10 Tip-Offs For Obtaining A Terrific Mortgage

If you’re considering buying a new home, and have not done this before, the process may seem a bit overwhelming—especially the part about home mortgages. The more you learn about mortgages, the more prepared you will be to make the right decisions and succeed at getting the mortgage loan that’s right for you. Here are some helpful tips that will give you an advantage when shopping for a home loan. This will not just prepare you for the application process, but will potentially save you thousands of dollars. More importantly, if only one of these tips helps you achieve homeownership, it will be Game Won!

#1: RAISE YOUR CREDIT SCORE

Your credit score is the single most important factor lenders will use in determining
a) whether or not you qualify for a loan; b) your interest rate if you do; c) the type of loan they can offer you. See page 15 in this magazine and read “Know Your Score to Score a New Home.” You’ll learn everything you need to know, and the importance of monitoring your credit score. Remember that raising your credit score will lower the interest rate on your loan more than reducing your debt. So if your choice is putting more money down on a loan or paying off your credit card debt, pay off the debt. It will raise your credit score.

Go to www.nerdwallet.com  and set up an account to get a free credit score that updates every week. Start early. Apply for credit and always pay all your bills, including rent and utilities, on time to build a good credit score.

A final note about credit reports: according to Fannie Mae guidelines, credit reports are only good for 120 days, so if you’ve gone through the process of getting pre-approved (see TIP #4) and find a home after 120 days, a new credit report will be required.

#2: KNOW YOUR DEBT-TO-INCOME RATIO

A red flag for lenders is when the applicant has a high debt-to-income ratio (DTI) that is calculated by dividing your total monthly debt payments by your gross monthly income and shows what percentage of that income goes to paying your debts. Some lenders may work with a ratio higher than 43% but, ideally, a good debt-to-income ratio is 36% or less. The best advice: lower your debt. This will also help raise your credit score.

#3: FIND OUT HOW MUCH HOME CAN YOU AFFORD TO BUY

Before you start shopping for a home and consequently go shopping for a mortgage loan, you should know the price of a home you can afford to buy. This will make your house-hunting more efficient and avoid heartache when you fall in love with a property you can’t afford.

It is generally agreed that about 28% of your gross monthly income should go to your mortgage payment and home expenses, and under 36% of your income should go to paying off debts like credit cards, car payments, and other loans. NerdWallet’s website has a home affordability calculator that can help with this, and there are many others on the web. Remember to add taxes, insurance, and other expenses that may not be factored into the calculators you are using, ones that are only good for getting a “ballpark” estimate. The best way to find out how much home you can afford is covered in Tip #4 and is highly recommended.

Remember, the sales price of a home is never the true cost. To get a realistic monthly amount that you will need to pay, you will need to take the monthly mortgage payment and add all the other costs associated with owning the home. This is another reason why you shouldn’t use the amount shown on any pre-approval letter as your price point.

You’ll most likely have property taxes, mortgage insurance, home insurance, utility costs, maintenance and repairs, and if this is your first home, chances are you will need to buy furniture, appliances, and have a host of other expenses. Make sure you budget these in to get the true cost of the home.

#4: GET A MORTGAGE PRE-APPROVAL LETTER

When you are ready to seriously start shopping for a new home, a mortgage pre-approval letter from a lender will set you apart from other shoppers who don’t have one. The letter is proof to your builders, real estate agents, and home sellers that you are a serious buyer. Your lender uses your credit report and your other documents that verify income and debt to issue your pre-approval letter, which is their offer to loan you a specific amount based on their conditions. You should know that you can get a pre-approval letter from more than one lender as long as it is done within a limited time, like 30 days, typically without affecting your credit score.

A word of caution: do not be misguided by the amount shown on your pre-approval letter. The worst thing you can do is think that this is the price of the home you should be shopping for. Set a price that you are comfortable with—one that works within your budget and won’t lead you into trouble down the road. As for budgeting, follow the popular 50/30/20 rule: 50% of your budget should go to recurring monthly bills; 30% toward miscellaneous needs; and 20% should go to savings and debt repayment. It is also a good idea to always shop below your limit so you have room to negotiate if you need to.

#5: SHOP AROUND FOR THE BEST LENDER

Not all lenders are created equal. Make sure you choose the one that is right for you. You may find differences in their rates, their loan programs, their funding sources, their requirements, and, of course, their experience. If you are a first-time buyer, you want a lender who will gladly and patiently walk you through the complicated process of getting a loan without making you feel less than smart.

Compare interest rates. Even a small rate difference can mean a large saving or large cost to you. The good news is that today, interest rates are at historical lows (hovering near 3%)—meeting or beating the record low of 3.31% in November of 2012. Compare this to 1981 when interest rates were as high as 18.5% and you can see this is a great time to get a loan. Because of that, and the large number of consumers in the market for a mortgage loan, you’ll find lenders today will be more flexible to get your business. Shop around.

#6: STUDY YOUR LOAN OPTIONS

The loan options on the market today are many, and each varies in the required down payment and qualifying requirements. Finding the one that is right for you will depend on many factors that change from consumer to consumer. The best advice is to do your research and rely on your lender to guide you in the right direction.

The most popular mortgage loans available are the following:

Conventional Loans are the most common, and are funded by private investors and then sold to the government-sponsored corporations of Fannie Mae and Freddie Mac. Some first-time buyer programs may be available that require only 3% down.

Jumbo Loans are not backed by the government and are for loans that exceed the limits set by the Federal Housing Finance Agency (FHFA). Used primarily to finance luxury properties and high-end homes, they are loans that exceed $510,400 or $765,600, depending on where the property is located.  

FHA Loans are insured by the Federal Housing Administration (FHA) and can offer low down payments of as little as 3 to 3.5%, low closing costs, and easy qualifying with credit scores of 580 or less depending on the lender.

USDA Loans are guaranteed by the U.S. Department of Agriculture (USDA) and are typically for homebuyers in rural areas. Down payments are often not required, and applicants may be able to qualify with a low credit score like FHA loans.

VA Loans are available for current or veteran military service members who meet the eligibility requirements of the program. The loans are guaranteed by the Department of Veterans Affairs and require no down payment or mortgage insurance. The minimum credit score requirement is generally 620.

#7: IMPORTANT LOAN OPTIONS YOU WILL NEED TO CHOOSE

Loan Terms:

In addition to choosing a mortgage loan option, you will need to make some decisions about the terms of the loan. Generally, you will need to decide if you want to go with a 15-year loan or a 30-year loan. There are pros and cons to each. Obviously, the 15-year term will require higher monthly payments, and it will mean you will have less cash every month. But your home will be paid off much sooner than the 30-year option. If you choose the 30-year option, it doesn’t mean you have to pay off the loan in 30 years. You would be surprised how many years you could shave off and how much money you would save in interest if you sent in an extra $100 a month and directed it to your principal. Even rounding up the amount to the next hundred dollars would make a difference, or sending in one extra payment every year. However, check with your lender first to make sure there are no penalties or fees if you pay off the mortgage early.

Adjustable or Fixed Mortgages

You may also have the option of choosing an Adjustable Rate Mortgage (ARM) or a Fixed Rate Mortgage. With an adjustable rate mortgage, you may be given better terms initially, but remember that the rate can be adjusted yearly. If you don’t plan on living in your home for very long, this may work for you. A fixed rate mortgage will lock in the prevailing interest rate. As low as rates are today, this may be the best option, but remember, a fixed rate mortgage doesn’t necessarily mean your monthly payment will remain static, because your mortgage may include an escrow account that collects extra cash for taxes and insurance. And if these go up, so will your monthly payment.

#8: THE ONE-TIME-CLOSE SECRET

If you are looking at custom-building your new home, here’s a loan that can be perfect for you: the One-Time Close Construction Loan.

Like the name implies, if you are building a new home, you only get one loan, and you only close one time. Unlike the conventional route where you have to get a construction loan first to build your home and then have to re-qualify and close on a second permanent loan to move in, the one-time construction loan does everything in one step. What that means is that you won’t have two sets of closing costs—just one. And once you get approved for the loan, you don’t have to worry about credit issues that could happen like you do if you have to get approved for a second permanent loan. You’ll save time and money. The best news: you only need a credit score of 640 and a low down payment of only 3.5%. Check out a local company that offers this unique loan option: Thrive Mortgage.

#9: IMPROVE YOUR CHANCES OF GETTING A MORTGAGE LOAN

Here are some things you should focus on:

a.)  Know what your credit score is

b.)  Work on improving your credit score

c.)  Reduce your debt

d.)  Shop around and compare lenders

e.)  Get a mortgage pre-approval letter from a lender

f.) Figure out what your budget is

g.) Save money for a down payment

h.) Get a list of the documents your lender needs

#10: MAKE AN INFORMED DECISION

Take your time. Do your research. Don’t just rely on what your lender or other advisors are telling you. Try not rush into getting a mortgage loan just because you don’t want to miss out on historically low interest rates. Buying a home is the single most important, and typically the largest, investment you will make in your lifetime. One that will affect you the rest of your life, either positively or negatively, depending on the decisions you make.

So—remember these tips, follow them closely, and you will be ready and well-prepared to buy the home of your dreams!