Author: Felecia Roberts

There are countless tips and strategies on how to reduce your monthly mortgage payments, but comparatively few on how to save money on a new mortgage when buying a home. Too many home buyers don’t even know about some of these options, much less give them serious consideration when finalizing the details of the mortgage with their home lender.

 

Buying Points on the Mortgage

There are two different kinds of “points” that people buy: origination points and discount points. Origination points offset the lender’s cost of processing the loan in exchange for a lower interest rate. Discount points is even simpler in that you’re making a one-time upfront payment to lower the interest rate on the loan. Often, the type of points you’re buying depends on the standard or default loan terms offered by the lender. Some lenders like to market a no closing-cost mortgage but then also offer the option to buy discount points when the borrower realizes lower interest rates are available to them. Either way, you’re paying more upfront to reduce the overall cost of the loan.

On a related note, due to their specific closing costs and loan terms, different lenders offer more generous terms than others when it comes to buying points. Fortunately, there’s a key metric that simplifies the decision to buy points. Ask the home lender what the breakeven date is for the points you’re considering buying. The longer you plan on staying in the home, the more sense it will make to buy points.

 

Minimizing and Negotiating Closing Costs

Even apart from covering the origination fees and paying down your interest rate, there are other ways to save money on a home loan by minimizing closing costs. Some of the taxes and governmental fees are unavoidable, but many closing costs are negotiable either directly through the lender or through the third-party vendor. This includes the inspection, survey, appraisal, notary, escrow fees, and title insurance.

When available, the most effective way to lower closing costs is to make an all-cash offer. Not taking out a mortgage completely eliminates the underwriting fees and many of the insurance requirements that come with a mortgage. It also makes you a much more attractive buyer to a prospective seller. More real estate investors are also buying properties in cash rather than trying to finance and manage multiple properties, especially as interest rates continue to rise and the cost calculations for taking on additional mortgage debt look less favorable. Similarly, some millennials are getting an edge up on the housing market by using a parent’s home equity to make an all-cash offer. Then, they can work out the mortgage and repayment mechanism after the home is purchased.

As with buying points, many of the most popular strategies for reducing closing costs have trade-offs that you’ll need to be prepared for. Closing at the end of the month will reduce the prepaid interest you’ll need to pay as part of the closing, but it will also reduce the time until your first mortgage payment. It also creates additional logistical stress and hassles as most buyers and lenders are trying to close at the end of the month as well.

 

Working with Realtors who Offer Real Value

The total real estate commission on a home sale is negotiated between the seller and the seller’s real estate agent. This leaves few options  for the buyer to proactively reduce the commission paid out of the sales price. It also mistakenly creates the impression that there is nothing at all a buyer can do to possibly reduce the traditional commission paid on the home purchase. Whatever the commission on a home sale, it’s typically split between the seller and buyer agents. But the average real esate commission nowadays is hovering around 5 percent, which means a lot of people would say many buyers should have to pay no more than 2.5% of the sales price to their agent.

Many buyer real estate agents are now willing to offer some type of cash rebate based on this type of commission structure. So, if the listing commission set at a full 6 percent by the seller, your agent is willing to refund the half-percent after the deal is closed and the commission fee is received. That said, if you’re looking for something unusual, something special, something that is hard to peg down a fair value for, then having an experienced and savvy realtor on your side can make a big difference. Either way, it’s hard to overstate the importance of finding a realtor who offers real value as part of the process.

Carrington Mortgage Services has launched a new line of subprime mortgages targeting the 100 million U.S. consumers with less than perfect credit. While Carrington already offers subprime loans via government channels, such as the FHA and VA, these new additions are not backed by Fannie Mae or Freddie Mac. They appear, instead, to be proprietary loan solutions offered by Carrington itself.

Here’s what the mortgage looks like: Borrowers can have FICO scores as low as 500 and loan amounts as high as $1.5 million. Recent credit events are okay, and bank statements are acceptable to verify income. Cash-out refinancing can be as high as $500,000. Carrington is advertising these loans as the ideal solution for those who have low credit scores, high debt-to-income ratios, a recent credit event, or who are self-employed.

 

What Carrington Mortgage is Saying

The company has said that these loans are “non-agency,” meaning they do not comply with the underwriting guidelines of Fannie May or Freddie Mac. Additionally, Carrington is offering jumbo loan amounts, which exceed the current conforming loan limit of $453,100. This is meant as a way to increase borrower flexibility over standard loan options. So, why should we care? Subprime mortgages were a major catalyst in the American financial crisis in the mid-2000s. Just a decade after the biggest financial crisis in U.S. history, the company has begun to offer these predatory loans. However, this isn’t the whole story.

 

History Review and Personalized Advice

One might argue that underwriting issues weren’t the only factor to lead to the housing crisis. Rather, the risk was layered. A multitude of factors, such as a low credit score, high debt-to-income ratio, no or low down payment, and limited documentation, combined to create a high-risk home loan. Conversely, a borrower with a very low credit score but a large amount of assets and down payment, along with a stable income, could be a suitable candidate for this new subprime loan. Low credit scores are incredibly common, and it could be that Carrington is attempting to offer a solution to those wrecked by the financial crisis and attempting to rebuild.

That said, if you have a low credit score and are in search of a mortgage, do your research. Don’t side with Carrington just because they will accept your low credit score; shop around and see what else you can find.

The majority of people have some experience in the “gig economy,” but many have made it their livelihood. If you make all or most of your income through rideshare, freelance, or app-based services, you’re likely wondering if this type of income can be used to obtain a home. While it may be more difficult than it would be with a salaried position, obtaining a mortgage with a gig economy job is not impossible.

 

Most mortgage lenders will verify your income to determine how much mortgage you can afford, but if it can’t be documented (or if it is documented in an unusual way), you might run into trouble. However, large mortgage financiers like Fannie Mae and Freddie Mac are already discussing options and beginning to take action for gig economy-reliant individuals. This means it should be easier for you to get a mortgage, even if the process is not yet completely clear. To that end, the cooling mortgage market may result in a more expeditious effort to get more customers in the door, meaning this process is likely to speed up.

 

Freddie Mac recently predicted that 43% of U.S. workers will be freelancers by 2020—up from just 6% in 1989. These positions are, essentially, jobs that allow the individual to put in the hours and time they can. The workforce behind companies like Uber, Lyft, and Postmates choose the hours they work to perform deliveries and driving-oriented tasks, while those who use Airbnb or Turo rent out their homes and belongings to others to turn a profit.

 

While many Americans have experience in this economy, most use it to supplement their existing income. Some also use it to meet a specific goal, such as saving for a down payment on a home or to qualify for a mortgage. While this provides an essential income boost for most, it introduces ambiguity to financial health; in the past, income was fairly straightforward, which allowed mortgage lenders to easily assess a person’s income and debt-to-income ratio. The gig economy is fluid, which inhibits the lender’s ability to make a sound assessment.

 

So, what is the solution? We don’t yet have one, but it will likely have to do with technology. We anticipate that mortgage providers will begin to develop a calculator to facilitate the process of better understanding gig economy income. Freddie Mac has already teamed up with a company called LoanBeam to use a patented technology called optical character recognition. This program scans and extracts key information directly from a prospective borrower’s financial documents to calculate a qualifying income that can be used to obtain a home loan. Currently, this process is manually performed, which can lead to extended application times and miscalculations.

The gig economy is not going away, and more workers will begin to rely on its flexibility to supplement their income. Technology will need to catch up to the market, but we don’t see that process taking too long.