Military Mortgage Guide

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The Internet is full of resources to help you learn about buying a home, so we will cut to the chase and give you some information that will benefit you as a military member.


Introduction:

The Internet is full of resources to help you learn about buying a home, so we will cut to the chase and give you some information that will benefit you as a military member.

Can you afford to buy?

Owning a home is the biggest financial commitment most people face. So, one must take buying a home seriously because the wrong loan products can devastate your financial future. Military incomes can certainly afford you the opportunity to buy a home, as long as you have good credit and do not already owe money to a lot of creditors.

When you pre-qualify for a loan, not only can you count all your income, you can count your Basic Allowance for Housing. In addition to the member’s income, if a spouse is working, their income counts if their name is on the application.

TIP #1 - When considering a home, you may not want to spend 100% of your BAH on a mortgage payment. You should calculate all your utilities, any maintenance, and homeowner’s associations’ dues as part of your monthly housing cost to make sure you do not find yourself in a pinch two months after moving in. Usually when renting, you only pay for minimal utilities so costs are low, but all of this changes when you buy a home. In addition to all of the utilities, you are now responsible for the upkeep of the home when something breaks.

TIP #2 - There are countless mortgage products that you may qualify for, but you need to make sure what you are getting is what you can afford. Many products called Sub-Prime loans may easily qualify you and get you what seems like an unbeatable rate, but the fine print may contain huge payments or even skyrocketing interest rates a few months down the road. Be sure to ask your lender and make sure you stay away from these types of loans.

Credit repair

  "Something everyone should use, even if you have good credit!"  

Most military families know months before they relocate that they plan to buy a home. This is the perfect time to review your credit report with a mortgage or credit specialist to see where improvements can be made. This can have a significant impact on your loan amount and even your interest rates. Credit repair is not just for those with poor credit. Families with good credit can save hundreds or even thousands of dollars by simply raising their score a few points.

Here is an example of a $150,000 home loan at 30 years fixed
Credit Score Interest Rate Monthly Payment Total Interest
720-850 5.57% $858 $158,880
700-719 5.69% $870 $163,200
675-699 6.23% $922 $181,920
620-674 7.38% $1037 $223,320
560-619 8.53% $1157 $266,520
500-559 9.29% $1238 $295,680
In our example the difference between a score of 619 and 675 is only 56 points. However that equates to $235 dollars, monthly!

There are three credit agencies that track credit ratings: Equifax, Experian, and TransUnion. All three have slightly different scoring ranges and will score your credit differently, but all will generally be close. When a loan officer reviews your credit report to qualify you for a loan, they take one or all three scores to determine your interest rate.

Making corrections to your credit report, even if you have good credit, can still save you hundreds, even thousands in the long run. For example, if your score is 690, your loan officer will qualify you for a specific rate. But you may qualify for a better rate if your score were 700. In our example above, that is $52 a month or $18,720 over the life of the loan.

Your payment history = 35% of score
How much you owe = 30% of score
Length of credit history = 15% of score
New credit applications = 10% of score
Other factors like types of credit = 10% of score

Improving your score depends on the discrepancies. It could simply be wrong information was reported to the credit agency, a late payment on a loan, or more serious discrepancies. Here are a few examples of how your credit score is impacted.

The best way to improve your credit is over time. Make payments on time and pay down debts are the two most significant. However, if you are looking to buy a home and you only have 30, 60 or 90 days, then there is still time.

Reviewing your report may reveal mistakes that were wrongfully reported or discrepancies that are more than seven years old. If you have an item that was not reported correctly, contact the financial institution and challenge the discrepancy. If they acknowledge that an error has occurred, confirm that it is corrected and then ask them to file a new report with the credit agencies. Corrected action can take months to appear on your credit report, however many financial institutions will send the updated information upon request so it will appear much sooner.

TIP # 3 - FREE CREDIT REPORT - The Fair credit reporting act allows you to get a free credit report from each of the 3 credit agencies, once every 12 months without obligation. You can request your credit report by visiting this link: https://www.annualcreditreport.com/cra/index.jsp. This website is the official site set up to get your free credit report. DO NOT apply for your report from copycat sites that require you to register and sign up for a paid service to get your report.

Your next option is to contact the three credit agencies directly. This must be done in writing unless you use the free website above. It allows you to dispute errors online. You can challenge a discrepancy and if they cannot substantiate it within 30 days by law, they must remove it.

TIP # 4 - Many fraudulent credit repair companies will send a letter challenging each discrepancy separately, whether it is an error or legitimate, hoping that the agency can not substantiate all the errors within the 30 days allowed by law and force it to be dropped. Credit agencies have indicators to detect this fraud, so be sure you only challenge discrepancies you truly feel are errors.

There are many online credit repair services that can help you repair your credit. But be careful, many are very unethical in their practices and all offer different approaches. Some will charge you a fee and give you the instructions just as I have. Others will write the letters for you and monitor the progress to correct your report. Be sure to ask how they will correct your report and exactly what you are expected to do. If you have the time, get a copy of your credit report and review it for errors. Then contact the credit agencies in writing and challenge any errors you find. If you do not have the time, let a professional credit repair agency assist you. The average fee is about $40 per month of service and can often have errors resolved in 3 to 6 months. $120-$240 spent now, can save you hundreds later.

Qualifying for a mortgage

If you feel you can afford the cost of home ownership then the next step is to get pre-approved by a lender. Just because you can afford the monthly payment does not mean you will qualify for a home loan. When you buy a home, you are essentially using someone else’s money. So they need to make sure there is an acceptable level of risk by giving it to you. When you apply for a loan, a lender will review your credit report to see how much debt you have and to see how well you pay your bills. If you are consistently late or carry a lot of debt, a lender will think twice about loaning you money.

As a member of the armed services, you can use your VA benefits. However, there are misconceptions about VA Loans. The VA does not loan the money for your home, rather they act as a co-signer. The VA guarantees the lender up to $417,000 of the loan, which means that if you default, the VA will pay the lender. But you must understand that the VA will expect you to pay them back if you put them in that situation. Having the VA as a "Co-Signer" will help you to qualify for a loan, but it is not a guarantee.

Having less than perfect credit does not mean you cannot qualify, you may simply pay a higher interest rate to help the lender offset the risk involved.

TIP # 5 - If you know you plan to buy a home, try to pay off as much debt as possible, and DO NOT make any large purchases or make new financial commitments like buying a car. Wait until after you buy the home to make large purchases. Debt to income ratio will lower the loan amount you may qualify for and raise your interest rate.

Where to apply

  "It is important for you to understand that shopping for a loan
is just as important as shopping for a home."  

Most people take it for granted and simply apply and accept a mortgage from any lender without careful consideration. However, this is risky business and you need to consider a few facts.

People are most concerned with the interest rate and what that means to their monthly payment. But interest rates are only one factor on the bottom line. You must also consider fees and points (1 point is 1% of purchase price) that the lender may require you to pay upfront to get a loan. Some loans may have a better rate but higher fees upfront. Talk to your loan officer about how long you plan to remain in the home and what options are best for you. If you are going to own the home for 3-4 years, it may be better to have a higher interest rate and less upfront fees.

To make sure you are getting the best loan, you will naturally want to compare what several lenders offer. But even this is hard to do. Each lender may have a slightly different loan to offer, and certainly different fees or points they charge. Even the interest rate will be different. Your credit score and risk largely affect interest rates, but each lender has their own requirements to qualify a person and may review your risk differently. This can affect what rate they offer you.

Comparing offers from different lenders will require you to apply with each one because no one will provide you a rate quote without first reviewing your credit score. But this has a negative impact. First, by applying with many lenders each will run a credit check to get your report. Each time a creditor runs a credit check; it negatively impacts your score. Secondly, because mortgage rates are adjusted throughout the day, it will be hard to compare rates, fees and points unless all the lenders offer the same loan type with the same fees, and all quote you a rate at the same time of day. Then you could honestly see who offered the best rate.

Your best option when applying for a loan is to find a mortgage broker. Brokers have access to loans from many, sometimes hundreds of lenders. They will run your credit report one time and input all your financial and other qualifying information into a computer system that will then electronically check the loan products from all the lenders at one time. By doing this, a broker can easily see what each lender charges for fees, what rate they offer based on your credit score, and can easily find the best loan for you.

Many people think of mortgage brokers as a middleman. True, they are, but this does not mean you are paying a middleman fee. Because brokers get wholesale rates from lenders, they will often add a ¼ to as much as 3% to the rate, so they make money for processing the loan. But generally these rates are no higher than you would see if you went directly to a lender like USAA or Bank of America.

TIP # 6 - Brokers are in business to make money, so when they compare loans from all lenders, they may not be looking for the best rate for YOU, rather the best rate for them. Brokers make the difference from what the lender is offering and what the broker offers you, (called Yield Spread). For example, Lender "A" may offer a rate of 6% to broker "A", but broker "A" tacks on ½% and offers you the rate at 6.5% keeping the difference as income. When you shop for a broker, make sure they are working IN YOUR BEST INTEREST, not their own. Ask them what the wholesale rate is from the lender and how much they will make on the loan. By law the broker is required to report the yield spread on the HUD-1 document you will sign at closing.

A good broker will disclose the wholesale rate and show you how much they will make for processing your loan early in the process, but they are not required to until the loan closes.

TIP # 7 - You need to understand the loan origination fee, points, and the yield spread all go to your broker as compensation for processing your loan. It takes a broker about 30 days to process a loan and get you ready for closing, so it is acceptable that they make 1% - 2% total compensation. Most all fees are negotiable, so if your broker will make more than 1-2%, challenge them to reduce their fees.

Ok here is our sales pitch: you knew it was coming.

The Military Mortgage Center hosted on www.Off-BaseHousing.com and www.MilitaryMortgageCenter.com has a third party broker that has agreed to find the best loans in the interests of YOU, the military buyer. This means they will find the best rates and lowest fee loans and pass them to you with minimal mark up for their compensation.

We highly recommend that you contact the Military Mortgage Center and speak to our sponsored broker before you apply anywhere else. Though this is a third party broker and we have no control over your experience with them, we have carefully selected the broker, and they have agreed to our terms to offer you the best mortgage they can.

A mortgage broker will consult with you on your loan options. Typically a VA loan is the best option for military families; however, there are other creative loan products that may fit your situation better. Only a mortgage broker such as the one found at the Military Mortgage Center, can provide you with expert consulting that is unbiased.

VA Eligibility

If you apply for a VA Loan, you will need your VA eligibility certificate when you submit your application, or soon after. If you do not have it already, you can download the request form from the Military Mortgage Center and mail it in. (Or you can click this link to the Dept of the VA website to get the form: http://www.vba.va.gov/ro/central/cleve/26-1880.pdf). The VA does not provide an electronic request at this time. You must complete the form, print it and mail it in. This process will take a couple of weeks before you receive your certificate.

However, if you are in a hurry and need a loan fast, the sponsored broker found on the Military Mortgage Center can get an electronic approval from the VA! This can be done in about 24 hours, but it requires you to apply for a loan with the broker. Considering what we discussed about brokers, there really should not be any reason for you to hesitate.

Pre-Approvals

Getting a pre-approval is very important. It not only states what you qualify for so you know how much you can afford, but it is a guarantee to a seller that you are ready to buy. If you are shopping for a home in a competitive market where homes sell quickly, it is not uncommon for a seller to receive multiple offers on a home. If you are not pre-approved, the seller will most likely accept an offer from someone who is because they do not want any surprises. Unfortunately, many buyers go shopping for what they think they can afford, only to find out later they cannot get a loan. This takes time and opportunities away from the seller, so they will almost always accept the offer from a buyer with a guaranteed loan.

Getting a pre-approval requires you to apply for a loan. Just as mentioned above, the lender/broker must know what level of risk you are to them and how much you can afford. Generally they can issue a pre-approval letter within 24- 48 hours. Ask your loan officer for details.

Rate Lock

When you get pre-approved for a mortgage, you should know what interest rate you will receive. However, that is dependent on the broker locking the rate. Rates fluctuate, sometimes several times a day. Until you are locked in, your rate can adjust. Some lenders offer a 30 or 60-day rate lock, which means they will guarantee the rate for that time. After that, if you have not purchased, you will need to lock in again and if rates have changed for the worse, it could raise your payments and reduce your buying power.

Some lenders will allow you to adjust your rate down if the over-all housing rates drop from the time you locked your rate. This is called a "float down". Not all lenders offer it and it is not automatic for those that do. Be sure to ask if your loan qualifies for float down.

Note: Some scrupulous brokers will tell you that your rate is locked and that you are guaranteed, when really they are hoping the over-all market will go down, so they can lock a lower wholesale rate and still give you the rate quoted, increasing their income. If the rates turn upward, then your broker will have to pay the difference to guarantee your rate. If they come to you and say, whoops sorry, we thought it was locked but it was not and the rate went up, walk away and find a new lender. Chances are they played the rate game and lost.

TIP # 8 - ALWAYS ask for documentation that the rate is locked! This will protect you if your broker is playing the rate game, and loses!

TIP # 9 - Some brokers may advise you to not lock because the market conditions are right for a down turn in rates. Although it is your option and you must decide the risk verses benefit, many brokers study market indicators and can provide good advise that could help you save a lot of money.

Fees

There is a lot to say about fees, but it would be difficult to explain in detail. All lenders impose fees for processing a loan. Unlike an auto loan with a simple application, a home loan has many parts that require several third party professionals to do the work.

Lenders decide what services they will impose a fee for and at what rate. That is why comparing loans from different lenders is difficult.

In all, there could be a dozen or more fees that you pay during your home buying process, so it is easy for a lender to take advantage of a buyer and charge a higher fee, or even a fee for a service that generally should not be charged. These are known as "Junk Fees". It is another way for lenders to make a profit at your expense.

Do not be afraid to challenge the fees your lender imposes.

TIP # 10 - The sponsored broker for the Military Mortgage Center does not charge Junk Fees and will not inflate fees unnecessarily.

TIP # 11 - Ask for a Good Faith Estimate (GFE) from your loan officer. A Good Faith Estimate is the estimated fees that will be involved with your loan. Many brokers will quote you a price, but because it is an estimate, they inflate the fees at closing and tell you some services were higher. It is too late to challenge fees at closing. The only option is to walk away from the deal, so most buyers are trapped into paying the higher fees. Ask your broker if they guarantee their Good Faith Estimates!

Choosing the rate or the fees?

Choosing the best mortgage rate is not the only factor to consider. It may be that a slightly higher rate is better, if the fees for the loan are less. Consider how long you will own the home. Most military families will own a home for 3-4 years then sell, so a higher rate in the short term may save you money if the fees are lower. However, if you plan to own your home for many years, then pay the higher fees and secure a lower rate! Consult with a loan professional about your options.

After you apply

Once you select the right mortgage, stay in touch with your loan officer. Make sure everything is on track and be sure to let him or her know if there are any changes in your financial status. DO NOT apply for credit, or make large purchases before your loan closes. Often, the lender will run a credit report right before finalizing your loan just to make sure there were no significant changes. So, wait to buy that new car or furniture until the loan is closed and you are moved in.

Disclaimer

The Sponsored broker pays Off-BaseHousing.com a small referral fee, but does not pay a fee based on commissions. This is industry standard to pay a referral fee for each client that is generated from a third party like Off- BaseHouisng.com. YOUR fees and rates are not impacted. The lender pays a referral fee to Off-basehousing.com, even if you choose not to use the broker. Standard industry referral fees range from $5.00 to $50.00. WE DO NOT sell your information or provide your information to any other lenders / brokers. Our sponsored broker only gets your contact information if YOU choose to contact them first via phone or an email form on our website.

The author is not a mortgage consultant and the views contained in this guide should expressly be considered opinion based on years of experience in the real estate industry, personal experiences and independent research.

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