Susan Doktor https://money.com 5m 1,186
The views of this article are the perspective of the author and may not be reflective of Confessions of the Professions.
Whether you’re a first-time homebuyer, a young family that’s outgrown your first home, or an empty nester who has decided it’s time to downsize, there’s a best mortgage deal out there for you. But “best” doesn’t always mean the same thing. How much cash do you have for a down payment? How’s your credit rating? What’s the purchase price of the home you’re buying? Your answers to these questions and more will determine what kind of mortgage makes the most sense for you. Fortunately, the mortgage market offers a panoply of choices—so many that some homebuyers are left confused. So we’re offering a list of five tips to make mortgage shopping simple and help you hone in on the right mortgage and mortgage lender for you.
Tip One: Take a Look in the Financial Mirror
You’ve probably been in more than one frustrating situation when you’ve wanted to declare, “I’m a person, not a number!” Shopping for a mortgage may turn out to be one more, I’m afraid. Mortgage lenders do a series of numerical calculations when deciding whether to offer you a loan and at what interest rate. That process is called risk assessment. You can’t avoid it—it’s how banks and other lending institutions stay in business. So it’s best to understand what factors lenders take into account when figuring out how safe it is to offer you a mortgage.
First things first. Your credit score figures mightily in the calculous. Have you taken a look at yours lately? Ideally, you will have downloaded a free copy of your credit report before beginning to house-hunt. That’s because, if you need to do a little credit repair, it will take a few months to make progress in boosting it. Bringing all your accounts up to date, even if you can only make the minimum payment due, will help boost your score. So will closing credit accounts you don’t use.
Lenders also look at your debt-to-income ratio when making their assessment of your creditworthiness. So do what you can to bring down your total debt before applying for a loan. Landing a new high-paying job would accomplish the same thing, of course.
Finally, consider the size of your down payment. If you put down a large down payment, that changes the loan-to-value ratio on your mortgage. The more you put down on your home, the less “risky” it’s considered by lenders.
Tip Two: Consult Several Types of Lender
You may be surprised by how many kinds of lenders there are out there. Your local bank, where you might keep your checking account, likely offers home loans and may show you some extra consideration for being a loyal customer. Most credit unions offer mortgages to their members, too. Mortgage brokers work with a variety of lenders and may be able to find you a mortgage solution. Online lenders have proliferated in recent years and typically offer greater convenience and may speed up the application, preapproval, and approval stages of the mortgage process for you. But the point is to shop around. Just make sure the lenders you speak with will not make a hard credit inquiry on you before you actually apply for a loan. Each hard credit inquiry has the potential to lower your credit score.
Tip Three: See What the Government Can Do for You
For qualified borrowers, government-backed loans are often the most economical mortgage choice. Federal, state, and even local communities may offer cost-effective mortgage solutions. The foremost of these opportunities include VA loans which provide a wide variety of benefits for veterans, active service members, and, in some cases, military spouses. While these loans are administered by lenders, they’re guaranteed by the federal government, so they’re viewed by lenders as lower-risk. That means they usually come with comparatively lower interest rates, more lenient credit qualifications, and more down payment options than private mortgages. In fact, many eligible homebuyers elect to take advantage of the no-down-payment option that VA loans offer.
The US Department of Agriculture originally conceived its own loan program to encourage development in rural areas and allow low- to moderate-income borrowers to purchase a home. But today, more than 90% of properties in the US are located in USDA-eligible areas. USDA loans also offer comparatively low interest rates and a no-down payment option for borrowers who fall within the eligible income bracket.
If you (or your property) don’t qualify for a VA or USDA loan, you may want to look into FHA loans, which are also government-guaranteed. If you’re a first-time homebuyer, don’t have a lot of cash to use for a down payment, or if your debt-to-income ratio is out of whack by conventional loan standards, FHA loans may help put homeownership within your reach.
You can also reach out to your city councilperson to find out whether there are community revitalization programs in your neighborhood that can make your home purchase more affordable.
Tip Four: Set Realistic Expectations for Yourself
The last thing you want, particularly in today’s competitive market, is to be slowed down by being turned down for a loan. So make an accurate assessment of how large a loan you’ll be able to get before you start shopping for a house. Most lenders offer a prequalification service: a non-binding estimate of how much you’ll be able to borrow and at what interest rate. That’s a good yardstick to use to narrow your home choices to only those you can afford. You can also get a rough idea by using a home affordability calculator. But many home sellers will only entertain offers from buyers who have officially prequalified with a lender. They don’t want to waste time, either.
Tip Five: Think Long-Term
Even if you only plan to stay in your home for a few years, it’s important to assess your mortgage choices with an eye toward the future. While adjustable-rate loans often come with lower interest rates initially, that rate is subject to change in a few years. With interest rates near record loans right now, it may make sense to lock in a low rate with a fixed-rate mortgage. Experts predict interest rates will rise in the near future, so you may want to choose predictability over saving a few dollars every month. Look beyond your monthly mortgage payment and consider the lifetime cost of your loan. Remember that choosing a longer loan term will result in paying more interest over the years. So will making a small or no down payment. That’s all stuff you want to figure out before committing to a home and a mortgage. An experienced mortgage professional will be happy you through your options in detail and can help you zero in on the best solution for you.
About the Author
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of subjects, including personal finance, real estate, and government affairs.