This is Mortgage Secrets Episode 1.

Hi, I’m John Downs, a mortgage loan officer with about 17 years of experience in the mortgage industry. It’s the only job I’ve ever had, actually. Every day, I get phone calls from people around the country. They’re calls from “What should I do?” or “How should I do this?” or “My loan officer just said this,” or “I don’t think I can.”

What I noticed is that the industry itself doesn’t really promote deep education of trying to help regular, everyday people just do the right thing, so I created this podcast to dive into all the little things that people should think about before they jump and make one of the biggest decisions of their life: buying a house. It’s the largest financial transaction that most people have, so over the course of this show, we’re just going to get into the weeds about all the little things that you should be thinking of. Many of the things you’ll probably hear and say, “Man, I never even thought about that,” but after dealing with us and after listening to this podcast, my goal is that, as you move forward, you move forward with great confidence because you’ve thought about everything, it feels good, and it feels right. So, let’s jump into this first episode.

You know, every day, I get phone calls, and I hear the same myths over and over and over again, but they’re all different.

“My credit is not good enough. I need to pay off my debt.”

“I think buying a house is a sham.”

We’ve heard it all, so I think we’ll take some time to dive into all those and unpack all of them to address it front and center and just figure out the truth for you. The reason I say “for you” is because I think many of these myths are specific to the individual. There is no right or wrong. There’s you and what you’re trying to accomplish, and then it all makes sense.

One big myth I get is that “I need to put down 20%.”

I think it’s framed in a couple of different ways. Some people would say, “I need to put down 20% because I don’t want that PMI. The PMI is crazy, and I don’t want it.” A lot of other people think they just need 20% down, and it’s just not true. There are many different ways you could probably talk about this topic, but I think as industries or markets evolve, and you take different points in time, my story probably changes a little because the loans that were available also change with the markets.

Generally speaking, if people are able and ready to purchase, they should look at the amount of money they have, and instead of trying to save up to hit a goal, I think they should say, “I have this much—what can I do?” Most people that go in and have that conversation and really unpack all of the possibilities come out really excited. They usually say, “Wow, I’m so glad I had this conversation because I really didn’t think I could do this. I thought I could never buy. I thought I needed $50,000, and I only have $20,000. I can’t believe this is happening!”

That’s one of the biggest myths that I think holds people back, and there are many studies out there from the Association of Realtors and mortgage bankers’ associations, and countless articles that will say the average down payment per Freddie Mac is 17-point-something percent. Another recent article said that the average down payment for millennials was right around 7%.

Again, back to what I said earlier, it should start with you. What do you have? Where are you in the process of buying a house in life? Then map out the numbers and see if it works for you.

The second big myth is “My credit is not good enough,” or “I need perfect credit in order to buy a house.”

Credit scoring is its own animal. It’s very complicated. There are three different credit bureaus. You have consumer model scores, which, unfortunately, give a lot of false belief. Generally speaking, they’re a little higher than what actual mortgage companies use, but credit scores can go as low as the 400s, and you can get them well up into the low to mid 800s. When you look at lending, it’s somewhat safe to say that a credit score of about 740 gives you best pricing, but loans can be done down to scores of 580 or 600.

Depending on the loan that you get, it may or may not affect your rate. For instance, if you have a government-sponsored loan (think FHA as an example), the rate is kind of the same. You could have the world’s best credit or the world’s worst credit, and if you qualify for that FHA loan, you’re both getting the same rate.

On the conventional side, it’s a little different. The government agencies, Fannie Mae and Freddie Mac, have come out with these things called “loan level price adjustments.” In 2007, 2008, and 2009 when the world started foreclosing, I think they looked at it and said, “Geez, we were pricing everyone the same (kind of like FHA does it today), but we probably shouldn’t because the loans with lower credit scores defaulted at a higher rate. Let’s just charge a little bit to make those a touch more expensive.”

A lot of people look at that and say, “Well, if my credit score is lower, that means that my rate is going to be higher,” but again, everything in housing needs to be looked at in the context of time. Think of just prior to the election of 2016. Interest rates were 3.5%. Let’s say that person with a slightly lower credit score had something like a 3.8% rate. They might have looked at that and said, “3.8% is higher than 3.5%. I’m going to work on my credit. I’m not going to buy right now.”

But then fast forward to March and April of the following year. Their credit score is finally ready. The best rate that was available is 4.25%. You could go back and say, “Geez, my credit score at that point in time with that slightly higher rate was actually better than the time that I wanted for. I waited to get better credit because I wanted a better rate, but the market ran away from me. In general, rates are higher. Properties are more expensive.”

Again, everyone needs to look at the context of time to figure out, “What would it look like if I did it today?” There are lots of different credit models that are being run out there right now. If you dissect it, what I’ve been told is that in a perfect world, a person would have maybe a credit card or two, an installment loan, maybe two, and a mortgage, and that without the mortgage, sometimes it could be hard to hit the higher credit score itself, but in general, new debt—whether it’s a mortgage or anything, credit cards, student loan, or whatever—look at it in 6-month increments. You get a new piece of credit today, and your score will drop a little bit. At 6 months, it improves. At 12 months, it improves. At 24 months, it improves again. But big pieces of debt—car loans, mortgage… If you’ve been run through the ringer on a mortgage, and you’ve got that piece of credit, generally, your credit scores are higher.

Another big thing is, if your credit improves, you can restructure the debt. If rates are still lower in the future, and your credit score gets better, you can refinance. Refinancing is so easy these days and so cost-effective that you might as well get in if it works and the payment is tolerable. A lot of people think that’s a hurdle, and if they just had a real conversation with someone to look at real numbers and alternatives and run a few what-if scenarios of life in 6 or 12 months down the road, would they make a different decision today? I think they would.

Myth #3 is a big one. I get this one all the time. Now, if you think about it, I’m in D.C., so it’s the land of the over-educated, super smart attorney—mountains of student loans. They’ve just been put through the ringer in studying.

I get this question a lot: “Well, I’ve got these student loans, and I think I’m just going to pay these off before I buy.”

You can kind of group that in with any other debt. “I’ve got to pay off my car.” “I’ve got to pay off my credit card.” “I’ve got to pay off this stuff.” Everyone starts with “I want to go into this debt-free or with less debt.”

I have a couple of stories there. I’ve seen a lot of people who took that approach. We had a great conversation, and they just said, “You know, it just feels good to not have the debt, so I’m going to pay it off.” Then they call back two years later, and we start. I keep very good notes, and we’ll look back at the old conversation we had—the rates at the time, the price points at the time—and then we fast forward to now when they’re ready to buy.

A couple things have happened. One is all their down payment money went to paying off their debt, so they were at a position that they didn’t have a lot of cash, so they were somewhat limited in what they could buy. Their income may have been awesome. They’re completely debt free, but now they don’t have the down payment that they need to buy what they want.

Other things? Rates were higher. That place that maybe they could get for $2,500 a month is now going to cost them $2,800 a month. Now that doesn’t even work because properties are 15% to 20% more expensive because of the market they were looking in. Now you need to tack on more payment for that.

And there are other stories of people who actually went in and said, “OK, I know that debt is there. Obviously, one day it needs to go,” and they bought a house. Maybe the mortgage wasn’t awesome. Maybe the mortgage was an FHA loan or something like that, had a little bit of PMI or mortgage insurance or something, but then two years later, those same people were able to take a home equity line to consolidate their student loans. Some of them actually sold their house, took the cash, paid off their student loans, and then still went out and bought another place. It’s just amazing to see the amount of wealth that people can create by just getting a house sooner. I get that there’s good debt and bad debt, in my opinion, and good debt is something that has a tax deduction, and bad debt is everything else, but sometimes that bad debt is there, and taking on some good debt can actually accelerate the pay-off of all the bad stuff. It can kind of be the world’s perfect debt restructuring. You want to pay off your student loans? Go buy a house. It sounds funny, but it’s true!

Another one of my favorites is myth #4: “I’m pre-approved.”

I hear this from lots of different angles. I hear an agent say, “I’m working with this buyer but they’re pre-approved,” or I have someone that says, “Hey, I’m just going under contract. I’m pre-approved, but I want to get some interest rates or quotes to get ready for choosing a path.”

First, let’s talk about what a pre-approval letter is. A pre-approval letter is a letter someone gives a lender that says, “I think you can get a loan, and I think that’s what you should hear. I think you can get a loan. Based on what you’re telling me and what I see, you should be OK, I think.” That’s what a pre-approval letter is, and it ends up only being as good, in my opinion, as the person that actually wrote it for you.

Sometimes people jump in and take online applications that leads to a credit pull that then leads to automated underwriting decisions, but no one looked at anything. They didn’t look at your bank statements or your pay stubs or your tax returns or anything like that, and they give you this letter. The letter says, “Yeah, based on everything they gave us, the loan looks good,” but if you think of how automated systems work, it’s taking data, running it through a system, and giving an answer.

Well, what if the data is wrong? That’s, quite honestly, where I see a lot of problems in the business—whether the income was miscalculated or put into the system incorrectly, or you want to put in $10,000 of assets, and the system read $100,000 of assets. A big myth is “I’m cool because I’ve got this letter, and everything is going to be awesome.”

The reality is that people need to look a little bit deeper into how hard they worked for that approval letter. I’m all about being easy on my clients. In the initial conversation if I’m talking to someone, I can ask some higher-level questions:

“What do you make?”

• “How do you get paid?”
• “How long have you worked there?”
• “Give me a big-picture overview of all your assets. Just lump it all together. If you had to run to the bank today and pull it all out, what would it be?”
• “On a scale from 1 to 10, how would you rate your credit?
• “Oh, you’re at 10? Let’s talk about your debts. I think this is good.”

A letter can be given based on that. We could pull a credit report and say, “Yep, your debts are right, your score is whatever,” and you could go buy a house, but I do believe, for many people, you should take that extra step and go a little further. Work with a lender that looks at all the pay stubs or uses some of the new digital technology that allows them to extract it all right from the beginning. There’s new technology out there that, within a conversation, we can digitally extract income and assets, so it removes all of the confusion and pulls out all the layers of the problems that bake up and move forward.

The other time I hear this is when an agent calls me and says, “Hey, John, this client of mine has a listing. They’re set to close in 10 days, and the lender just said they can’t do the loan, but I’m confused because they had this pre-approval letter! Why did they write that pre-approval letter if the loan wasn’t going to be any good?” and when you unpack it all, it all goes back to laziness up front, not asking all the right questions.

Sometimes it’s the consumer that just chose to take the easy path, and maybe the lender wanted to go a little deeper, and they said, “No, let’s keep it online. Let’s text each other and send a few emails back and forth.” If people just went a little old school and jumped on the phone, earmarked 30 or 45 minutes to unpack some stuff, uploaded some pay stubs and bank statements, they probably wouldn’t have any of those issues, and all those closing problems that you hear about probably just wouldn’t happen.

For me, a pre-approval letter is much bigger than just this high-level overview. What I think is that the pre-approval letter should have deep understanding of all the ins and outs of your income and how you get paid, your assets (not only where they are right now but where they were in the last 60 days and how they’ve all flown back and forth)—everything you can think of.

And that pre-approval letter also leads to the recipe of your contract strategy. With just an approval letter, an agent can only write a contract so strong, but if they have confidence that that pre-approval was done accurately with a super deep dive, they can write stronger offers, and when you write a stronger offer, you win. The sooner you win, the more equity you build, and then you’re out of the rat race of housing, which in some markets can be crazy.

Myth #5 is the old “ARMs are terrible, and 30-year fixed rates are where it’s at.”

My personal feeling on this is that you choose a mortgage for your life—whatever that is. Sometimes that means an adjustable-rate mortgage. You’ll hear lenders call them 5-year, 7-year, 10-year ARMs (adjustable-rate mortgage). That number you hear is the period of time in which the rate is fixed, and nothing changes. Why would you get a 30-year fixed at a higher rate if you absolutely knew you were moving in 5 years, and you were on a contract at work, and you relocated, and you’re going back home? There is legitimate savings.

With every mortgage you get, you need to measure:

• When does it change?
• How predictable are my life actions between now and that point in time?

I usually say to take your move point and add 2 years. If you know you’re moving in 5 years, do a 7-year ARM. If you think you’re out of here in 3, a 5-year should be OK.

My personal story is my wife and I did a 5-year ARM on a house in 2006. We swore we were going to move out of this house. “There’s no way we’re keeping this place.” Adjustable rates turned out to be the secret savior of the housing market. A lot of people don’t know that, but everyone kept saying, “ARMs are bad, and they’re going to adjust and go crazy.”

My rate was about 3.75% on this 5-year ARM, and it adjusted to 2.5%. Then it went to 2.5%, and then it went to 2.6%. We’re still in that house. Actually, I refinanced it in late 2016 when rates dropped because we realized maybe we will be in that house for longer.

The point here is you should choose a mortgage that fits your life, you should understand the risks on the high and low side, and you should be prepared to refinance if things change. That’s my personal story.

The last myth that I hear quite a bit is that you should pay off your mortgage as quickly as possible.

Or if not pay if off as quickly as possible, you should double up payments and do bi-weekly payments and just pay this thing off as fast as you humanly possibly can. I have this saying at the group in our office, and I tell everyone, “Every dollar you have or make can be saving or earning something.” If you pay your mortgage down, you’re saving interest on your mortgage. What is that? You have a mortgage, and you have a rate—let’s call it 4%. You make money, so you pay taxes. Right now, it’s a tax deduction, so let’s call it a real cost of 3%. So, the question is, the other money that you have that you could be putting towards this mortgage to pay it off faster, can you put it somewhere else and earn more than 3%? The more you start studying and researching the compounding effects of interest and long-term market returns, it really goes back to that every person out there should probably a long mortgage forever and ever, until they get maybe later years in life where you’re in capital preservation mode, and you just don’t want to lose.

A few years ago, I actually did this study. I had a group of people from 65 to early 70s. They were all retired, so, of course, they loved to sit back on the phone and talk forever. It was awesome. I learned a lot from those people because half of them… Let’s take a step back. They all lived life almost the same. They were on the same income trajectory all during life. None of them really inherited buckets of money from relatives, but yet these people were worth $3 to 5 million and, in another bucket, were worth $300,000. It’s a huge difference!

When you really unpack the lives of all the people, and you learn their investment styles and habits, the people worth $300,000 to $500,000 just didn’t like debt. Every dollar they made went to paying off debt. They had a mortgage, and they paid it off. They did short-term loans. They were somewhat squeezed in their monthly budgets because they were paying that mortgage off so fast. The other people exercised proper leverage. They kept every house they ever owned. They refinanced strategically. They extracted some equity out of one to help buy another and restructure the debt, so the overall debt load was at a better rate.

I think there’s a powerful story in that. All too often, we look at today, and then we think of the returns next year, but when you look at life 30 to 40 years out, and you take a step back and realize that a dollar you save today can be worth 15 times that when you retire, wouldn’t you rather just keep that money and other vehicles growing? And wouldn’t you rather fix your housing expense almost like you pay rent? You pay a check, and you live for 30 days. It’s the same thing with a mortgage—that’s your housing expense. Put that other money to work. Again, it’s not for everybody, but it’s a conversation that I think everyone should have.

That wraps up the first episode. Just know that there are a lot of other things we’re going to be talking about in this podcast series that’s very important to me and the clients that I serve. Check back between now and then on www.DownsMorgageGroup.com, or email us at DownsGroup@VellumMortgage.com I hope you’ve enjoyed the show!