How to Choose Mortgage Financing
Purchasing a new home is a big commitment and, in many instances, the largest investment you will make. Because you will be tied to a large loan for a long period of time, it is important that you do your research to make sure you have the best possible loan for you and your lifestyle. In this course, you will learn about eight critical tips you should consider when shopping for a mortgage loan.
Tip #1: Know Your Credit Report and FICO Scores Prior to Applying for a Mortgage Loan
Before you even think about buying a new home, you should make sure you know what’s on your credit report as well as your FICO scores. In fact, approximately 75 percent of all mortgage lending decisions are based on your FICO score.
A FICO score is a credit score developed by Fair Isaac & Co., and is a method of determining the likelihood that someone will pay their bills. These scores are calculated using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. There are three bureaus that transmit a FICO score: Experian, Trans Union and Equifax. Some lenders use only one of the scores, while others use only the middle score. It is recommended that you take a look at your credit report at least six months prior to applying for a home loan because if there are problems, you can make the adjustments within that period of time. You can also see the issues that may be affecting your score negatively and do something to change them (e.g., paying off a credit card, paying off an overdue bill, etc.).
Tip #2: Look for First-Time Buyer Programs (If applicable)
If you are a first-time home buyer, it is in your best interest to check out the first-time buyer programs available in the market. In many instances, these programs are sponsored by the state or government, and usually offer better rates and terms than other available mortgage loans for which first-time buyers would qualify. Some are specifically designed for individuals with damaged or little credit, while most can assist people who have only saved a small down payment for the loan.
Tip #3: Get Pre-Approved for a Loan
It is important that you get pre-approved for a loan, not just pre-qualified; many get these confused with one another. Getting pre-approved for a loan requires you to actually apply for the loan, providing tax returns, pay stubs and other critical information. The lender then agrees, in writing, to give you the loan. When you pre-qualify for a loan, the lender lets you know what you can most likely be approved for based on your income, amount of debt and down payment.
If you are pre-approved for a loan, you will have the advantage over someone who is pre-qualified in the market because you are a “for sure” deal.
Tip #4: Borrow Only What You Can Afford
Many people make the mistake of borrowing as much money as they can get from a lender, not necessarily what they can afford. In some instances, people will borrow the largest amount they can, thinking that their incomes will increase over time, making the loan payment more reasonable for them in the future. Do not think this way!
If you are maxed out making a mortgage loan payment, what will you do when something needs to be fixed in your home? Or, if something happens to another large item, like your vehicle? What about property taxes, homeowners’ insurance, HOA fees and utility costs?
Many experts recommend keeping your mortgage payments (including taxes and insurance costs) to approximately 25 percent of your gross income. You need to make sure you borrow what you can comfortably afford so you can "live" in your home, not just "exist" in your home.
Tip #5: Shop Around for Rates and Terms
Too many people with good credit are sold on mortgage loans that are designed for individuals with poor credit, or “subprime” loans, because they are more profitable loans than conventional ones. Be sure to shop around for the best rates and terms available for a person with your credit score. To find out what the market rates are for your FICO score, you can go to www.myfico.com.
Additionally, if you have a good FICO score and credit history, and you are a first-time home buyer, you may want to steer clear of government-based programs (e.g., FHA loans) because you will probably pay more than something you can find in the private sector.
Tip #6: Don't Pay Useless Fees
Many mortgage lenders will add fees to the mortgage loan process that are not necessary. For example, some mortgage lenders will charge you a document preparation fee of $150, when in actuality the computer creates the forms, not the lender. Or, they may charge you $150 for a credit check, which may only cost them $15.
Shop around and ask about the points charged on a loan (or 1% of the loan amount) and other fees charged by different lenders. Make sure you understand why the fee is being charged. Don’t just write a check at closing for fees you really shouldn’t be charged.
Tip #7: Plan to Pay Closing Costs
The day you get your loan, or the day your loan “closes,” you will be asked to pay several different fees, such as attorney’s fees, taxes, title insurance fees, homeowner’s prepaid insurance fees, points and other lender fees. All of these “closing costs” should not be more than 2%-7% of the selling price of your home. Again, make sure you know this amount (at least an estimated amount) prior to closing on any type of mortgage loan; you do not want to be surprised at closing.
Tip #8: Keep Cash On Hand After Closing
In most instances, after you close on your home, you will have to pay for things you did not anticipate. It is recommended to keep a fund equal to three months’ worth of expenses to draw from when needed.
Buying a home is not something that will happen overnight. Take your time and do your homework. You have the power to find the best possible mortgage loan for your specific needs. Remember, this is an expense you will be paying for many years. Do it right the first time.