What you should know about shopping for a mortgage
There are a few things you should consider when shopping for a mortgage. A mortgage is a loan specifically for a real estate property, either land or building. A mortgage is a secured loan, meaning it is tied to the value of your property until it’s completely paid off. Most mortgages have a lifespan of 30 years, however, it can be shorter or longer. If you continually default on your mortgage repayment, the lender can take action to take-over the property and sell it to get back their money. This is called a foreclosure. In order not to foreclose, here are some valuable tips about buying a home.
Know how much you can spend
How much are you willing to spend on the loan? This would involve the fees associated as well as the monthly interest rate. How much can you repay monthly? Typically, most lenders use a 28/36 rule when looking at your finances. This implies that your monthly income should not exceed 28% of your gross income. You need to consider you various financial obligations like car loans, personal loans, credit card bills and so on.
Think about your finances, don’t get a home loan that you can’t repay. It will destroy your credit score, and you may even end up losing the property.
Your Credit Score May Determine Your Approval
Lenders always look through your credit score and credit history when assessing your application. A credit score of at least 720 would qualify you for lower rates. A credit score of between 620 and 720 would still qualify you for the loan but at slightly higher interest rates. If your score is lower, you may get higher interest rates. Your application might even be rejected.
This necessitates the need to know your credit score before approaching a bank for a mortgage. You can get your score for free with any of the three credit bureaus once a year. If it is low, you may work to boost it a little. Get copies of your credit report from the bureaus, review each item on the report and dispute any error. You may get the help of a credit repair company to help you with the process.
Qualifying for a Mortgage
To qualify you for a mortgage, the lenders consider both your income and debts. They use both data to calculate the Gross Debt Ratio, of GDR. The GDS helps them determine how much you qualify for. The GDS the percentage of your total income you will need to pay for all home-related expenses. Typically, the GDS shouldn’t be higher than 32%.
There is also the Totals Debt Ratio, or TDS, which is the percentage of your income (pre-deductions), which you will need to pay for all your debts (including home-related costs). The TDS typically shouldn’t exceed 40% of your total income.
Choosing a Lender
Different categories of lenders exist, including commercial banks, brokers, mortgage companies, credit unions, and the lesser known thrift institutions. The rates and terms differ among individual lenders. Here are some questions you should ask
- What are their current interest rates and what is the highest interest rate you can afford?
- Is your interest rate fixed or adjustable?
- Do you require any down payment? How much?
- Do you require a Private Mortgage Insurance? What would be the additional cost?
- What other fees do you charge?
- What else do I need to know?
You should speak to various lenders and get feedbacks. Then analyze their terms and choose the best for you. You can also check to see the national and state specific interest rates to calculate your mortgage.
Compare Various Lenders
It’s always a great idea to ask for a recommendation from people you know in your neighborhood. You should always ask for help while you can, because some day it might be too late. Besides, friends and family are always keen to help when they know they can. Those who recently got mortgages can help you with up to date information on what you should do.
You an also find other lenders with excellent terms and compare their interest rates. Comparison shopping can save you a whole lot of money on a mortgage. Watch ouf for lenders with complicated conditions and high rates. Then request for quotes from the remaining lenders. This will help you know how much you can save from each. Reminder, every time you request a quote, a lender will pull your credit report.
Don’t Worry, It Only Counts as One Credit Check
When a mortgage lender pulls your credit, this is considered a hard pull and does affect your credit score. However, you are granted a window of one month by the credit bureaus for rate shopping. Any credit pull from a lender in the same vertical – in this case it’s mortgage loans – will only count as one pull on your credit score.
There are Additional Costs
Lenders offering lower interest rates are often considered the best. While this might be true, there are other fees involved that can raise the overall cost of the purchase of the home. A mortgage with lower interest rates may have higher fees. Therefore, it is essential you enquire about all the charges you will encounter. This may include application fees, loan origination fees, broker fees, underwriting fees and settlement or closing cost. Some lenders also charge prepayment penalties. When choosing a lender, you should consider the interest rate in addition to all other fees and closing costs.
There are Different Mortgage Options
It is not surprising to find homeowners complaining of how they would have chosen a different mortgage option. It is what happens when you fail to research for the best financing option for your needs. You have two primary choices.
• Fixed vs Adjustable Mortgages
Fixed mortgages offer a stable loan rate all through the loan life. The interest and payments will remain the same until you pay back the entire loan amount. Adjustable rates, on the other hand, have interest rates that can change at specific times in the loans period. The rate can be increased or reduced after the first few years.
• Government or Conventional Mortgages
You have the option to use government-backed mortgage programs like the FHA or VA. This may be beneficial to reducing the down payment costs. You can also opt for convention mortgages with no government interventions. This has the advantage of reducing the cost of insurance.
Read about other mortgage options here
What is NEXT?
Now that you know what exactly to look out for a while choosing a mortgage lender, the next step will be how to start the application process.
Getting Pre-Approved by your Lender
After getting quotes from your preferred lender, submit all required information. This may include your W-2 form if you are unemployed or your income statement if self-employed. You may also have to provide other documents that will help them assess your application. The lender will give you a pre-approval amount, which will be based on your financial capability.
This pre-approval will remain valid for a certain amount of time. After that, the lender and you will have to recalculate your home loan based on the current interest rates. So you are on the clock at this point in finding a home.
Find a House and Make an Offer
After getting a pre-approval, you can start shopping for a house based on the lender’s pre-approved range. When you find a home that matches your specifications, make an offer to buy it. If the offer is accepted, you will then take the purchase agreement back to the lender along with a formal loan application.
Lastly, Submit Your Loan Application
Fill the Uniform Residential Loan Application and take it to the lender. Ensure you fill the form accurately and submit it alongside the purchase agreement. At this stage your information will be sent to Underwritters to validate your credit worthiness. They dictate whether you get the loan or not. Most cases you will get approved, and will have the keys to your dream home.
Conclusively, searching for the ideal mortgage lender take time, however its one crucial process that ensures you have the best possible outcome. Follow the steps above to get the best out of your mortgage deal.