Blog – CTeBockhorst's Blog

Where Does the Money for Your Mortgage Loan Really Come From?

October 15, 2024 by Coleen TeBockhorst

If you’re considering a mortgage loan, you might wonder where the money actually comes from. It’s not as simple as walking into your neighborhood bank and getting a loan directly from their vault, like it used to be decades ago. Today, the mortgage lending process is part of a larger, more complex system involving major institutions like Fannie Mae, Freddie Mac, and Ginnie Mae. Let’s take a closer look at how it all works.

The Big Players: Fannie Mae, Freddie Mac, and Ginnie Mae

In today’s mortgage industry, most of the money for home loans originates from three major government-sponsored entities:

Fannie Mae (Federal National Mortgage Association)
Freddie Mac (Federal Home Loan Mortgage Corporation)
Ginnie Mae (Government National Mortgage Association)

How the Mortgage Process Works

When you apply for a mortgage through a lender, they’ll process your application, verify your information, and ultimately provide you with a loan if you qualify. You then make regular mortgage payments, but it’s important to understand that the lender who gave you the loan may not actually own it. In fact, your loan often gets bundled with many other loans into a pool, which is then sold to one of the big players mentioned above.

The company that collects your payments is called a servicer, and they manage the loan on behalf of the actual investor. While you might send payments to them, they usually do not own your loan. Instead, they receive a small monthly fee for managing it, typically about 3/8ths of a percent of your loan balance. These small fees can add up significantly, especially for companies that service billions of dollars in loans.

The Mortgage Loan Cycle

Once your loan is bundled into a pool and sold to Fannie Mae, Freddie Mac, or Ginnie Mae, these entities receive fresh funds, allowing lenders to make more loans to other borrowers. This cycle keeps the mortgage lending system running efficiently, enabling more people to access home loans.

But it doesn’t stop there. These institutions often take the loan pools and divide them into smaller pieces known as mortgage-backed securities (MBS). These securities are sold to investors on Wall Street. If you have a 401(k) or mutual fund, you might even own a portion of these mortgage-backed securities. For example, Ginnie Mae bonds are securities backed by the mortgages on FHA and VA loans.

What Happens When Your Loan Is Sold or Transferred?

It’s common for your loan to be transferred from one servicing company to another. While it might seem like your loan is being sold again, this isn’t the case. It’s simply the transfer of the right to service your loan. The original terms of your loan remain unchanged, and the new servicer will continue to collect your payments.

Understanding Jumbo Loans

There are exceptions to this system. Loans that exceed $726,200 (known as jumbo loans) don’t fit Fannie Mae and Freddie Mac guidelines. These loans are packaged into different pools and sold to other investors, but they are still often securitized and sold as mortgage-backed securities.

The Backbone of the Mortgage Industry is Mortgage Banking

This continuous buying, selling, and securitizing of loans is what we call mortgage banking, and it’s the backbone of the modern mortgage industry. By understanding this process, you can better appreciate how your mortgage fits into a larger system and why your loan might be transferred during its lifetime.

If you have any questions or want to know more about how your mortgage works, feel free to reach out. We’re here to guide you every step of the way.

What’s Ahead For Mortgage Rates This Week – October 14th, 2024

October 14, 2024 by Coleen TeBockhorst

The CPI and PPI reports delivered their data, showing inflation figures slightly below expectations. However, the positive impact of these reports was tempered by hawkish comments from Federal Reserve members during recent meetings. Despite this, the overall outlook remains optimistic, as further rate cuts are anticipated. Lending partners have also responded positively, significantly lowering their lending rates over the past month.

Consumer Credit

Consumer credit increased by $8.9 billion in August, following a revised $26.6 billion surge in July, the Federal Reserve reported on Monday. This represents a 2.1% annual growth rate in August, a slowdown from the 6.3% rise in the previous month. Economists surveyed by The Wall Street Journal had expected a larger increase of $13.2 billion in August.

CPI

U.S. wholesale prices were unchanged in September, pointing to subdued inflation in the economy. This suggests that a bigger-than-expected increase in consumer prices last month is unlikely to last. Economists polled by the Wall Street Journal had forecast a 0.1% increase.

PPI

A key measure of consumer inflation increased slightly more than expected in September, which could complicate the Federal Reserve’s plan to cut U.S. interest rates twice more this year. The ‘core’ consumer price index, which excludes food and energy, rose by 0.3% for the second consecutive month, according to a government report on Thursday. Wall Street analysts had predicted a smaller increase of 0.2% for this core inflation measure.

Primary Mortgage Market Survey Index

15-Yr FRM rates saw an increase of 0.16% with the current rate at 5.41%
30-Yr FRM rates saw an increase of 0.20% with the current rate at 6.32%

MND Rate Index

30-Yr FHA rates saw a 0.08% increase for this week. Current rates at 6.12%
30-Yr VA rates saw a 0.07% increase for this week. Current rates at 6.13%

Jobless Claims

Initial Claims were reported to be 258,000 compared to the expected claims of 230,000. The prior week landed at 225,000.

What’s Ahead

There will be a very light week ahead after the release of the CPI and PPI reports, with only regular jobs data to note.

Are You In A Position to Cosign on a Loan?

October 11, 2024 by Coleen TeBockhorst

As home prices continue to rise, some buyers may struggle to qualify for a mortgage on their own. In these cases, a mortgage cosigner can be a helpful solution. However, whether you’re considering asking someone to cosign or you’re being asked to take on this role, it’s essential to understand the responsibilities involved.

What Does It Mean to Cosign a Loan?
A cosigner agrees to take on the responsibility of paying the mortgage if the borrower cannot. This means their credit will be pulled, and they’ll sign paperwork, but they won’t gain ownership of the property. In many cases, the cosigner is a family member or close friend who acts as a “non-occupant borrower,” meaning they share financial responsibility but won’t live in the home.

Cosigner vs. Co-Borrower
While both cosigners and co-borrowers help with the mortgage process, there’s a key difference. A co-borrower is listed on the property title and has ownership rights, while a cosigner does not. This distinction is important because being on the title can expose you to additional legal responsibilities, such as potential liability if someone gets hurt on the property.

Pros and Cons of Cosigning a Mortgage
Cosigning can provide significant financial assistance, but it also comes with risks.
Pros:

The borrower may qualify for a larger or more affordable loan due to the cosigner’s income.
It can enable a borrower with poor or limited credit to secure a mortgage.
A cosigner’s solid employment history can improve the chances of approval for someone with unstable income.
The borrower can start building equity sooner by qualifying for a mortgage more quickly.

Cons:

The cosigner is legally responsible for the mortgage if the borrower defaults.
Late or missed payments can negatively impact the cosigner’s credit score.
The loan will appear on the cosigner’s credit report, which may limit their ability to take on additional debt.
The financial strain could damage the relationship between the borrower and cosigner.

Understanding the Process
Before cosigning, the lender will evaluate both the borrower and cosigner’s finances, including income, credit history, and debt levels. This is part of the pre-approval process, and it ensures that both parties can meet the mortgage obligations. The cosigner will be held accountable if the borrower defaults, which could result in legal action.

Some loans, such as FHA loans, have specific requirements for cosigners, and in these cases, the cosigner may be added to the property title. Additionally, the cosigner must meet certain relationship and residency criteria, as well as financial qualifications like debt-to-income ratios.

Cosigning on a mortgage is a significant commitment with potential benefits and drawbacks. Before moving forward, it’s important to understand the obligations that come with cosigning and explore all available options to find the best solution for both parties.

What Is A Home Loan Offset Account And How Does It Work?

October 10, 2024 by Coleen TeBockhorst

Looking for ways to reduce the amount of interest you pay on your mortgage and shorten its lifespan? A home loan offset account might be the solution. This financial tool allows you to reduce the interest on your mortgage by using the balance in a linked account to offset your loan amount. Let’s explore how it works and how you can benefit from it.

What Is a Home Loan Offset Account?

A home loan offset account is a transactional bank account linked to your mortgage. The balance in this account is deducted from the outstanding loan amount when calculating the interest on your mortgage. The more money you have in this account, the less interest you pay.

How Does a Home Loan Offset Account Work?

Once your offset account is created and linked to your home loan, you can deposit funds and use the account like a regular bank account. The main difference is that the balance directly impacts how much interest you’ll pay on your mortgage.

For example, if you have a $250,000 home loan and $50,000 in your offset account, interest will only be charged on $200,000. This reduction in the principal amount helps lower your overall interest payments and can significantly shorten your loan term.

Benefits of a Home Loan Offset Account

Reduce Interest Payments: By decreasing the amount of the loan subject to interest, you could save thousands of dollars over the life of your mortgage.
Access to Funds: Unlike other forms of loan repayment strategies, the money in your offset account remains accessible, so you can use it as needed.
Flexible Use: It functions as a regular bank account, meaning you can make transactions, deposit your salary, or use a debit card linked to the account.

Treat It Like a Savings Account

One of the most effective ways to use an offset account is to treat it like a savings account. Over time, as you deposit more funds, the balance will reduce the amount of interest paid on your home loan. However, the key benefit is that you still have access to the funds whenever you need them.

Understanding the Types of Offset Accounts

100% Offset Accounts: These accounts offset the full balance, meaning every dollar in the account directly reduces your mortgage’s interest-bearing amount.
Partial Offset Accounts: A portion of the balance offsets the mortgage. For instance, with a 75% offset account, $10,000 in the account reduces the interest paid on $7,500 of your mortgage.

Strategies for Maximizing a Home Loan Offset Account

Open with a Set Balance: You can open an offset account with a specific amount dedicated to reducing your loan’s interest and make occasional deposits to increase its balance.
Replace Your Bank Accounts: Use the offset account as your primary bank account to maximize its balance and reduce your mortgage interest further.
Combine with Credit Cards: Consider paying your everyday expenses with a credit card and keeping more money in your offset account to maximize interest savings, paying off the credit card balance before interest accrues.

A home loan offset account can be an effective tool for reducing mortgage interest and shortening the life of your loan. By keeping a healthy balance in the account, you can save on interest payments while maintaining access to your funds. Exploring how to integrate an offset account into your financial strategy may help you pay off your mortgage faster and save money over time.

Does Your Home Loan Have a Prepayment Penalty?

October 9, 2024 by Coleen TeBockhorst

Buying a home is a huge milestone, and the excitement of closing can lead many buyers to quickly accept any mortgage offer without fully understanding its terms. One important detail to watch for is whether your mortgage includes a prepayment penalty. This fee can be an unwelcome surprise, so it’s crucial to know what you’re signing up for before finalizing your loan.

What is a Prepayment Penalty?
A prepayment penalty is a fee that some lenders charge if a borrower pays off their mortgage within a specified period, typically during the first two to five years. Though less common, some loans still include this clause. The lender charges the penalty to recoup the loss of expected interest from the loan. Prepayment penalties can apply whether you refinance or sell your home, so understanding the conditions of this fee before signing is essential.

How to Determine if You Have a Prepayment Penalty
Don’t wait until the closing process to ask about a prepayment penalty. Review your loan estimate thoroughly after pre-approval. While prepayment penalties are more typical with certain loans, always read the fine print. If anything seems unclear or if there’s a discrepancy between what you’re told and what’s on paper, reach out to your loan officer for clarification.

What Can You Do About It?
If you find out that your loan includes a prepayment penalty, you still have options. For some borrowers, the penalty isn’t a concern, especially if they plan to stay in the home long-term and don’t expect to refinance soon. Sometimes, agreeing to the penalty can lower your interest rate or closing costs.

However, if you foresee moving or refinancing within a few years, this fee could be problematic. In that case, try negotiating with your lender to remove or reduce the penalty. If that doesn’t work, consider shopping around for another lender who offers better terms.

A prepayment penalty can significantly impact your mortgage, but understanding it upfront allows you to make informed decisions. If you do encounter this fee, negotiation and comparison shopping could help you secure more favorable loan terms.

Consolidate Credit Card Debt with a Cash-Out Refinance

October 8, 2024 by Coleen TeBockhorst

If you’re feeling overwhelmed by credit card debt, a cash-out refinance may be an effective way to manage it. This type of mortgage allows you to utilize your home’s equity to pay off high-interest credit cards, consolidating them into a single, lower-interest mortgage payment.

How a Cash-Out Refinance Works

A cash-out refinance lets you replace your current mortgage with a new one for more than what you owe. The difference is then given to you as cash, which you can use to pay off your high-interest debt. Here’s how the process works:

Apply for a Cash-Out Refinance: You start by applying for the refinance.
Home Appraisal: Your lender will arrange for an appraisal to determine your home’s value and how much equity you can access.
Borrowing Limits: Typically, you can borrow up to 80% of your home’s equity, minus the remaining balance on your current mortgage.
Debt Payoff: The lender will use the cash from the refinance to pay off your credit card and other high-interest debts.
New Monthly Payments: You’ll begin making monthly payments on your new mortgage, which often comes with a lower interest rate than what you were paying on your credit cards.

Advantages of Using a Cash-Out Refinance to Consolidate Debt

Lower Interest Rates: Mortgage rates are typically much lower than credit card interest rates, so you could significantly reduce the amount of interest you’re paying.
Easier to Budget: Instead of making multiple payments to various credit card companies, you’ll only have one mortgage payment each month, making your finances easier to manage.
Boost to Your Credit Score: Paying off high-interest credit cards can improve your credit score, which may make it easier for you to qualify for loans or credit in the future.

Risks to Be Aware Of

While the benefits are appealing, it’s important to consider the risks:

Home Foreclosure: Since your home is used as collateral, failing to make payments could result in foreclosure, putting your home at risk.
Paying More Interest Over Time: If you extend your mortgage term, you might end up paying more in interest over the life of the loan, even if your monthly payments are lower.
Reduced Home Equity: Tapping into your home’s equity decreases your ownership stake, which could limit future borrowing options or reduce the proceeds if you decide to sell your home.

A cash-out refinance can be an excellent tool for consolidating high-interest credit card debt and reducing your monthly financial obligations. However, it’s important to carefully weigh both the benefits and risks, particularly regarding the impact on your home equity. Consulting with a mortgage professional or financial advisor can help ensure you make the best choice for your financial future.

What’s Ahead For Mortgage Rates This Week – October 7th, 2024

October 7, 2024 by Coleen TeBockhorst

Last week was a fairly light week, with the non-farm payroll data being the most significant release. The data showed that payrolls are growing at a faster rate than historical trends suggest, which could indicate that inflation is still above the Federal Reserve’s target. In contrast, the upcoming week has a busy schedule, with many important economic releases lined up back to back.

Non-Farm Payrolls

Hourly pay for American workers rose a sharp 0.4% in September – above expectations – to put the increase over the past 12 months at 4.0%. That’s up from 3.9% in the prior month. Wages are rising faster compared to the last few years before the pandemic. Wage gains rose just slightly over 3% on average in 2018 and 2019 before the coronavirus exploded.

If wages keep growing at a 4% rate, it could call into question the Fed’s view that labor costs will remain non-inflationary.

Primary Mortgage Market Survey Index

15-Yr FRM rates saw an increase of 0.09% with the current rate at 5.25%
30-Yr FRM rates saw a decrease of 0.04% with the current rate at 6.12%

MND Rate Index

30-Yr FHA rates saw a 0.25% increase for this week. Current rates at 6.04%
30-Yr VA rates saw a 0.26% increase for this week. Current rates at 6.06%

Jobless Claims

Initial Claims were reported to be 225,000 compared to the expected claims of 220,000. The prior week landed at 219,000.

What’s Ahead

Next week will be a heavy week, starting with key inflation reports like the CPI and PPI. These will be followed by the FOMC Minutes, Consumer Credit data, and the University of Michigan Consumer Sentiment report.

How to Get a Mortgage Without a Credit Score

October 4, 2024 by Coleen TeBockhorst

Getting a mortgage without a credit score may seem like a tough task, but it is possible. Many assume that a credit score is a must, but if you don’t have one, you can still pursue your dream of homeownership. Here’s how.

What is a Credit Score?

A credit score is a numerical value that shows how well you manage debt. The score is based on factors like your payment history, how long you’ve had credit, and how much credit you’re using. Higher credit scores typically mean better mortgage terms, including lower interest rates.

Loans Without a Credit Score

If you don’t have a credit score, it’s not the end of the road for a mortgage. While many lenders are cautious about lending to people without a credit history, there are still options available. Some government-backed loans, such as FHA, VA, and USDA loans, accept applicants without a credit score. Additionally, certain conventional loans with a large down payment or shorter terms may also be accessible.

The Underwriting Process

Without a traditional credit score, lenders will need to evaluate your creditworthiness using non-traditional credit sources. Lenders typically ask for four forms of alternative credit to show that you can reliably make payments. These could include rent payments, utility bills, phone bills, insurance premiums, and even school tuition.

Once all the documentation is submitted, the underwriting process can take longer than it would for someone with a standard credit history—potentially up to 60 days or more. Since manual evaluation is involved, it’s important not to commit to any home purchase without contingencies for funding approval.

How to Build Credit

If getting a mortgage without a credit score proves challenging, you can start building a credit profile. Opening a credit card and responsibly managing it by paying off balances in full each month is a good start. Keeping your credit usage under 30% of the credit limit can help build a strong credit score over time.

While having no credit score can make the mortgage process more complex, it’s not impossible to secure a home loan. By providing alternative forms of credit or working on building your credit, you can still achieve homeownership.

Do VA Entitlements Ever Expire?

October 3, 2024 by Coleen TeBockhorst

The VA home loan program is one of the most valuable benefits offered to those who have served in the U.S. military, providing veterans and active-duty personnel with access to favorable mortgage terms. One common question is whether these VA entitlements ever expire.

What is VA Home Loan Entitlement?

VA home loan entitlement refers to the amount the Department of Veterans Affairs guarantees to a lender if the borrower defaults on the loan. This guarantee significantly reduces the lender’s risk, which allows veterans to access zero down payments and lower interest rates. The VA doesn’t issue the mortgage itself but backs loans made by private lenders.

VA entitlements come in two forms:

Basic Entitlement: In 2023, the basic entitlement is typically around $36,000 or 25% of the loan amount, whichever is less. Veterans can use this entitlement multiple times as long as they meet eligibility requirements.
Bonus Entitlement (Second-Tier Entitlement): For higher-cost homes, veterans can access additional entitlement beyond the basic amount. This helps veterans secure larger loans in areas where housing prices exceed the standard limit.

Does VA Entitlement Expire?

The short answer is no. Once a veteran is eligible for the VA home loan program, they keep that entitlement for life. There is no expiration date for using it, making it a long-term benefit that veterans can tap into at any time during their lives.

Restoring Loan Entitlement

Veterans who have used their VA entitlement in the past but have paid off their loans or sold their home can have their entitlement restored. This gives them the flexibility to use a VA loan again, although certain conditions apply depending on the situation. Veterans should consult the VA or a lender to understand the specific process for restoring their entitlement.

What About Foreclosure?

In the event of a foreclosure, veterans may lose their entitlement. However, the VA allows for entitlement restoration under certain conditions. If a veteran repays the VA for any losses or sets up a repayment plan, they can regain their eligibility.

VA entitlements are an incredible financial resource for veterans and active-duty service members, providing flexibility and long-term benefits with no expiration. Whether you’re buying a home for the first time or looking to use your entitlement again, this benefit is there when you need it.

Steps to Take Now to Build Your Credit for a Home Purchase Next Year

October 2, 2024 by Coleen TeBockhorst

If you’re thinking about buying a new home next year, there’s one important factor to consider before you start browsing listings—your credit score. A strong credit score can make a huge difference in the interest rates you will qualify for and can also determine your mortgage approval. Starting the process of improving your credit now gives you a head start, putting you in a better position to achieve your homeownership goals when the time comes.

Here are five steps to help you get started:

1. Check Your Credit Report

Before anything else, it’s essential to know where you stand. Request a copy of your credit report from the major credit bureaus. This will allow you to review your current score, see if there are any inaccuracies, and understand what areas need improvement. If you find any errors, dispute them immediately to avoid negative impacts on your score.

2. Pay Down Debt

The amount of debt you carry compared to your total credit limits is one of the most significant factors affecting your credit score. Begin by paying down your highest-interest debts first while making consistent payments on the rest. Reducing your credit utilization rate to below 30% can boost your score significantly over time.

3. Avoid New Credit Lines

Opening new lines of credit right before applying for a mortgage can raise red flags for lenders. Each new account can lower your average account age, which impacts your score. Focus on managing your existing accounts responsibly rather than seeking new credit.

4. Set Up Automatic Payments

Late or missed payments can hurt your credit score and are recorded for up to seven years. Setting up automatic payments ensures you’re never late on bills, which will help build a strong, consistent payment history. This habit can steadily improve your score and show lenders you’re a responsible borrower.

5. Stay Patient and Consistent

Improving your credit score is a gradual process, so the sooner you start, the better. Even small, consistent actions over the next several months will help you make significant progress. The goal is to have your credit in top shape by the time you’re ready to apply for a mortgage.

Why Good Credit Matters for Your Mortgage

A higher credit score can not only help you get approved for a mortgage but also potentially save you thousands of dollars over the life of your loan. Lenders use your score to gauge the risk of lending to you, and a better score usually means lower interest rates and more favorable loan terms.

Conclusion

If a new home is on your radar for next year, preparing your finances now can make a world of difference. Take the time to check and improve your credit score today. Your future self will thank you when you’re settling into your dream home with a manageable mortgage.

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