Shop For A Home Mortgage
Getting the best mortgage rate isn’t as simple as applying for a life insurance policy or a credit card. There’s a lot of factors that determine the type of loans you qualify for, and the terms you’re offered.
For anyone in the preliminary stages, here are three things you can start doing today.
- Watch your spending – Don’t apply for new credit cards, don’t make large purchases, and try to lower your credit vs. debt ratio. The objective is to look less risky to the company loaning you money.
- Improve your credit score – Lenders will have a minimum credit score in order to get approved for a loan program. By paying off some of your bills (and on time), you’ll qualify for more loan programs and options.
- Start saving for a down payment – Generally the more money you can put down on a house, the better. Ideally 20-percent, but there are programs that require as little as 3.5-percent.
For those looking to buy a home soon-ish (within the next 2 months) we outlined the steps involved with shopping for a mortgage.
What To Do Before Shopping For A Mortgage
1. How Much Can You Pay Each Month?
Your first task before shopping for a new house is to establish your budget. It’s not enough to calculate what you have for the house down payment, or how much you can pay each month. You should lay out all your potential expenses, including unexpected expenses that could occur.
- Are you planning to have children?
- Cost of college tuition (or student loans)
- Medical and drug prescriptions
- Alimony payments
- Will you have to take care of elderly parents?
Remember that the rate you agree on (if it’s a fixed rate mortgage), is the rate you are going to be locked-in at upon agreement. This means that even if there’s a crisis – laid off, large medical expense, etc. – you are technically on the hook for the monthly mortgage payment.
In a recent article, Seattle.gov estimates that 47% of Seattle residents struggle to pay their mortgage, or are rent burdened due to COVID-19. And many are accumulating significant personal debt due to loss of income.
It’s also good to separate your “good debt” vs. “bad debt”. From a credit score perspective good debt in the form of student loans or home mortgage because it shows financial progression. Bad debt in the form of credit cards, personal loans, or auto loans.
|Good Debt||Bad Debt|
|Home Mortgage||Credit Cards|
|Student Loans||Personal Loans|
|Business Ownership||Auto Loan|
2. Get All Your Mortgage Paperwork Ready
Before you apply for a mortgage, you’ll want to have all your ducks in order. Below are some of the docs and paperwork you should have ready.
- three years of tax returns
- bank statements (showing that you can afford a 5% down payment)
- last 2-3 months of pay stubs
- updated credit report from the credit bureaus
3. Home Mortgage Loan Questions
How long will you stay in the home?
- If relocation is your reason for moving, it can impact the type of loan you want to choose. There are loans as short as 10 years, and go up in increments of 5 years and up to a 30 year mortgage.
What’s happening in your family?
- Having children or sending having to pay college tuition within the mortgage loan term can have a big impact on you financially.
What other big expenses can I expect to have?
- Maybe you need a new car, or will have to help parents who will need assisted living care.
What does the bigger financial picture look like?
- A 15-year mortgage may sound tempting like a middle ground, but if it means gutting your savings or withdrawing on your retirement fund, it may not be worth it. Take a full look at your finances, including long-term investments.
Where To Shop For A Mortgage
As you can guess there are a lot of mortgage types available. Some are universal and available to everyone, and others such as a FHA Loan or VA Loan (or Veterans Loan) will only apply to a certain people.
Explore your loan options
1. Fixed rate or adjustable rate
A fixed-rate mortgage, commonly for a 15 or 30-year term, is often the safest bet because you know that the rate won’t change on you. However in some circumstances an adjustable-rate mortgage (or ARM mortgage) may suit you better.
There’s no harm in exploring a mortgage loan with an introductory fixed rate and annual rate resetting, as long as you understand that payment amounts will be less predictable if interest rates change.
2. Put less money down.
For people who can’t come up with a 10% down payment, there are government issued mortgage loans, and specifically the Federal Housing Administration loans (known as FHA loans), which only require a 3.5% down payment. But be prepared to factor in the cost of private mortgage insurance.
3. Check rates online.
A mortgage lender is the bank or institution that offers and underwrites your mortgage loan.
Each lender has specific borrowing guidelines that they use to verify your creditworthiness and ability to repay the loan. This includes your credit score with the major credit bureaus, income, and the size of the loan. The lender will set the terms, interest rate, repayment schedule and other key aspects of your mortgage.
What To Look For In a Mortgage Loan
- Annual Rates. Get a list of rates that each lender or broker offers, and if considering an adjustable rate mortgage (ARM), about how your monthly premiums may vary.
- Points. Sometimes points are referred to as “mortgage discount points”, and are not always understood by the borrower. Points are equal to 1% of the total loan amount, and they are used to pay interest ahead of time. So if you are getting a loan for $200,000, one point would be equal to $2,000. Mortgage discount points are paid up-front, at the time of closing. It is important that a borrower understand that discount points are an interest payment, so they do not reduce the loan amount.
- Potential Fees. Home mortgages often include a loan origination fee, home closing costs, broker fees (3-6% of what you pay for the home), or early payment penalties.
- Down payments. If your down payment is less than 20%, you may have to pay private mortgage insurance (PMI). For those who can afford a 20% down payment, you can apply to cancel the PMI.
How to Shop For A Home Mortgage Loan
Depending on your down payment percentage, lenders may offer the same type of loan but at varying costs. This can be due to overages, or fees pocketed by lending institutions or brokers. Take the information you’ve gathered with you as you visit various lenders, and don’t be afraid to make them compete for your business by informing them that you’re shopping around.
Once you are happy with the mortgage negotiated, get a written lock-in rate. There’s usually a fee for this, but it’s often refundable after closing. Plus, you won’t have to worry about what happens if interest rates rise while your loan is being processed.
While you may be tempted to take a lender’s first offer, remember that even a small difference in interest rate can add up to tens of thousands of dollars over the next 10-30 years.
At the end of the day, a home mortgage loan is a big commitment and you should have a lawyer look over the paperwork before you sign and submit anything.