All About Mortgages
Join John Murphy of Consumers Credit Union as he discusses the basics of getting your very first mortgage. Learn about credit scores, down payments, and why we need to see that statement page that says, Listen today!
00:07 Lynne Jarman-Johnson: Money, I’m Home, from Finance to Fitness. This is the Consumers Credit Union podcast, I’m Lynne Jarman-Johnson, and today we have a hot topic. It is one that you might have been thinking about or you’re thinking about in the future, and it is called Home Ownership: Common Mistakes. John Murphy is our Vice President, of Mortgage Lending. Thank you so much for being with us today, John.
00:28 John Murphy: My pleasure.
00:29 LJ: Oh, my gosh, this really is a hot topic.
00:31 JM: It is.
00:32 LJ: I think that our producer Jake just mentioned that the number one search tool or term in Google searches quite often, especially when it comes to home ownership, is “credit score,” and “what’s my credit score?” When you’re buying a home, whether it’s your first, your second, there are many mistakes that, you know what, you don’t even think about that you’re making a mistake, it just happens. Let’s share a little bit about credit score, and how important credit score is when you’re about ready to want to want to buy a house.
01:03 JM: So the timeline is six months out. When you want to buy a house in the spring, now is the time when you want to find out where you stand in the credit world.
01:11 LJ: And you want before you actually apply for that house?
01:14 JM: Absolutely. And this information is available free of charge on a number of websites. We suggest annualcreditreport.com, where you can actually get your three FICO scores, your Experian, TransUnion and Equifax, and so you’ll know if there’s errors. 30% of credit reports contain errors. Some have a material impact, most do not. But you need to know that six months in advance, because it may take that long of a time for you to repair what damage may have occurred because of the misreporting, or maybe it’s just a missed bill or two, which happens to everybody.
01:48 LJ: What is a good credit score?
01:50 JM: A good credit score… A minimum credit score, let’s start with that, for a conventional loan, which is your standard Fanny Mae, Freddie Mac loan is going to be 640. It may go down to 620, and 620 is in the breakpoint for FHA. So FHA will go 620, typically down just a little bit less than 600. But most people, if you have a credit score of 650, 660, that’s going to be in the top 75% of all credit scores in the country. So most people have decent credit and all credit can be repaired. There’s not anything that’s fatal on your credit report.
02:23 LJ: When you need to repair your credit report, what is it that you’re looking for? How fast can you do it? Oh, like, “I want to buy a house next month.” Can I do it next month?
02:33 JM: It’s highly unlikely if your credit needs repair to where you’re not getting approved for any financing, it’s going to take at least 60 to 90 days for that to cycle through the system. The creditors report once a month, but the score is a lagging indicator of your credit history. It’s a historical look back. So, yes, mistakes take 60 days to fix and on our credit reports, it shows you how much your credit score will actually improve if you do the following things. So, we really try and project in a narrow window, what that might be 60 days from now.
03:09 LJ: So what are those things?
03:11 JM: Well, number one, it’s the 75% of your credit score is determined by how you pay your bills. And that’s looking back in the last 12 months, have you paid all your bills on time, your credit cards, car payment, mortgage payments? Any vendor that reports…
03:24 LJ: That’s the number one thing?
03:25 JM: The number one thing is people that just don’t pay bills on time. Number two is average to outstanding balances. So if you’ve got a credit card with a $10,000 balance and you’ve got one credit card, but you always keep $7,000 to $8,000 on that credit card, that will hurt you severely. Better to have three credit cards with $5,000 and maintain a $5,000 total balance. Keep your outstanding balance to available credit at 30% or less, and you will help your credit score, not hurt your credit score. And then the third thing is variety and type of credit versus… In other words, a branded credit card like Consumers Credit Union versus a department store credit card, where the interest rate is much higher. That’s known as credit of last resort, because they’ll approve almost anybody when they’re charging 30% interest.
04:13 LJ: That’s why when you’re there, they’re always asking you.
04:15 JM: They’ll give you a discount and 12 months interest-free, the interest accrues, and almost nobody pays it off in 12 months. So get a Consumers Credit card, which is a low rate, very transparent, versus a 30-35% card at your local department store.
04:30 LJ: One of the things about home ownership is that it… Like probably the majority, and I’m not sure you can correct me on that, is going to be a joint process, meaning a husband, wife, partners who decide to purchase property in a home. So, their credit score is important on both sides?
04:49 JM: That’s absolutely correct. And you don’t need to be married to be a joint borrower on a loan, co-borrower, it can be friends. It can be boyfriend-girlfriend. It can be domestic partners. It doesn’t have to be husband and wife. But when we look at two sets of credit scores, there’s three on each side, we look at the average of each and then we take the lower of that. So it’s the low middle score of both borrowers. And that can… If you’ve got 800 FICO and the partner has a 600 FICO, we have to use the lower of the two credit scores, if they’re both jointly on that application, and it does create issue sometimes.
05:26 LJ: So, what other mistakes are out there that somebody might not even know that they’re starting to do, if they have a long-term goal of getting into a house?
05:35 JM: Well, I think credit number one, number two is look at your personal budget, because we qualify people on gross income. Out of your gross income come something called taxes, right? There’s day care, there’s groceries, there’s car insurance. These are expenses of living that we do not consider. Consider a personal budget, make a spreadsheet, and it’s not just your house payment, it’s the house maintenance, it’s the utility bills that will undoubtedly increase. All your life expenses have to be factored in there. Realtors sometimes don’t do as good a job as we’d like about counseling people on the entire overall personal debt load, just the debt load on the house itself. So get that in order before you give the realtor a price point or a target on the house that you’re looking for.
06:24 LJ: So what’s really interesting… Yeah, I laugh about a friend of mine who’s in the landscape business always says, “You can tell when an individual has purchased a house and forgot about the lawn.”
06:36 JM: Oh, of course.
06:37 LJ: He’s forgot about the outdoor living of a home.
06:40 JM: Which is expensive to maintain. And it’s a very… Your landscaping is an investment, just like your furniture inside the house, maybe even more so, as far as curb appeal goes. So plan ahead, consider your personal budget, all your wishes and aspirations with a new neighborhood, and try and not finance up a vehicle right after you buy a house, let that old car sit in the driveway.
07:03 LJ: Does that happen a lot?
07:04 JM: It happens way too much. New house, new car, new ride.
07:07 LJ: New car, you can have a new garage.
07:09 JM: New garage. The neighbors won’t see your 1986 Buick, and it runs just fine.
07:16 LJ: That’s exactly right. So one of the discussions is about the aspiration of buying a home, and you see stories out there about, “Well, if you rent, if you pay this much in rent, you can buy a home.” But basically, what you’re saying is you have to remember that that rent price… There is so much more that goes into a home than just the mortgage payment that you’re making.
07:42 JM: Well, that’s a very common and typical response from a lot of people, that, “Look, I’m paying $1000 in rent, I might as well buy, my payment will be less.” Not necessarily. And number two, that may not be in your best interest, because if you plan on keeping that house for only a couple of two or three years, you will lose money on transaction costs; whereas rent, you’ve got the… You may be paying a higher rent, but you retain flexibility in your lifestyle, in your maintenance. You don’t want to be tied to a house if you’re single, you want to go out and have fun, and a house is an obligation, it requires many, many hours or many, many dollars to upkeep it and make it function as it should.
08:24 LJ: So that component is really… You have to think about it. How important, then, is it for that pre-approval, in advance, so that you know, “This is truly what I can afford,” it’s not, “Hey, this is what I afford now, but this is what is on the table.”?
08:40 JM: When we generate pre-approvals, Lynne, we ask them about their personal goals, aspirations, budgets. Maybe they’ve shared with us that they plan on starting a family; kids are expensive.
08:51 LJ: No.
08:52 JM: Yeah. You would know, you had lots of practice.
08:54 LJ: I have.
08:56 JM: Six children?
08:57 LJ: Yeah, yeah.
08:57 JM: Six children, right?
08:58 LJ: They don’t get less expensive as we age. [chuckle]
09:00 JM: They don’t get less expensive, even if they’re off the payroll, right, exactly. So if they share that with us, then can kind of build a little model for them that they can take to their realtor to say, “You can afford a $300,000 house, but really, we’d like to keep the payment at $1500, which is a $230,000 or $240,000 house.”
09:19 LJ: Right. So really think about it in advance, and be that partner in helping that individual get…
09:24 JM: And expect the unexpected. Life events occur, job loss, injury, pregnancy, cars break down. Give yourself a cushion. If you take yourself to the max… We’ll almost never take somebody to the max, and if we do, we like to have somebody else take a look at that just to make sure we’re doing what’s in the best interest of the member, that we’re not putting them in more house than they really could afford.
09:47 LJ: Than they can afford. What slows down obtaining a mortgage? You’re really ready, you rock-and-roll, you want that, what slows it down?
09:54 JM: The number one thing that slows it down is the inability to access documents for us when they’re needed. So we give you a list as soon as we get your application, we run it through, and we get you conditionally approved, and then we give you a long list of documents that most people don’t have in a filing… The old file… Remember the old filing cabinet that your parents had?
10:13 LJ: Nowadays, everything is digital.
10:15 JM: Everything is digital. And you need passwords, and you may not have logged on to banking, and we need all that information, and it’s easy to get to us, but you have to have your fingers on it so that we can get it. And the more you delay, the longer your mortgage loan will take.
10:30 LJ: And it is funny, because you know how it’s natural for an individual to say, “Well, I gave you the paperwork, so now’s… You might have taken three weeks to get the paperwork too, but now it needs to go fast.” [chuckle]
10:42 JM: Well, and you had six pages on your bank statement, and you ran it through the scanner, and we got page one, three and five.
10:49 LJ: Which happens.
10:50 JM: Which happens. Or page six is blank, believe it or not, says, “This page is left blank intentionally,” we need that page.
10:56 LJ: Isn’t that funny?
10:57 JM: We are that particular. If it’s a six out of seven pages, and the last page is blank, we need the page.
11:02 LJ: Right. Right. What is frustrating for some, it would be frustrating to say, “Gosh, this doesn’t seem like an easy process,” but the communication is the most important, it sounds like, to make sure that that process does run smoothly, and to have people know that, “Look, there might be bumps.”
11:21 JM: Well, and people, Lynne, that we deal with, for the vast majority of people, they know what the, “What,” is; “I need to document my income,” but they want to know the, “Why.” They’re smart people, they want to know, “Why do you need that information? Why do you need to take a two-year average of overtime? Why do I need to source this deposit that came into my account? It’s my money. Lynne paid me back the loan.”
11:44 LJ: Makes no difference. Right.
11:45 JM: As long as you explain to them the nature of that inquiry, that it’s not frivolous, they’ll provide you that information. So we’re really good about that, is not only the “What,” but the “Why,” as well.
11:56 LJ: Right. How stressful is it, sometimes?
12:00 JM: Oh, very stressful. Think of how many homes you’ve bought and sold in your lifetime; maybe a dozen, is it?
12:05 LJ: Yeah, you’re excite… You’re all excited, and then you’re nervous, and then you’re excited.
12:07 JM: Most people buy and sell three to four homes in their lifetimes, so how good are you going to be at something you do three or four times in your life? Typically, not very good, not very good. I went to a…
12:19 LJ: You’re not practiced.
12:20 JM: I went through a loan application, it was another lender, for a… I ended up coming back to Consumers, and I was asking questions, and he says, “You’re in the business, you should know the answer to this.” It was different, I was on the other side of the table, and I saw, it was my transaction was the most important thing, and we have to remove ourselves from that and keep our members updated that, “It’s going to take 20-25 days to get this loan approved, so relax, we’re in control.”
12:44 LJ: And you know what? It is their most important.
12:47 JM: It is, very much.
12:48 LJ: No matter what, and you felt that.
12:50 JM: Psychologically, they’ve moved in, and they’ve moved on, and they’ve… They’re re-decorating before the loan’s even closed.
12:56 LJ: So let’s recap, what do you think is the top three items that people, if they’re thinking about getting a house this spring, next spring, whenever it may be, what’s the top three things that they need to remember?
13:08 JM: Well, number one is get pre-approved, pre-qualified early in the process. Number two, identify how much you’re going to invest in this purchase. Is it going to be a gift? This… Now’s the time to start planning the receipt of that gift. Is it going to be your own funds, liquidating an IRA, 401K? Now’s the time to start thinking about that. And number three is choose a reliable real-estate partner. I know there’s a temptation that, “I’m going to find my own house on my own, I’m going to… And I can save money.” It doesn’t work that way, the realtor’s paid by the seller, not the buyer, right? So you want to find and get recommendations and interview tours for realtors to get a good fit. Some don’t like first-time home buyers, others specialize in that; so those three things will, and of course using Consumers Credit Union as a source of financing, will guarantee a smooth process.
14:00 LJ: That’s awesome. Real quickly, we ask this, because this is a podcast on finance to fitness; obviously a house is the biggest chunk, isn’t it?
14:08 JM: Mm-hmm.
14:09 LJ: For you, though, as you have… You’ve moved, you’ve started in new companies; has there been any advice on how to stay financially fit, that you just have found, “Wow, that really worked or resonated with me?”
14:26 JM: Yes, and it’s kind of Dave Ramsey-esque before Dave Ramsey was around. And my dad had a little 3 X 5 box, plastic box, with envelopes in it. And he would cash his paycheck and put certain money in certain envelopes, and that was his budget. And so he said, when I graduated from college and moved to Texas, that was one of my graduation gifts, not a fancy car; it was a plastic box with envelopes.
14:52 LJ: That is awesome.
14:54 JM: And I still use that system, of course, on our online banking, and I’ve got probably 15 sub-accounts. And every paycheck, I’ll put certain money, and at the end of the year, I just… Car insurance is outrageous here in Michigan, and when it’s due, I’ve already got the money there. So it’s… That was many, many years ago, and I used that envelope system, it kept me liquid, and I had plenty of money to do what I wanted to do.
15:18 LJ: And now, you’ve mentioned the word, “sub-account,” and for those listening, that’s a savings account; and you can do multiple savings accounts. Well, John, thank you so much.
15:26 LJ: Thank you, Lynne.
15:27 LJ: Money I’m Home, from finance to fitness with Consumers Credit Union.