Getting the Best Mortgage Rates in the New Economy

by Brandon Cornett

All home buyers want the lowest mortgage rate possible when applying for a home loan, because it directly translates to a smaller payment each month. And who doesn’t want to shrink their monthly expenses?

But how does one obtain a low rate on a mortgage loan and, for that matter, why is it important in the first place? These are the subjects we will discuss in this tutorial for first-time home buyers.

How Your Credit Score Relates

When you apply for a home loan, you be sure that the lender will request your credit reports and scores from all three of the reporting companies (Experian, Equifax and TransUnion). Lenders also reserve the best rates for borrowers who fall into a certain credit category.

What score you need to qualify for this category will vary from one lender to another, but it’s safe to say that the better (higher) your credit score, the lower the mortgage rate you’ll receive. This in turn translates into a lower payment each month, which is the whole point to all of this.

Here’s something not many home buyers realize. Over the last few years, the score needed to qualify for the best rates on a loan has risen. This is largely due to tougher restrictions on lending institutions (as a result of the subprime loan crisis of 2007 - 2008).

In fact, I saw Jean Chatzky (financial editor for the Today Show) on TV not long ago, talking about this very subject. She said that in May of 2008, borrowers needed a score of at least 620 to qualify for the best rates. By May 2008, however, that requirement had increased to 760 … an increase of 140 points! Today, in 2010, those higher standards are still in effect.

How You Can Improve Your Score

This is a good time to introduce you to another acronym related to home loans, a term you’ve probably heard before on television. The acronym if FICO (pronounced fie-coh). It stands for Fair Isaac Corporation. This is the company that created the scoring model that is used today. Basically, it’s a computerized scoring model that turns your financial history into a numerical score between 300 and 850 (with higher being better).

So with all things being equal, a higher FICO number means that you’ll be offered a better rate on your loan. That’s because a higher number tells lenders you know how to manage your finances, and that you’re responsible when it comes to paying bills.

You can maintain a good score by paying all of your bills on time. This includes credit card balances, car payments, rent, utilities, etc. It also helps to reduce your overall debt, starting with those credit cards. These are the keys to being a successful home buyer in the new economy.

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at to learn more about this topic.

Top 5 Mortgage Questions Among First-Time Home Buyers

by Brandon Cornett

Here’s what we did. We reviewed all of the questions emailed to the Home Buying Institute over the last six months. We made a list of the most common mortgage-related questions sent in by home buyers, and we answered them below. What’s the result? A must-read article for first-time home buyers!

So here they are, starting with the most common mortgage question we receive…

1. What credit score do I need to get a mortgage?

In the past, we did not get this question as much as we do today. Yet, it has quickly risen to #1 in terms of frequency. There are two reasons for this — economic recession and media coverage. The housing crisis of 2008 led to a full-scale economic recession in 2009. Long story short, it’s harder to qualify for a mortgage loan in the current economy. Lenders today are more strict with their lending criteria, including credit scores. There has been plenty of media coverage about all of this, and that’s why so many home buyers are asking this question. So let’s answer it.

First, you need to realize that the numbers I’m about to give you are only averages. Every lender has its own standards and criteria, and they vary a lot. Lenders will also review other criteria, in addition to your credit score (income, debt, affordability, etc.). In the current economy, you’ll probably need a credit score of at least 670 to qualify for a mortgage loan. In order to get the best rates on a mortgage, you’ll need a score of 750 or higher. Again, these numbers are not set in stone. They are merely averages taken from recent surveys.

2. How much of a mortgage loan can I afford?

The most important thing to understand is that you must answer this question for yourself. A mortgage lender cannot tell you how much you can afford to pay each month — they can only tell you what they’re willing to lend you. It’s possible to get approved for a mortgage that’s too big for you. It happens all the time, and it often ends up with a foreclosure situation. So you need to set your home buying budget early on in the process, before you start talking to lenders.

This is a relatively simple process. All you need to do is subtract your monthly expenses from your net monthly income (after taxes), and you’ll have a rough idea of what you afford to pay toward a mortgage each month. When you add up your monthly expenses, include everything but your current rent payments — you won’t have a rent when you buy a home. Be sure to account for entertainment / leisure expenses, retirement and savings contributions, and whatever debts you currently have. Subtract these expenses from your monthly income, and use that figure as a monthly limit for your mortgage. Do not exceed that maximum amount, even if a lender approves you for more. Stay within your budget!

3. How do I apply for an FHA loan?

Let’s start with a quick definition. An FHA loan is any home loan that’s insured by the Federal Housing Administration, which is part of the Department of Housing and Urban Development / HUD. The FHA does not actually make loans to consumers — rather, they insure the loans made by primary lenders.

These loans offer certain benefits to first-time home buyers. Lenders receive guaranteed repayment from the federal government, even if the homeowner ends up defaulting on the loan. This government backing makes it easier for home buyers to qualify for FHA loans. You don’t have to put as much money down (as little as 3.5%), and your credit score doesn’t have to be perfect. That’s the primary appeal of FHA home loans.

To apply for an FHA loan, you would need to start on the FHA website. From there, you can find a list of FHA-approved lenders in your area, and you can apply for the program directly through those lenders. You can actually start this process through either the HUD or the FHA websites. Here are the links:

After you submit an application with an FHA-approved lender, they will review your financial situation and tell you (A) if you’re qualified for the program and (B) what kind of rate / terms you might get.

4. How do I get pre-approved for a mortgage loan?

It’s wise to get pre-approved for a mortgage loan before you start house hunting. It helps you limit your search to the types of homes you can actually afford. Sellers will also take your offer more seriously if you have your financing lined up. Fortunately, it’s a straightforward process. Just contact your chosen lender and tell them you want to get pre-approved for a mortgage. They will set up an appointment and tell you what to bring (W-2 statements, bank statements, pay stubs, etc.).

Afterward, the lender will tell you how much they are willing to lend you, based on your financial situation. They’ll also give you a pre-approval letter with the same information.

5. Should I choose a fixed or adjustable-rate mortgage?

A fixed-rate mortgage keeps the same interest rate over the entire life of the loan. On the contrary, an adjustable-rate mortgage (ARM) has an interest rate that will adjust or “reset” every few years. These days, most ARM loans start with a fixed rate for a certain period of time, typically three to five years, and will start adjusting after that. During the initial fixed-rate period, an ARM loan will usually have a lower rate than a regular fixed-rate mortgage. This is why some home buyers choose ARM loans in the first place — to get a lower rate, and thus a smaller mortgage payment each month.

I generally recommend fixed-rate mortgages for people who are going to stay in a house for a long period of time, more than a few years. The only time I would even consider an adjustable / ARM loan would be a short-term residency, where I knew I would be selling the home within a few years. For example, I did my final military tour in Maryland, and I knew I’d be moving out of the state after two years. So I used an ARM loan to get a lower interest rate, and I sold the home long before the three-year point where it would start adjusting. This is the only type of situation where I recommend the ARM loan. For long-term residency, I recommend a fixed-rate mortgage for predictability.

You should learn everything you can about fixed and adjustable mortgages, and choose the one that best suits your needs. Once you learn about the various pros and cons of each option, and obvious choice will begin to emerge.

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at to learn more about this topic.

Mortgage Loan Rates - 5 Things a Home Buyer Should Know

by Brandon Cornett

Buying a home requires plenty of homework (no pun intended). There are new concepts to grasp, unfamiliar terminology to learn, and plenty of decisions to make along the way.

The mortgage loan interest rate is one of the topics that confuse a lot of home buyers, especially the first-time buyers who are new to the process. So in this article, I’ll explain how an interest rate gets applied to a home loan, and how it affects you as the borrower.

5 Things a Buyer Should Know

1. The rates offered by a lender will vary from one person to the next. It’s largely based on a borrower’s credit score. The higher your score, the better the rates you’ll be offered when applying for a loan. This is why you see so much fine print on the advertisements of mortgage companies — there’s a lot of variance involved. So when they offer a “teaser rate” in their marketing materials, it may or may not apply to you.

2. The interest rate is one of four factors that will determine the size of your monthly mortgage payment. Collectively, these factors are referred to with the acronym PITI. The ‘P’ stands for the principal amount you borrow. The first ‘I’ stands for the interest you pay on the loan. The ‘T’ is for taxes on the home. Lastly, the final ‘I’ is for insurance (i.e., the homeowner’s policy you are required to have before closing.)

3. In order to qualify for the best rates on a mortgage loan, borrowers need a higher credit score today than they needed just a few years ago (a 750 or higher in many cases). If you’ve been watching the news lately, you can probably guess why. The subprime mortgage mess of 2007 - 2008 has led to tougher restrictions on lenders. In turn, the lending institutions have tightened up on their loan criteria for qualification, rate assignments, etc.

4. Every buyer should study the key differences (and pros and cons) between adjustable and fixed-rate home loans. With an adjustable mortgage, or ARM, the interest rate will typically start out low for an introductory period. This period commonly lasts for three to five years, after which the loan will adjust or “reset” to a higher rate. In many cases, this increase can be significant and will therefore lead to a bigger mortgage payment each month.

5. For buyers who plan to remain in a house longer than three to five years, the fixed-rate mortgage is usually the best option. As the name suggests, this type of loan will carry the same level of interest for the entire time you’re paying it (regardless of what the economy does). This offers a level of financial certainty, which for many borrowers is all the reason they need to choose this option over the ARM.

Clearly there is much more to learn about interest rates, as they apply to buying a house. But I hope the points I’ve made above give you a better understanding of this subject. I recommend you learn more about each of the items covered above, particularly the pros and cons of adjustable versus fixed mortgages. Being an educated consumer is the first step toward success in the real estate world.

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at to learn more about this topic.

Getting Mortgage Quotes Online - Tips For Internet Security

by Brandon Cornett

Thanks to the Internet, the entire real estate process has gotten a lot easier. You can find homes and research prices online, and you can even request quotes from mortgage lenders with less time and effort than in the past.

And while these are certainly good things, you must also exercise a bit of caution when getting home loan quotes via the Web. You need to protect your personal information at all times, and you need to learn about the various companies that offer this kind of web-based service. This calls for some light “detective” work on your part, and that’s what I’m going to teach you in this article.

Before we get to the actual steps involved in this process, let me offer you some good news. With a little research and common sense, you can benefit from the convenience and efficiency of online mortgage quotes while protecting your identity at the same time. There are plenty of reputable companies that offer these services. Of course, there are some scams out there as well, but these will be fairly easy to spot once you read this article.

Without further ado, here are five ways to protect your identity while getting loan offers via the Web:

1. Go With the Names You Know

Generally speaking, it’s best to use a company you’ve heard of before when requesting mortgage quotes through the Internet. Here’s why. The fact that you’ve heard of them suggests that the company spends a lot of time, energy and money on their brand name. Such a company will go a long way to protect its reputation and brand, and they do this by providing a good service and looking after their customers. Personally, I would never offer sensitive information to an unknown company — too much of a wild card for my comfort. I recommend you do the same.

2. Look for the ‘S’ in the Web Address

A website that is truly secure have the letter ’s’ in the prefix of the website address / URL. This means the site is encrypted to keep hackers and identity thieves out, as much as possible anyway. When you visit a lender’s website — and before you transmit sensitive information through the site — check the web address that appears in your Internet browser. If it’s truly a secure website, there should be an “https://” prefix before the “www” part. Note the all-important letter ’s’ in that prefix. If the address starts with “http://www” (lacking the letter ’s’), then it’s not a secure site.

3. Look for Third-Party Verification

Reputable mortgage companies will go the extra mile to have ensure their websites are secure for visitors. This will often include the use of third-party verification of site security. In other words, the company will hire another company to test and verify the secure areas of their website. You’ve probably even seen the certification seals on financial websites in the past. A common one is the “TRUSTe” seal of approval. In most cases, you can actually click on the image / seal to check the security status of the site you’re on.

Conclusion and Going Forward

Using the Internet is a great way to get quotes for a home loans while saving time and energy in the process. You just have to exercise a little caution along the way. Follow the safety guidelines I’ve provided above when requesting mortgage offers via the Web, and you should be fine. And remember this mantra of Internet safety and security … when in doubt, back on out!

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at to learn more about this topic.

When is the Adjustable-Rate Mortgage a Good Idea?

by Brandon Cornett

This is one of the most frequently asked questions we receive at the Home Buying Institute. But despite the frequency, I’m always happy to answer. A failure to understand the inner workings of the adjustable-rate mortgage loan is what got many homeowners into foreclosure trouble over the last few years.

Let’s start with a quick definition. The adjustable-rate mortgage (commonly known as the ARM loan) has an interest rate that will adjust or “reset” at a predetermined frequency — every three years, every five years, etc. This is very different from the fixed-rate mortgage loan, which holds the same interest rate over the entire life of the loan.

The interest rate is one of the factors that determines the size of your monthly mortgage payment, so when the rate increases or decreases the size of your monthly payment changes up or down with it.

Many of the adjustable-rate mortgages given out these days are actually “hybrid” in nature. They start with a fixed interest rate for a certain period of time. After that initial period, the rate will reset or adjust — and it will continue to adjust with regular frequency. This is where the uncertainty comes into the picture, because you never know exactly how the rate will adjust. It typically means an increase, but you don’t know how much of an increase.

ARM Loans, Bad Credit and Payment Shock — A Common Pattern

These types of loans were favored by the subprime lenders you’ve heard so much about lately. When a person has bad credit, they have trouble qualifying for a mortgage loan. And if they do get approved for a loan, they will usually end up paying a higher interest rate than somebody with good credit. This can make the mortgage payments unaffordable for the home buyer, unless … the lender can find a way to reduce the interest rate for the first few years.

And that’s where the ARM loan came in. Subprime lenders would often use some version of the adjustable-rate mortgage to minimize the interest rates for the first few years of the loan. This would make the loan payments seem more affordable to the borrower — at least initially. When you hear the phrase “teaser rate” used to describe mortgage loans, it usually refers to this type of lending practice.

So, John and Jane (both of whom have bad credit) purchase a home through an ARM loan. The rate is relatively low for the first three years, so everything seems fine. While the mortgage payment is a significant chunk of change for John and Jane, they can afford it for now.

After three years, the interest rate resets to a higher rate. And in the case of a subprime mortgage loan given to borrowers with bad credit, the rate usually increases significantly. The next thing John and Jane know, they are suddenly unable to afford their new payment. So they have three options — (1) refinance the loan, (2) sell the home, or (3) suck it up and try to manage the new / larger mortgage payment.

Many people in this situation over the last few years were unable to pursue option #1 (refinancing) because their property values dropped since the date of purchase. So their options were reduced to just two — sell the house or try to handle the new payment. We know from history that a lot of people took the latter route, whether it was by choice or not. We also know that this type of scenario contributed to the record-breaking numbers of home foreclosures we’ve seen over the last two years.

How to Safely Use an ARM Loan

The scenario described above is an example of how not to use an adjustable-rate mortgage / ARM loan. If you plan to keep the home for many years, the fixed-rate mortgage is usually your best bet. As we have seen, you cannot count on being able to refinance the loan before the interest rate adjusts. Nor can you predict how much larger the payment is going to be after the adjustment period.

But there is a smart way to use the ARM loan. I have used one myself in the past, and it worked out perfectly for my wife and I. It worked out well [and here's the key to all of this] because we knew we would only be in the home for three years, at the most. This was my last tour in the military, so we bought the house knowing we would be moving again in a few years. The ARM loan was ideal for this scenario. We saved money while we owned the home (because of the introductory period of low interest), and then we sold the home and moved before the rate adjusted.

This is not the only scenario where an adjustable-rate mortgage can be used wisely. But it is the most common scenario. The key here is that you (A) understand how this type of mortgage works and (B) choose the best loan type for your particular home-buying situation.

Do plenty of research before picking a type of home loan. This article is only the beginning of your research. Don’t let a mortgage lender tell you what’s best for you — take their advice, sure, but make your own decisions based on thorough research. It’s your financial future, after all.

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at to learn more about this topic.


Common Misconceptions About FHA Home Loans

by Brandon Cornett

FHA home loans are a popular financing strategy for home buyers. They’re especially popular with first-time buyers who don’t have much of a down payment saved up. But FHA loans are also commonly misunderstood. Here are some of the biggest misconceptions about these loans.

But first, a quick definition. An FHA loan is simply a mortgage loan that’s insured by the Federal Housing Administration. The FHA is part of the Department of Housing and Urban Development, better known as HUD. This government agency insures mortgage lenders against losses resulting from borrower default. This makes the lenders more inclined to use the program, and to give loans to people who might not otherwise qualify for a mortgage.

Myth #1: Anyone can qualify for an FHA loan.

Truth: Not everyone will qualify. Generally speaking, it’s easier to qualify for an FHA home loan than a conventional mortgage loan. But that doesn’t mean they’re available to everyone. In fact, the Department of Housing and Urban Development (HUD) has recently tightened up their lending standards for FHA loans. One of the changes affects people with low credit scores. If your credit score is below 580, you’ll have to make a larger down payment. If your score is way below 580, you probably won’t get approved for the loan. With good credit, you’ll still have to make a down payment of at least 3.5% to get approved. You’ll also need to document your income and expenses, to show that you can afford the monthly payments.

Myth #2: You can get an FHA loan with no money down.

Truth: In the current economy, you can’t get any kind of loan without making a down payment of some kind. The days of “easy credit” and “no money down” disappeared when the housing bubble burst. The minimum down payment for an FHA loan is currently 3.5%. And, as mentioned earlier, you’ll need a credit score of 580 or higher to qualify for the 3.5% down payment. If your score falls below that cutoff point, you’ll have to put 10% down.

Myth #3: FHA loans are safer, because the government will bail you out if you fall behind.

Truth: Wishful thinking. If you fall behind on an FHA home loan, you can be foreclosed upon — the same as any other type of loan. Remember, the FHA is not the one giving you the money. You must apply for one of these mortgages through an FHA-approved lender. The government just insures the lender against losses resulting from borrower default. So the lender can still foreclose on you, if you fail to make your payments. As an FHA borrower, you might have more workout solutions and modification options available, but that’s about it. The FHA will not “bail you out.” So make sure you buy an affordable house!

Where to learn more:

Federally insured loans offer certain advantages to home buyers. But they are not a risk-free path to homeownership. As a borrower, you are still responsible for making your payments on time. If you would like to learn more about FHA loans and how they work, refer to the resource links provided above.

Author's Note: The original version of this article was written by Brandon Cornett. Brandon is a consumer advocate and publisher of the Home Buying Institute. Visit the author's website at to learn more.