“Spectacular achievement is always preceded by unspectacular preparation.”
Robert H. Schuller
I have said it before, and I will say it again: Buying a home is a Big Deal! And so is shopping for a home mortgage. In order to help you understand the process better, here are my top mortgage loan shopping tips.
Home Buyer Mortgage Loan Shopping Tips
1. Know your credit worthiness before you shop.
There are numerous free services to help you monitor your credit score and payment history online. Take the time to know your situation before you shop for a lender.
Do you need to repair your credit first? Credit repair takes time. If you don’t push off your purchase in favor of repairing your credit, you may face a costly loan or loan denial.
Debt-to-income ratio is a good marker for credit worthiness. Bankrate suggests that, in most cases, lenders like to see borrowers with a debt-to-income ratio of 36% or less.
Note: During the process of shopping for a mortgage, make sure to avoid changing your credit situation. Applying for car loans, credit cards, or other types of credit can affect your overall credit worthiness.
2. Research different loan types and programs.
There are many loan options available to a home buyer. Make sure to take a look at the benefits and drawbacks of each one. Understanding the differences between FHA, USDA, and conventional financing is a good place to start.
Within each loan type are several programs, each with their own lending guidelines. One example of this is the use of a variable rate vs a fixed rate loan. If you plan on staying in your home for the full loan term, a fixed rate loan is often the best option. But if you plan to move after a few years, a variable rate loan, which generally has lower interests rates at the start of the loan, may be a better option.
3. Know what you can afford.
Even though a lender may approve you for a $500,000 home, that doesn’t mean you will be comfortable paying a mortgage on that amount. You are in control of your finances. Make sure your new loan fits in the budget.
4. Consider your down payment.
It is recommended that you put 20% down on a home to gain an equity position quickly and avoid paying mortgage insurance, but this isn’t always possible. Knowing what you have available for a down payment beforehand can help you choose a mortgage that will fit all your needs.
Some programs, like the FHA, require only 3.5% down, and others require as little as 3%.
Note: When considering your down payment amount, make sure to budget for other fees like insurance, closing costs, appraisal fees, etc.
5. Shop around and compare lenders.
Although interest rates are often a driving factor in selecting your mortgage provider, they are not the only factor. Each lender will have their own fees which may include application fees, lender fees, document preparation fees, appraisal fees, and more.
Remember, you are shopping for a home mortgage not just grabbing the first one you can find. The difference between one lender and another could be thousands upon thousands of dollars.
Note: The Federal Reserve has an easy-to-use free PDF you can print to compare different lenders. Here is their Mortgage Shopping Worksheet.
6. Get pre-approved.
Getting pre-approved will give you more bargaining power with sellers when you make an offer. It is also a great jump start to the home mortgage process once you have selected a home. With a pre-approval, you already know what terms you can expect for your home mortgage. You can adjust your home shopping accordingly.
7. Get advice from reliable sources.
Uncle Bob may have received a great mortgage deal 15 years ago, but does he understand the market today? My biggest advice here is to use vetted online sources to gather your information. One of my favorite sources is the Realtor.com mortgage section.
7½. Check online for lender reviews.
Every lender has had issues, but how they have dealt with them is often reflected in their online reviews. One thing to look for is ease of communication. Do reviews seem to imply that contacting your mortgage lender is easy? Do they answer their phone or email quickly?
When under contract on a home, there is a set number of days to get all the paperwork and details handled. This includes the coordination of several people: you, your mortgage lender, your Realtor, and a few others. I have seen deals fall through and, in extreme cases, earnest money lost due to sub par coordination and communication.
Shopping for a mortgage can be a frustrating process, but it is well worth the effort when all is said and done. Hopefully these mortgage loan shopping tips will help shoulder some of the burden.
Share some of your home mortgage loan shopping tips in the comments.
Disclaimer: As a Realtor and a real estate investor, I have provided these tips based upon my experiences. You should always seek to confirm advice given as it applies to your personal situation. I do not recommend specific lenders or mortgages, I just present common benefits and drawbacks. Ultimately, you need to do the research for your situation.