydown involves paying upfront discount points to permanently reduce the interest rate for the life of the loan.

  • How It Works: Each discount point typically costs 1% of the loan amount and can reduce the interest rate by approximately 0.25%.
  • Benefits: Offers long-term savings on interest payments and reduces monthly mortgage costs.
  • Ideal For: Borrowers who plan to stay in the home for an extended period and want to lock in a lower rate.

3. Key Differences

  • Duration: Temporary buydowns are short-term, while permanent buydowns last for the life of the loan.
  • Payment Source: Temporary buydowns are often funded by the seller or builder as an incentive, whereas permanent buydowns are typically paid by the borrower.
  • Cost vs. Savings: Permanent buydowns provide continuous savings, while temporary buydowns offer immediate relief with eventual higher payments.

Understanding the distinction between temporary and permanent mortgage buydowns can help borrowers make informed decisions to manage their mortgage payments effectively. Consulting with a mortgage professional can help determine which strategy best aligns with financial goals and long-term plans.

26
Mar
By Mike Pfefferman
Mortgage

The Difference Between FICO Score and Credit Score: How It Affects Your Mortgage and Rates

When applying for a mortgage, your creditworthiness plays a significant role in determining your loan approval and interest rates. Two commonly referenced terms are FICO score and credit score, which are often used interchangeably but have distinct differences.

1. What is a Credit Score?

A credit score is a broad term that refers to a numerical representation of a consumer’s credit risk. It is calculated based on various scoring models, including FICO and VantageScore, and is derived from credit report data such as payment history, credit utilization, and length of credit history.

2. What is a FICO Score?

A FICO score is a specific type of credit score developed by the Fair Isaac Corporation. It is the most widely used scoring model by mortgage lenders. FICO scores range from 300 to 850 and are calculated based on five key factors:

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • Credit mix (10%)
  • New credit inquiries (10%)

3. How Do They Affect Your Mortgage?

  • Interest Rates: A higher FICO score typically qualifies you for lower mortgage interest rates, while a lower score may result in higher rates or loan denial.
  • Loan Approval: Lenders often have minimum credit score requirements, and FICO scores are a primary factor in the underwriting process.
  • Loan Terms: Your score can affect down payment requirements and loan programs available to you, such as conventional, FHA, or VA loans.

4. Key Differences

  • Scope: Credit scores can come from various models, while FICO is a specific scoring model.
  • Usage: Most mortgage lenders rely heavily on FICO scores for risk assessment.
  • Impact: Your FICO score has a direct influence on mortgage rates and loan eligibility.

Understanding the distinction between a FICO score and a credit score is essential when preparing for a mortgage application. By improving your FICO score, you can increase your chances of securing better loan terms and lower interest rates.

25
Mar
By Mike Pfefferman
Mortgage

Navigating Mortgages as a Self-Employed Professional

Securing a mortgage as a self-employed professional can be more challenging than for traditional W-2 employees, but with the right preparation and documentation, it is entirely achievable. Here’s a guide to help you navigate the process:

  1. Document Your Income
    Lenders need to assess your financial stability and income consistency. To do this, you’ll need to provide:
    • Tax returns for the past two years
    • Profit and loss statements
    • Bank statements
    • Client invoices or contracts
    • Consistency is key, so showing steady or increasing income over time strengthens your application.
  2. Manage Your Tax Returns
    Many self-employed individuals minimize their taxable income through deductions, but this can reduce the income lenders consider when evaluating your mortgage application. It’s essential to strike a balance between tax savings and showing sufficient income for loan qualification.
  3. Boost Your Credit Score
    A strong credit score can offset some of the challenges associated with self-employment. Pay down debt, make timely payments, and avoid opening new lines of credit before applying for a mortgage.
  4. Increase Your Down Payment
    A larger down payment can make you a more attractive borrower. It reduces the lender’s risk and can help you secure better interest rates.
  5. Work with a Mortgage Professional
    Partnering with a mortgage originator who understands the unique needs of self-employed borrowers can make a significant difference. They can help you find lenders that specialize in working with non-traditional income streams.

While obtaining a mortgage as a self-employed professional may require additional effort, proper documentation, financial management, and the right guidance can help you achieve your homeownership goals.