Mortgage Mama, Caroline Harden, Wants Womxn To Buy Houses

Mortgage Mama, Caroline Harden, Wants Womxn To Buy Houses

CAROLINE: My name is Caroline Harden (@caroline.mortgagemama). I live in Boone, North Carolina, with my husband and my five, almost six-year-old daughter and a dog and a cat in a very little house. We live in the mountains and love it here. I work as a mortgage loan originator, which means I’m the person that takes you from thinking about buying a house all the way to closing and then beyond if you ever want to refinance or if you want to buy another house. I stay with my clients all the way through the whole process.

CHELSIE: Cool! I didn’t know what a mortgage loan originator was. Mortgage loans sound really intimidating. Buying a house sounds intimidating, especially for a lot of womxn. And I know I’m not alone in that. What do you think are some common misconceptions that are widely held about buying your first home? 

Down Payments & Private Mortgage Insurance

CAROLINE: One of the biggest ones is that you need to have 20% down. That’s not a thing anymore. You can have all kinds of down payments. There are even programs with 0% down payments. I’m not allowed to say specific numbers for down payments without quoting full terms, but you can research and see there are some very low down payment percentage options. If you pay a lower down payment, you have to pay something called PMI or private mortgage insurance, which a lot of people in older generations will just say, “No, no, no. It’s the worst. Don’t ever do that. Save up to 20%.” But really what PMI does is it helps to enable people who have less of a down payment to be able to afford a house and to be able to get into a house sooner. 

Student Loans

CAROLINE: Student loans are another thing. A lot of people think that if they have student loans that that’s going to stop them from buying a house. That’s not true. If you’re on an income-based repayment plan, which is where you have an agreement with your servicer to pay less than the fully amortized amount per month, like maybe you’re paying $50 a month instead of 250, a lot of mortgage companies can use that $50 when they’re calculating your debt to income ratio rather than the full 245. So there’s a lot of flexibility in terms of that. You don’t know what you don’t know. The biggest recommendation I usually have for people is to start talking to a mortgage loan officer that you trust, find a referral from a friend or family member, especially somebody who’s in a similar situation to you. Birds of a feather flock together. So like if you know that your friends went to the same school as you are in the same general financial situation as you and they had a great experience with one person, then that person is likely going to know how to be able to work with your income and your situation better than somebody who only works with middle-aged executives. You know, it’s, it’s a different thing.

 

The Right Time Myth

CAROLINE: A lot of womxn seem to think that buying a house is something you do when you’re settled or when you’re married or when you have a family or you’re in a more quote-unquote stable position, but single womxn are the largest rising group of homeowners out there today. It’s a fantastic way to build wealth, because when you’re paying your mortgage payment, you’re paying into the equity of your house and house values go up over time. So your house makes you money over time. If you’re younger and you decide to buy a house, that’s not your forever home, and it’s a smaller house that you can continue to pay that payment as you move on into another house. Now that’s an investment property all of a sudden, and you can charge rent on that and you can make money on that. And that’s nearly passive income. You can even do that while you’re in the house. You can use the rent for roommates to help you qualify for the loan. Homeownership isn’t just something for people in a certain stage of life. It is for everybody. 

 

Qualifying Credit Scores

CHELSIE: I love that. What credit score do you need to buy a house? 

CAROLINE: It depends on your lender. There’s a lot of flexibility there too. Some lenders need to see above 640. Some lenders, to get you good terms, will need higher than that, but there again is a lot of flexibility. And if you find a mortgage lender who has experience in credit repair or credit score improvement, they can actually help you to raise your credit score to get you into the next bracket of eligibility. A coworker of mine has been working with some of her clients just to raise them up maybe 10 to 15 points over time so that they can get into the next sort of tier or bucket as credit scores that get some, a lower interest rate and saves them like $50 a month in the long run. So credit score is very flexible. It does not have to be a perfect 800. You do not have to be in a perfect situation to buy a house. If you pay your bills on time, if you try not to have collections, then you’ll probably be okay. 

Getting Ready To Buy

CHELSIE: What can people thinking about buying a house do to start preparing for that? 

CAROLINE: It’s kind of like if you were to take your car to a mechanic and say my car is making this weird noise, I need you to tell me what’s wrong because I’m just going to go home and fix it. And then they’re like, okay, let me open the hood. And you’re like, no, no, no. Just tell me what’s wrong with it. And I’m going to go home and fix it. It’s not going to be nearly as effective if that mechanic can go in there and look and see what the real problems are, see where the strengths are. So as a loan officer, if you can go in somebody, his financial situation, and see what’s really going on, that’s going to help formulate a game plan. So that person knows what steps they need to take. Again, you don’t know what you don’t know. The biggest step I think is to just start having some savings and reducing your debt ratio. Debt to income ratio is all of your debts, the monthly payments, divided by your income. So say you have $400 of debt a month and you have $2,000 of income. Your debt to income ratio would be 20%. You want to keep your debt to income ratio below 45%, including the house payment. You want to add all your monthly payments and then your estimated house payment. And as long as it stays below 45%, you’re in an okay position for the house price that you want. 

CHELSIE: When people think about debt their mind automatically likely goes to student loan and credit card debt but would, if you’re making a payment on a car loan or a car lease, does that also count as debt too? 

CAROLINE: Yep. Anything that you have to give your social security number to get counts as debt. So that TJ Maxx credit card or anything like that, it’ll report on your credit report as this is a monthly minimum payment and that’s what we’re going to count when calculating your debt to income ratio. 

CHELSIE: Would someone interested in buying a house find a realtor first or a mortgage loan officer?

CAROLINE: They would likely want to find a mortgage loan officer first because most realtors aren’t going to take you to show you any houses until you have a preapproval letter. A preapproval letter is a seal of approval saying that that mortgage loan officer’s behind you and believes that this is the right thing for you to do. Your loan officer believes that, okay, this is the price range that we can work with. And the likelihood that we get to closing is extremely high. And so the realtor is going to want to see that letter because they’re not gonna want to want to take any of the risks right associated with getting you into houses, without knowing that you can pay that much because in the past people would just say like, “Oh yeah, I can afford this much a month.” And then the realtor would take you to all these houses and waste hours and hours and hours. And then that person would go to a bank and the bank was saying, “No, you cannot afford this house.” And then that realtor is out all of that time and energy because they don’t get paid until closing. Also, you actually don’t pay a realtor at all. The seller pays the realtor. 

 

Mortgage Loan Rates

CHELSIE: Mortgage loan rates are lower than ever. What does that mean for a homeowner? 

CAROLINE: So what that means is that it increases your purchasing power. So going back to that debt to income ratio, the interest rate is going to affect the monthly payment for that house. So last year, a house that was worth like 200,000, you might have to pay $1,200 a month. This year’s house is worth $250,000. You might have to pay $1,200 a month since the rate is lower. So your purchasing power increases as the interest rates drop. 

15-Year Versus 30-Year

CHELSIE: What’s the difference between a 15-year loan and a 30-year loan, obviously the terms, but why, why would you do one or the other? 

CAROLINE: With a 15 year loan, your money starts going to the principals faster than it does on a 30-year loan amortization. You might remember an amortization schedule from ECON class, but it starts out with a big chunk of interest and a little bit of principle. And then as it goes along the principal increases. And by the end, you’re paying only principal payments, which is just the amount that you borrowed. So with the 15-year, it’s shortened so that access is way steeper. You start paying more into principal way faster than it is on a 30-year. A 15-year mortgage is more expensive because it’s divided up over 180 payments rather than 360 payments, but you do save a lot in interest over time. A lot of times what I suggest to people is if they can afford a 15-year payment, do a 30-year loan and pay that extra in every month because it’s going to go straight to the principal. And then if you have a really bad month or if you have an emergency, you have that lower payment locked in. By having the 30-year, you have a little bit more flexibility in your budget. 

Terms To Know

CHELSIE: What are the terms to know for new home buyers? It can be scary for people to ask these questions because they don’t want to feel dumb, but I’m here to feel dumb for everybody. 

CAROLINE: There’s a ton of acronyms. One that you hear a lot is PMI. That’s private mortgage insurance which is insurance that you pay each month that protects your lender in case of default, and that is only if you put less than 20% down. 

CHELSIE: What is amortization?

CAROLINE: Amortization is basically how the loan is divided up over time because it’s a fixed rate, and your mortgage will be a fixed payment. So the amortization is how the interest and principal are divided up over time. 

CHELSIE: What is the principle?

CAROLINE: The principle is the amount that you borrow. So if you bought a $200,000 house and you put $10,000 down, you’d have $190,000 in principle. 

CHELSIE: Then interest goes on top of that. Right? And that’s where that mortgage loan rate comes into play?

CAROLINE: Yep. Interest is what you pay the bank for borrowing that money. 

CHELSIE: And that’s why they give you money to borrow is because that’s how they make their money. Are there any other terms that might come up?

CAROLINE: DTI is that debt to income ratio we talked about earlier. That is one of the bigger qualifying ratios. In North Carolina, we have due diligence and earnest money deposits. Some States just have earnest money deposits. And what that is is when you go into contract earnest money deposit, it’s just saying to the seller, we mean it, we’re not going to back out unless something crazy happens. And so you would generally put like maybe a thousand dollars into an escrow account with the attorney.

CHELSIE: It’s like a Goodwill payment?

CAROLINE: Yeah. Like a good faith payment. There’s also closing costs and prepaids. That’s a big one. So closing costs are what you pay the attorney and the mortgage company to close the loan. Those are costs rather than investments. Prepaids are where you pay your taxes and your homeowner’s insurance and some interests ahead of time because your mortgage company will pay those for you. And so you have to pay a year in advance and then you have to pay a little bit of a cushion so that when the next year comes around, if the taxes went up or if your homeowners’ insurance went up, that amount that you’ve been paying into every month will still cover it. Prepaids are everything that goes into your monthly escrow. Your monthly payment is principal interest taxes and insurance. That’s the basics. Then you add private mortgage insurance and any homeowners-association stuff that you pay directly to your neighborhood. 

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