When it comes to getting a home loan, purchase-money and refinance mortgages are two ways to get it.
Both are very different and are used in different circumstances. In this article, we will look at what the exact differences are as well as look into how to quality for both.
Purchase-Money Mortgage Explained
Purchase-money mortgages are very easy to explain. This type of mortgage is given to the buyer of a property as a means to finance the transaction. The “lender” of the money can be the seller of the home or a financial institution (lender).
And while this all seems simple enough, purchase-money mortgages separate into a couple of types. The first one is very straightforward. This is the “straight land contract”, which follows the normal path to purchasing a home. Simply said, buyers are required to make a down payment. As for the rest of the mortgage, the buyer pays it off by getting a home loan. This loan has higher interest rates so you’ll always pay an extra more.
The second type is a “rent-to-own” mortgage. Unlike the previous one, the buyer has two choices when getting into a rent-to-own agreement. Namely, a buyer has the option to get into a lease agreement or is obliged to pay off the rest of the money during the duration of the lease. In some cases, the buyer can pay the rest of the money owned when the lease-purchase option expires. But most sellers won’t lease you the home without expecting some sort of payment.
Where purchase-money mortgages excel is in the qualifying area. Potential homebuyers can obtain both rent-to-own and land contracts with a less than stellar credit card score. These mortgages can also be agreed on a specific price, and the buyer will commit to paying that price even if the value of the property goes up in the meantime.
But not everything is sunshine and rainbows with purchase-money agreements. When buyers get into such contracts with sellers, it’s usually because the buyer is in a rougher financial state and cannot qualify for a financial loan elsewhere.
This comes with its own set of risks for the seller, so do expect to put a larger down payment. The seller does this to protect themselves. In addition to that, financial institutions will give you higher interest rates and the closing costs are generally much higher.
Refinance Mortgage Explained
The other form is the refinance mortgage. Refinancing is much different than picking up a loan to buy a property. While both help achieve the same thing, refinancing does it much differently.
The way refinancing works is even simpler. You take a new loan and use that money to pay off your existing one. The important thing to note is that you can’t refinance if you haven’t previously taken a loan.
The good thing about refinancing is that financial institutions will generally offer much more favorable terms. These include, among others, lower market interests.
As for the reason why many choose to refinance, well it mostly has to do with either cashing out a portion of their equity or reducing the monthly payments of an existing loan and refinance it to repay with more favorable, but longer term.
Some of the downsides of refinancing include very high closing costs and prepayment penalties. The latter can especially be a problem if you choose to refinance again. Prepayment penalties are also bad for you if you manage to pay off the mortgage quite early.
Plenty of financial institutions offer both refinancing and purchasing options to millions of Americans. But it’s safe to say that going to the right people will prevent a costly mistake.
So, that’s why we suggest you take a look at ClearPath Lending.
How to Qualify for Refinancing
As with any sort of loan, every financial institution and lender will look at a couple of key factors before getting you approved. These factors also play a role in determining the interest rates and terms of repayment.
While there are plenty of factors to consider, meeting all the criteria will mark you as “safe” in the eyes of the lender. The safer you appear the better rates and terms you’ll be given. Many homeowners have taken the initial loan with a spotless credit score. But their score has downgraded by the time they chose to refinance. In this case, the terms of the refinancing will change depending on your new credit score.
Luckily for you, there is a solution to the “bad credit score” problem. Let’s look at how to tackle it.
How to Approve Your Credit Score to Get Approved?
Every financial institution and lender follows the FICO Score as a means to calculate your credit score. The FICO Score will give you a rating from 300 to 850, and the higher the number the better the chances to qualify.
While plenty of other scoring models exist, the FICO Score is widely used across the US.
Numerous factors play a role in your score going up or down, as we discussed earlier. It’s important to impact them as much as possible before trying to apply for refinancing to get better rates and terms. To do that, you can do a couple of things.
· Pay Your Bills in Time
Reliability plays a huge factor in getting approved and getting better terms. The more you pay your bills in time, the more reliable and trustworthy you are in the eyes of the lender.
· Pay Off Debt
No one wants to do business with people that are in debt. And that same rule applies to lenders. Lenders will not give you favorable rates if you are in debt. So another way to improve your credit score is to pay off as much debt as you possibly can.
· Don’t Close Unused Credit Cards
The way credit utilization works is you have much more of it if you have more credit cards. While most credit cards will cost you money to maintain each year, closing unused credit cards may increase your credit utilization ratio.