Springtime is here and that means house hunting season has begun, which means mortgage shopping has begun! Just like night follows day, when spring arrives, it’s real estate time in the good old US of A. If you’re in the market for a home, whether you’re looking to become a first time homeowner or if you’re planning to move from one place to another, you have to be on top of the mortgage market and the challenges that are involved.
Interest rates on home mortgages have been at record low levels for several years now and that may be about to change. Knowing how to get the best deals when entering into what might well be the biggest single purchase you will ever make becomes a must! You simply don’t want any regrets when you buy and there are some real basics you must know before you commit.
I have purchased four homes myself starting back in the mid 1970’s and as recently as 2007. Although details were a little different each time, the basics of buying a home really haven’t changed at all.
Once you have made a decision on where you want to live and purchase a home, it’s time to start the wheels in motion and secure the financing you will need to make that deal. Unless you’re resourceful enough (or lucky enough) to be able to buy in cash, you will need a loan to make things happen and there are some basic guidelines you need to know. Here are a few simple steps you should follow to make sure that you get the very best deal for yourself.
Steps to Mortgage Shopping and Buying Your New Home
1. Down Payment
The very first thing you need to do is to have some funds of your own which you can use as a deposit to buy a home. Assuming you do, try to get together at least 20% of the expected purchase price so you can avoid what is known as PMI (private mortgage insurance) which will be tacked on to your mortgage payments until you have at least 20% equity in your home.
2. Your Credit
The next thing you need to do is to check your credit score and get a copy of your credit report before you venture out to shop for your mortgage. You can get all of that information for free from numerous sites like WalletHub. You don’t have to fear that checking your own report might lower your ratings. Checking you own score will have no impact on your score and it will give you a good idea of what your chances are to obtain a great mortgage rate. The better your score, the better your rate will be. Examine all items to see if any mistakes appear…correcting errors before you mortgage shop is really important. Don’t just assume all the entries are correct.
3. Credit Checks
Don’t fear multiple credit check inquiries from mortgage lenders when you are shopping. Credit bureaus understand that no matter how many inquiries you have made, you will be only obtaining a single mortgage and will overlook the ones that are not acted upon and not let that lower your score. There is usually a 14-45 day window in this shopping period.
4. Types of Mortgages
There are two types of mortgages to be aware of: conventional and government backed.
- Conventional mortgages (which are the vast majority of all mortgages) are primarily made by thrifts, commercial banks, mortgage companies, and credit unions.
- Government mortgages are made by private lenders but backed by the US government. They have some specific rules attached like that they may not be used for rental purchases and must be owner occupied. Frequently, they are made to first time home buyers or lower income buyers and have more lenient standards attached to them to aid in purchases. If you qualify, you will save money so check out that possibility.
5. Types of Mortgage Rates
Know the difference between fixed and adjustable mortgages.
- Fixed rate mortgages are the “vanilla” mortgages. They come in set years like 30 years or 15 years and have the same mortgage rate fixed for the entire term of the loan. They are best for those who plan to stay in one home for at least 10 years and have a steady predictable prospect of an income. The rate will not increase even if market conditions change and that’s a comfort to the homeowner.
- Adjustable rate mortgages, also known as ARM’s and variable rate mortgages, are very popular when you are not planning a long-term stay of more than 5 years in a location. They are usually offered at lower rates than fixed mortgages, sometimes known as “teaser rates” and are less expensive for the initial term. That’s great, but be aware that when an adjustment is made, you will probably see your monthly payments go up and unless you are planning on refinancing the mortgage at that time, increases can occur more than one time in the life of your loan. By the way, refinancing will also cost you some money so don’t think that this is simple decision just to save money over the first few years of a mortgage. That may be right for you but you must have a good idea of your future needs and plans about your home and its location before committing.
*It’s very important to understand that the lowest interest rate may not be your best deal. There are numerous “extra” costs and fees associated with a mortgage and that can and will determine what your best deal is. See extra costs and negotiations below for details.
6. Shop Around
Just like Smokey Robinson and the Miracles said back in the 60’s, shopping around is the way to go. Don’t assume that the first guy out of the box has the best deal, but get multiple offers before you commit. It’s a great idea to play one against another and make it a competition. In fact, that’s the best way to get the best deal. Far too many people don’t spend enough time in this process, and when you are paying a mortgage over a 30 year period, every fraction of a percentage can mean thousands and thousands of your dollars over that period. Don’t believe me? Check a mortgage calculator online and see what a quarter or half point can mean on your loan over a 30 year period!
Whether you work with a mortgage broker or with a banking institution, remember that they make money on your transaction and are not obligated to give you the best possible deal. If you are feeling confident about the process, you can even obtain a mortgage and its information online. That is a good way to get a lower cost on a loan because of their reduced overhead, but for many it’s not as comfortable as a face-to-face discussion. I have done it both in person and online and it can work either way. Remember though, you must carefully compare and check all the details and it’s why you need to…
7. Get Everything in Writing!
All details and commitments and promises must be in writing or they will have no legal basis. If you don’t understand something ask the question and if you need clarification you may want to seek an attorney who specializes in real estate transactions to protect yourself.
Not to be confused with pre-qualification, some buyers seek out pre-approval from a lender which “proves” to potential sellers that they will be able to get the necessary mortgage. It can also be a good step to finding out how much of a mortgage you can be approved for. But beware, just because a lender is willing to loan you the money doesn’t mean you should spend that much. Only you know what you can truly afford based on your incomes, expenses, debts, earning potential, etc. You don’t want to overspend and end up “house poor”.
9. Extra Costs and Negotiations
There are lots if things to be aware of that can and will affect your mortgage costs. They include:
- Application Fee
- Loan Origination Fee
- Broker Fee
- Appraisal Fees
- Title Search fees
- Check to see if your mortgage includes penalties for prepaying your debt before the end of the term: it shouldn’t!
- Will you need mortgage insurance? Avoid it if you can. (usually needed if you are not making a deposit on your purchase of at least 20%, paid monthly until you reach a 20% equity position on the property)
- Points! Understand what they are and if it is to your advantage or not to “buy down” your mortgage interest rate on a fixed mortgage. You will pay $1,000 fee for every point taken off the rate, but if you stay in your home for 30 years, it may save you tens of thousands of dollars on your total expense. Do the math on a mortgage calculator and see if it is to your benefit.
- Anything else the lender can think to increases your fees!
Always ask what the fee is for and always try to negotiate and ask for a reduction or waiver. If you don’t ask, you will never get a reduction or waiver and if the broker wants a deal bad enough, he will at least compromise a bit. If you have offers from other lenders indicating things like “no application fees” bring it up when you are negotiating. Play one lender against another, it does work.
Finally, when it comes to fees and costs get what is known as a Good Faith Estimate (GFE) that is required by law. This document must be given to you so you see in writing what the mortgage will cost you in total. If you don’t get one, run as fast as you can before you commit to anything.
If you are just beginning the home buying process, take some time to get some advice from your friends and family as to their experiences. And if you have a financial advisor you trust, they may be of help as well. Take the necessary time to dot all the i’s and cross all of the t’s so that your purchase is smart, safe, and satisfying. Home ownership is still the American Dream. It can be scary but with the proper preparation, it’s successfully accomplished by millions every year.
Are you in the market for a new home this spring? Is this your first time? What are your biggest concerns about making this purchase and what have you done to prepare for this big experience?