How To Shop For A Mortgage

Getting The Mortgage That’s Right For You

When shopping for a home mortgage make sure you obtain all the relevant information:

Research current interest rates. Check the real estate section of your local newspaper, use the Internet, or call at least six lenders for information.

Check the rates for 30-year, 20-year and 15-year mortgages. You may be able to save thousands of dollars in interest charges by getting the shortest-term mortgage you can afford.

Ask for details on the same loan amount, loan term, and type of loan from multiple lenders so that you can compare the information. Be sure to get the Annual Percentage Rate (APR), which takes into account not only the interest rate but also points, broker fees, and other credit charges expressed as a yearly rate.

Ask whether the rate is fixed or adjustable. The interest rate on adjustable rate mortgage loans (ARMs) can vary a great deal over the lifetime of the mortgage. An increase of several percentage points might raise payments by hundreds of dollars per month.

If a loan has an adjustable rate, ask when and how the rate and loan payment could change.

Find out how much down payment is required. Some lenders require 20% of the home’s purchase price as a down payment. But many lenders now offer loans that require less. In these cases, you may be required to purchase private mortgage insurance (PMI) to protect the lender if you fall behind on payments.

If PMI is required, ask what the total cost of the insurance will be. How much will the monthly mortgage payment be when the PMI premium is added and how long you will be required to carry PMI?

Ask if you can pay off the loan early and if there is a penalty for doing so.

There is a long list of sources for mortgages loans: mortgage banks, mortgage brokers, banks, thrifts and credit unions, home builders, real estate agencies and Internet lenders.

Tips for Working with Lenders

Get recommendations: Ask friends and family members for suggestions, especially if they’ve recently obtained a loan.

Check credentials: Mortgage bankers are regulated by either your state’s department of banking or division of real estate. Check with the one appropriate to your state to see if a lender is in good professional standing. Mortgage brokers may be state regulated or not. If not, check with the local chapter of the National Association of Mortgage Brokers or the Better Business Bureau to see if their record is clean.

Do your homework: Learn about typical mortgages and ask questions when something looks amiss; a broker may be trying to pad closing costs or other fees at your expense.

Take care online: There are plenty of attractive deals online, but first make sure you’re dealing with a reliable broker or lender.

If you’re working with a broker, the National Consumer Law Center recommends you demand to know how much the broker is making from the lender as well as from any fees you might be paying. It’s best to get this information upfront and in writing. Avoid a broker who is double-dipping-getting a fat premium from the lender, as well as fees from you.

The Real Estate Settlement Procedures Act (RESPA) requires lenders to give you information on all closing costs and escrow account practices. Any business relationships between the lender and closing service providers or other parties to the transaction must also be disclosed.

Many of the fees are negotiable. More information is available from the Federal Trade Commission, the Federal Reserve Board, and the Department of Housing and Urban Development.

Pitfalls To Watch For When Shopping For A Mortgage:

Buying a home is one of the biggest decisions you can make, and it’s likely the largest purchase you will ever make. So it’s no surprise that there are multiple ways you can trip up.

Getting a mortgage is about more than having your offer accepted and signing on the dotted line. (Or hundreds of dotted lines, which is what it feels like at the settlement table.)

1. Neglecting to check your credit before starting the process.

Approaching mortgage lenders without having some idea where your credit lies is like going to an important job interview without checking for spinach in your teeth.

Mortgage lenders are going to go through your credit report with a fine-toothed comb, and they’re going to make decisions based on how creditworthy you appear to be, including whether to offer you a loan at all … or at what rates.

If you don’t check your credit score first, you stand to lose money, or your potential dream home.

What to do instead:

Ideally, you’ll check your credit well before you begin hunting for a home, and work to increase your score if you need to, or dispute errors on your report, since those can take time to rectify.

You’re entitled to a free credit report from each of the three bureaus (Experian, Equifax and TransUnion) once a year, and you can pull those from AnnualCreditReport.com.

If there are errors, fix them. (Some examples: Any accounts listed that aren’t yours, accounts incorrectly listed as being in collections, incorrect large balances reported, or incorrect late payments reported.) The bureaus have 30 to 45 days to investigate the issue and fix it accordingly.

Use free resources, like Credit Karma or Credit Sesame, to get an estimate of your credit score for TransUnion and Experian. If you want to see your actual FICO scores for each credit bureau, buy them outright (about $15 to $20 each) instead of committing to unnecessary and expensive monitoring when you sign up for a free trial.

2. Applying for new credit simultaneously.

When you’re applying for a mortgage, your credit is under serious scrutiny.

Apply for a new credit card and your credit score will dip temporarily due to the application credit check, which counts as a hard inquiry on your account for about 12 months.

The same goes for closing an old account—it will affect the amount of credit you have available, which will negatively affect your score.

(Note: For car or home loans, all credit inquiries made within about two weeks of each other count as one inquiry, so when you’re shopping around for mortgage brokers, be sure to submit all of your loan applications around the same time.)

What to do instead:

While applying for a mortgage, hold off on opening up a Macy’s store card or applying for a car loan.

And of course, continue making on-time payments and chipping away at any debt.

3. Choosing a mortgage lender without shopping around.

You’ll want to find a mortgage lender early in the process so you have a relationship with him or her when you find the home of your dreams.

By doing so, you’ll be able to kickstart the mortgage process by getting pre-approved, which means you can put in a serious offer quickly (should the need arise), and once you sign a contract, applying for the mortgage itself will take less time.

Even if interest rates and loan terms are similar across different lenders, final costs and fees at each lender might not be.

Because lenders are eager for your business, some will even offer a cash incentive for going with them, such as $1,500 back to you at closing.

In fact, if one lender is offering cash back but another one isn’t, ask the lender who’s holding out—he may change his tune if it means earning your business.

What to do instead:

Ask home-owning friends and co-workers whether they had a good experience with their mortgage lender.

Then check in with at least two or three lenders so you have an idea of what’s out there.

(While you’re at it, look at our checklist on getting a mortgage.) In addition to the interest rate and loan terms, have each furnish you with a breakdown of your total costs so you can compare.

4. Skipping pre-approval.

Pre-approval means basically going through a mortgage application process with a lender—filling out paperwork, verifying income—in order to be pre-approved for a loan of a specific size even before you’ve found a house to bid on.

It’s a great way to find out how much house a lender thinks you can take on, and it will give you some real specifics to work with—including an interest rate—while you’re house hunting.

What to do instead:

Just tell your mortgage lender you’d like to get pre-approved. You’ll have to provide paperwork, which can include pay stubs, W-2s, bank statements, tax returns, and relevant loan documents.

Once you’ve had an offer accepted on a house, you’ll merely have to give the lender the address and details of the offer to move forward with the mortgage process.

(You could also decide you don’t love that lender and want to go with a different mortgage lender after the pre-approval. If so, you’ll have to go through all the paperwork again and it will require another hard credit check.)

5. Taking on a loan that’s too big.

It may seem like you’re comparing apples to apples when you trade rent for a mortgage payment. But there are more expenses to consider when you buy a home, and you have to make sure you can afford to pay for them all.

If you bite off more loan than you can chew, you may find yourself eventually facing the sale of your home (or foreclosure) when you can’t make the payments.

What to do instead:

Along with your mortgage payment, make sure you’ve accounted for property taxes, homeowner’s insurance and maintenance costs that average about 1% of the home’s value every year.

Have home sellers furnish copies of 12 months of utility bills. And when you’re pre-approved for a mortgage, Derrick recommends taking the lender’s top number and lopping 20% off of it so you aren’t stretched to the limit.

Another good metric? Find out what payments would be for a 30-year fixed mortgage on the house.

6. Signing loan documents you don’t understand.

A mortgage is about more than just the monthly payment. It’s about how much you’ll pay over the life of the loan and what your interest rate will be throughout.

For instance, the monthly payment will be lower on a 3/1 adjustable rate mortgage, a common loan in which the first three years of payments are fixed and for the remainder of the loan the interest rate adjusts annually.

That means your interest rate could go down or up in three years—and so could your monthly payment.

What to do instead:

Make sure you understand what kind of loan you’re getting, what the payments will be from beginning to end, how much interest you’re paying, and whether you’ll have a fixed interest rate, or whether it will be fixed for a limited time before becoming variable.

Also, do you know how much money you’ll have to bring to the closing table with you?

Many lenders require you to pay property taxes and insurance up front, and it could be a big check.

7. Trying to time the market.

It can be tempting to try to time your home purchase so you lock in the lowest possible rate on a mortgage, either by dragging the process out if rates seem to be headed down, or jumping in before you’re ready.

What to do instead:

If you’ve found a house, and you love it, and you can afford the mortgage, go for it—don’t worry about chasing after a mortgage rate that’s ever so slightly lower than what you can get now.

On the other hand, if you don’t have enough money for a good down payment, don’t leap into a house before you’re ready, just because rates are low.

For a downloadable PDF of “How To Shop For A Mortgage”, click here.

For Further Information you can contact your friendly & experienced Century 21 All Islands Agent at:

(801) 580-4317
annettepjudd @ gmail.com

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