Must-Know Tips and Tricks for When You’re Shopping For a Mortgage
Purchasing a home, for most people, is the single biggest, most expensive purchase of your lifetime. If you’re a first-time home buyer, it may feel especially daunting — and confusing — as you try to figure out how to get the best mortgage that fits within your budget.
Finding the right one takes time, research and patience. The more prepared you are in advance, the smoother the process will go. Here are some tips and tricks to help you shop for your mortgage with the best chances of finding the right mortgage for you and your family.
Know the Costs
When it comes to buying a home, there are several costs you will likely pay beyond your down payment and your monthly mortgage payment. “Ask what fees your lender charges. These costs add up and are part of the hidden costs of doing a mortgage,” said Gene King, director of communications and PR for Wyndham Capital Mortgage.
There are also closing costs, transaction costs and, potentially, costs charged by the title company, said Bill Samuel, a residential real estate broker and investor in Chicago and founder of Blue Ladder Development. “Get in contact with a mortgage broker and have them provide you with an estimate of how much closing costs you will have to pay for a house. Once you know how much of your cash will go toward paying closing costs, you will know how much of a down payment you are able to come up with.”
Know What You Can Afford and Pre-Qualify
Before you set out house-hunting, it’s important to pre-qualify for a mortgage, said Andrina Valdes, COO of Cornerstone Home Lending Inc. “This is essentially no longer optional in today’s hot market and it will help to show a seller you’re serious.” Even if you are not sure you can afford a home, Valdes recommends you meet with a loan officer anyway. “They may be able to enlighten you on first-time-buyer-friendly mortgage programs with flexible credit requirements, as well as options for down payment assistance.”
However, note that pre-qualified does not mean preapproved. Think of pre-qualification as an estimate based on general information you provide to the lender. Preapproval only happens after the lender verifies your information with hard data, such as debt, income and assets, according to Investopedia.
Another helpful exercise to make sure you can afford your mortgage payment, according to R.J. Weiss, a certified financial planner and founder of the personal finance site The Ways to Wealth, is to insert your payment into a hypothetical 50/30/20 budget — “where 50% of your after-tax income goes to needs, 30% toward wants and 20% toward savings.” Ideally, your mortgage payment should fit alongside other needs into that 50% bracket.
“It’s in the hard work of understanding trade-offs where mortgage shoppers can find an adequate budget they’re going to be happy with long-term,” Weiss said.
Prepare the Paperwork
Save time in getting your mortgage rolling by preparing all the paperwork and information your lender will need at the beginning of the process, said Jeff Johnson, a real estate agent and owner of Simple Homebuyers.
“Most lenders expect you to bring along your pay from recent months, your tax returns from the past year and bank statements of a few months. Some may also ask for credit card and loan statements, and proof of your assets such as retirement funds and other investments.”
Additionally, understand how long closing may take in the current market. According to Valdes, “In today’s highly competitive housing market, time to close for all loans currently sits at 51 days.” Lenders who do their processing in-house minimize delays.
Assess the Loan Risks and Benefits
A common mistake of potential homeowners is to accept the first loan offered, said Eden Cheng, founder of WeInvoice, a software company.
“They don’t realize that they may be able to get a better offer elsewhere. On any given day, different lenders and brokers can offer varying interest rates and fees for the same type of loan, even when those applying have the same qualifications,” Cheng said. So, take your time going through your options and narrow them down to the ones with the most affordable interest rates.
Additionally, other factors may help you lower your rate, and potentially your monthly payment, said Valdes. “Improving your credit score, increasing your down payment amount, paying down debt to reduce your debt-to-income ratio and using a rate lock to lock in today’s rate for up to nine months.”
Look Into First-Time Homebuyer Programs
If you are a first-time homebuyer, there are numerous programs you can look into, Samuel said. Such programs include VA loans for veterans, HUD Dollar Homes, USDA loans, the Home Possible program and the FHA Loan.
“Some of these loan programs will allow you to purchase a home with a very small down payment. However, you want to be sure that you are financially fit before looking to purchase a home and have at least six months — ideally 12 — of living expenses saved up.”
According to Matt Bigach, a real estate expert and co-founder at Nexus Homebuyers, you can shop for a mortgage rate or you can shop for fees, but you can’t do both. It’s like solving for two variables at once.
The best way to comparison shop for the best mortgage rate, he says, is to ask different lenders what fees it would take to get access to the rate you want. “The lender that gives you the fewest fees is your lender.”
Don’t try to obtain a mortgage without clarity and research, the experts agree. Shop around for brokers and lenders until you feel you’re happy with the options.
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Last updated: May 26, 2021