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Carson Jones: Hey everybody, welcome back to the Clear to Close podcast. My name is Carson Jones with Team Honey Real Estate here in St. George, Utah. And with me as always is Ryan Bolton with Synergy One Lending also here in St. George, Utah. Thanks for coming again, Ryan. And today we’re going to be talking to Ryan about some of the keywords to mortgages and just to the mortgage industry. I’ve got five keywords here that I’m just going to let you discuss and teach us about each little one, maybe in a brief couple minutes for each individual word. And then we’ll do the same in a future video for maybe more real estate related keywords. This is five lending or mortgage industry keywords. The first one is appraisals. Appraisals is both. You get appraisals with real estate, with realtors as well as mortgage lenders, but a lot of times we need those appraisals because of the loans. Give us a little bit of an idea of exactly why lenders look for appraisals and then what that is exactly.
Ryan Bolton: Absolutely. An appraisal is a third party form done by a licensed appraiser to give us an idea of what homes have sold that are similar to the home that’s being purchased or refinanced. It’s a big report. It’s 40 pages long sometimes, depending on the type of property. And it’s going to go through other homes that have sold that are similar to that home. And the reason we want to know that as lenders, we’re loaning money against the home and we’re going to go off the sales price or the appraised value, whichever is less. That’ll determine the loan to value. That’ll determine how much money you can finance, all those types of things. It is something where that’s a crucial part of getting a mortgage is what is the value of the home.
Carson Jones: Does that mean… Let’s say you’re buying a house for $500,000 and the appraisal comes in at $400,000? Does that mean you can actually get a loan for $400,000? Or how does that play into it?
Ryan Bolton: Yeah. The loan to value will be based on the lesser of the two. You would have to bring in the $100,000 plus your down payment off the $400,000. It doesn’t go… And vice versa. Let’s say that you’re buying it for $400,000, but it appraises at $500,000. You don’t get to use that difference. Still loan to value is based on the lesser of the two. You can’t just finance that shortage into the loan.
Carson Jones: How much does an appraisal cost to the buyer usually?
Ryan Bolton: Usually it depends on the type of appraisal. You’ve got VA, FHA, conventional. Most of them around $600 is usually a good average in Utah.
Carson Jones: Okay. And is there ever a time when you’re getting a loan that you might not have to do an appraisal?
Ryan Bolton: Yes. They do allow for… Excuse me. My voice. I’m losing my voice this morning. There are times where you can get a waiver. You can actually get a waiver on that there’s enough data that supports the value that you’ve put in there. But I will tell you that that’s going away because as values start to slow a little bit, those waivers are going away as well. When the market’s going up like crazy, they have a little more faith that the value is going to be more than what they’re loaning anyway, so you see those waivers happen more often. I think those are going to start slowing down.
Carson Jones: Okay. That leads into other ones we had. We already talked a little bit about your down payment and that can change depending on exactly what type of loan you’re doing and a whole bunch of different factors. But the cost of the appraisal, that would go into your closing costs, correct? That’s actually our next… Our next two keywords are combined. Closing costs and the down payment. Talk to us a little bit more about those two.
Ryan Bolton: Yeah. And that’s really crucial. You have a certain down payment, which is a percentage of the sales price or appraisal, whichever is less, then you have closing costs on top of that, unless you build those into the sales price, but typically you’re going to have 5 or 10% down or 20% down plus the closing costs. I have a lot of clients that’ll say, well, can I just roll the closing costs into the loan? No. That loan is a percentage of those numbers. Closing costs are on top of that. That’s where you have to put less money down to where you can then… You have the money to cover it or you have to build it into the sales price. That’s usually the best way to do it.
Carson Jones: And so I keep seeing where buyers might say, hey, we’re going to offer you $500,000, but on top of that $500,000, we want you guys to give us $10,000 in closing costs. What exactly does that mean for both the buyer and the seller?
Ryan Bolton: That’s really a good way to do it because it keeps the price where they need to and they get more for the value instead of lowering the price. If you lower a mortgage $10,000, you’re not going to say very much on the payment, but having $10,000 to work with to cover the other costs will go a lot further. It’ll help that client get in the home, it’ll help the seller sell the house. It’s really a win-win. It’s all coming from the equity. Nobody’s writing a check for this stuff. It’s all just built into the price. It’s way better. If you’re out there looking at homes and you’re thinking, oh, I want to offer a lot less, you’re better off to get more for the sales price. You really are.
Carson Jones: Okay, so you would recommend, essentially, a higher sales price, especially if they can get closing costs paid on at least part of it.
Ryan Bolton: Yes. It’s the cheapest way to cover it instead of out-of-pocket.
Carson Jones: Is there a standard of how much closing costs might be on a loan? Is everything $2,000 or is it percentages? How does that all work usually?
Ryan Bolton: Yeah, it depends on the rate-to-fee combination you get. There are some hard costs like appraisal, title. There’s certain things that are going to be a percentage of the loan. Generally speaking, 3% is what you want to try to figure in. That way you’re not building into the rate as well or having to come up with more. If you can build in 3%, typically, that’ll cover almost all of it.
Carson Jones: You’ll be safe.
Ryan Bolton: You’ll be very safe at 3%. Now, if the loan amount’s lower, that’s where you have to get a little more percentage, because the appraisal is a flat fee, regardless of how much the sales price is. The percentage on a lower loan amount’s higher. But generally, 3% will cover you in most cases.
Carson Jones: And do you pay those closing costs throughout the life of your loan or do you pay the closing costs right away as soon as you purchase that house?
Ryan Bolton: Yes, if you pay it out of pocket, you’ve paid for it, where if you build it into the sales price, the loan amount is higher, which is covering those things. But you’re talking $10,000 might save you $5 on a mortgage versus $10,000 to get rid of the other expenses. Plus, if you have money left over, you can use it to buy down the rate or buy down the mortgage insurance. Having the flexibility of the cash will give you way more options on a better loan.
Carson Jones: Understood. Understood. Now we get into pretty much qualifications, right, so our next few are going to be discussing that. The first one is credit score. Talk to us about credit score. That’s an episode that could last two hours, of course, but give us just a brief rundown on credit score and then also how that can affect your approval for a loan.
Ryan Bolton: Yeah. The appraisal is the property. That’s where you have the property is what we’re identifying. Credit score is more of your qualification as part of that. Debt ratio is another one that we’ll get to here in a minute. But credit scores are a real indication of how you’ve been paying your bills. It’s a credit history. It gives us a three-digit number for the three credit bureaus to show how likely you’re going to repay the loan based on your previous history. The higher that score, the better the rates and terms. That’s just simply how it works. Mortgages work on 20-point increments. You get the same rate from 741 up to… Sorry. 641 up to 659. You’re getting that same interest rate.
Carson Jones: And then at 660, it’s a different interest rate.
Ryan Bolton: Yeah. 660 to 680, 680 to 700. If you’re right at the top of that tier, getting your score up just a few points bumps you into a whole another category. It’s well part of buying a house. You really want to get your credit pulled, make sure you’re maximizing those numbers because you’ll get a better loan if your credit score is higher, which is how it works.
Carson Jones: And when will they pull your credit? Do they pull it right when you’re getting ready to close? Or do they pull it a few months before? When is the time to actually get your credit pulled?
Ryan Bolton: You really should pull it at the pre-approval stage. Once you’re doing the pre-approval, you want that number and it’s good for 90 days. After that, they have to do a soft pull to make sure the score hasn’t dramatically changed or new debt has showed up or a new late or something like that. It’s good for 90 days, but it’s important to get that score first so you have time to be able to adjust it. But it is pulled. And then 10 days before closing, they will also pull the credit to make sure the score hasn’t dropped. There’s a couple of times it gets pulled. But you want to pull it early, early, early, early.
Carson Jones: Yeah. And tell me a couple of things that might affect your credit score within those 90 days. Are there certain things that, hey, I can go buy a new car with a week left on my contract? Is that going to affect your credit score that quickly?
Ryan Bolton: It doesn’t affect the score as much other than the inquiry. you have an inquiry for a new debt. The bigger problem is it now adds to your debt ratio. If you have a debt ratio that’s really tight or you’ve got it all approved, and all of a sudden you add a $500 car loan to that, now you may not qualify for the house. You could lose the house by adding new debt. The most common thing you’ll see is people go and get furniture packages or appliances or stuff like that and get it on a credit card. That’s where it can hurt your ability to get the loan. Not the score as much, other than the inquiry. It’s more the debt that’s being added that causes a problem.
Carson Jones: Well, and that’s actually a good way to go in the next one because the next keyword was going to be the debt ratio. Tell us a little bit about what that means because honestly, even for me, when I first started real estate, debt ratio is confusing to me. I was like, what is this exactly? Tell us how a debt ratio is even calculated and what that means for your loan.
Ryan Bolton: Yeah. We take the gross income that a client makes or if they’re self-employed, there’s different calculations. We come up with what we figure is their monthly income. Then we take a percentage of that and the debts that are on their credit have to be under that amount plus the new mortgage loan. Typically 45%. It’s something where if you’re more than that, it’s an exception or your credit scores have to offset it. But generally speaking, we want to see that all your monthly bills, the new mortgage, the car, the visa, student loans all fall under 45% of your monthly income.
Carson Jones: And you’re talking the minimum payments for each month on each one of those?
Ryan Bolton: Yes. Yes.
Carson Jones: Okay, so not the full amount of that.
Ryan Bolton: Yeah. And it’s not the balances. It doesn’t matter if you have a $100,000 truck loan or something like that.
Carson Jones: If your payment is $500 a month, that’s what goes on it.
Ryan Bolton: And they don’t count things like cell phones, insurance, utilities. Those types of things are not included. That’s why we go off of 45% because we know there’s other stuff out there. That’s generally what they want to do.
Carson Jones: People have to consider any type of loan that they’re paying off, even a furniture loan that they owe $10,000 to the furniture company, they still have to consider that in their debt income.
Ryan Bolton: Yes. Anything that really shows up on credit. Other things that don’t show up on credit that can hurt them or child support, separate maintenance, alimony payments, those types of things. Or if there’s a 401(k) loan, because it’s coming out of their paycheck. Part of our job is to figure out where are the debts, where is the income, and that ratio needs to be under 45%.
Carson Jones: Understood. Understood. That’s good. We’ve talked already about appraisals, closing costs, down payments, credit score and now debt ratio a little bit. The last one is something that we talked a lot about over this past year is interest rates. And interest rates, it seems like everybody’s just watching the charts, seeing like, oh, it’s up, it’s down, it’s up, it’s down. And sometimes people feel like interest rates are extremely high when actually they’ve been not as high as they’ve been. Look at 20 years ago. We would think we’re extremely low, right? Talk to us a little bit about interest rates and then how that also comes into play on your new loan that you’re getting ready to get.
Ryan Bolton: Absolutely. Interest rate is going to determine the payment. Payment determines the debt ratio. Those things are what help you qualify for a home. Obviously the lower the interest rate, the more home you can afford for the same payment. Interest rate is a calculation that determines how much your monthly payment is going to be to pay back the amount that you’re borrowing. There’s a lot of stuff out there about interest rates of buying down your interest rate, the different types of programs that are out there. And that’s where the preapproval can help you walk through how your specific situation will affect your interest rate. But a mortgage rate is really what you’re going to borrow, what you’re going to pay back in interest for the ability to buy that home. Interest rates definitely are down from what the high point of even last year in October, but they’re off the lows that we saw just a few years ago. It’s all relative on what’s out there and what’s available. But interest rates now are much more what a normal rate is for a mortgage. We’re not… It’s interesting to see it go up as high as it did. But really, if you look at a 40-year average, we’re actually still below what a 40-year average is.
Carson Jones: And so how does the interest rate work within my payment? Let’s say, again, I buy a house for $500,000. And let’s say… Actually, let’s just say my mortgage is $2,500 a month. Okay. I have a $2,500 a month mortgage and the interest rate is 5%. Right? How much is, how much of that $2,500 a month payment is going towards interest compared to going towards a principal if it’s a 5% interest rate?
Ryan Bolton: Yeah. There’s another acronym in the industry called PITI, which is principal, interest, taxes, and insurance. Most of the time your payment is going to include covering the property taxes, which most states there do once a year. In Utah, it’s due every November. Part of your payment is going to go to cover the taxes. The next one’s going to be the homeowners insurance. You’re going to have a part of your payment going to serve as renewing your insurance. The next two are going to be principal and interest. Most of it is interest, especially the first five years of a loan, a lot of what you’re paying back because you’re amortizing it over such a long period, the first five years, about 90% of it’s going to interest. The rest goes to principal. But your payment is broken into four different categories. The interest is definitely the biggest category.
Carson Jones: Okay. You’re not talking that only… If it’s $2,500 a month, not only 5% of that goes to interest rates.
Ryan Bolton: Right. Yeah.
Carson Jones: And I think a lot of people can…
Ryan Bolton: It’s a 5% that’s amortized over that 30-year period, so it’s really a yearly rate you’re going to be paying at the 5%.
Carson Jones: Okay. A lot of people get confused by that. They think, oh, $2,500 bucks a month, only 5% of that is my interest rate. I think that’s the way a lot of people look at their interest rate and it’s not quite the same, so…
Ryan Bolton: Yeah. If you take your loan amount, whatever you owe or whatever you’re looking to buy and you times it by the interest rate, so it’s 5%, 0.05, divided by 12. That’s what you’re paying each month in interest. Now, obviously that goes down as the principal goes down, but it goes down so little the first couple of years. I always recommend if you can round up your payment a little bit, $50, $100, can help offset that first couple of years. And just realize that all of your payment isn’t principal or interest or taxes or insurance. There’s four things typically that come out. And then if you have an HOA, that’s separate, but it’s usually not part of your mortgage payment. But I would say Utah is very common for taxes and insurance to be included in the payment.
Carson Jones: Well, very good. Well, let us know what other words that have come up in your mortgage life. Maybe you’ve gotten a couple loans on different houses and you don’t know what certain words or terms meant. Let us know what those are and we can discuss those on here. But let us know if you have questions about appraisals, closing costs, down payments, credit score, debt ratio, and interest rates. Those are a few that we talked about and we just hit a few very brief points on each one of those today. Let us know what other questions you have and we’d love to answer those for you. Otherwise, give either of us a call and Ryan can answer really any of your mortgage questions that you might have.
Ryan Bolton: Great.
Carson Jones: Thanks so much for watching. We’ll see you guys next time.