Most first-time homebuyers jump straight into the real estate market by searching high and low for a property they love. And that’s a natural inclination. But before you start comparing neighborhoods, kitchens and man caves, as your real estate professional, I would advise you to first address the most important financial aspect of the homebuying process. And that’s shopping for a mortgage.
Learning a few mortgage basics and becoming familiar with some industry terminology can help you find the best mortgage lender and the type of loan best suited to your circumstances.
Your Credit Is Key
Have you checked your credit score lately? It’s one critical factor mortgage lenders consider when deciding whether to write you a mortgage—and at what rate. Having a low credit score won’t necessarily prevent you from getting a mortgage, but you’re unlikely to be offered the best-case-scenario rates advertised by lenders. Review your credit report carefully. Many credit reports contain credit-killing mistakes but these can be corrected. You can also take steps to increase your credit score, like paying down any high-interest credit card debt you may have. It's often that Debt to Income ratio that often disqualifies buyers for any loans.
Loans come in many shapes and sizes.
So-called “conventional” loans are the most common type of mortgage. Some are fixed-rate and some are variable-rate. Variable-rate loans sometimes offer lower rates and short-term savings at the outset of your mortgage, but those rates are subject to change with market conditions. Typically, with a variable-rate loan, your mortgage rate is reviewed and revised every three years. Right now, mortgage rates are trending downward and have reached near-historic lows. Many experts are recommending locking in a fixed-rate loan as soon as possible since this opportunity to reduce the long-term costs of your mortgage may be fleeting.
Government-backed loans fall into a separate mortgage category. If you are a military veteran or qualifying active service member, a VA loan might be the best choice for you. Unlike conventional loans that have stricter down payment and credit-worthiness requirements, VA loans may make it possible for you to purchase a home with no money down. If your credit score doesn’t meet the threshold set by conventional loans, you can often still get a VA loan. USDA loans offer similar benefits to people who purchase homes in designated rural areas. Most first time homebuyers normally apply for the FHA loan, since the down payment is lower than most conventional loans.
When you take out a mortgage, you can choose how long you want to take to pay off your loan. Thirty-year mortgages are the most popular mortgages by far. But if you can afford the higher monthly payments associated with a 15- or 10-year loan, you can significantly reduce the life-long cost of your loan.
The size of the down payment you make will also affect the cost of your loan over the long-term. If you make a large down payment, you’re borrowing less. That means you’ll pay less in interest for as long as you own your home. In addition, many lenders require you to pay Private Mortgage Insurance (PMI) if you are putting down less than 20% of the purchase. That can add hundreds of dollars to your monthly mortgage payment until you have paid off 80% of the appraised value of your home.
Choosing the right mortgage lender.
You might start looking for a loan by contacting your regular bank. Banks tend to treat existing customers well. That’s one reliable way to build business. But they also tend to have strict credit requirements if you are applying for a conventional loan.
Credit unions tend to be more flexible. Their focus is on serving their members and they may be more inclined to loan to homebuyers whose credit scores aren’t in the upper echelon. They often offer more competitive rates because they aren’t subject to the same corporate income mandates as traditional banks.
Online lending institutions are increasingly popular with today’s home shoppers. They offer a convenient way of comparing mortgage programs. Because they operate with lower overhead, their rates are often among the lowest available. They also offer the advantage of quick turn-around on loan applications, which can be an advantage when you’re in the middle of heated negotiation. But, you will want to make sure that they are licensed to do business in the state that you are planning to buy your home.
You can also try working with a mortgage broker to find a loan. Mortgage brokers act as middle-men between homebuyers and lending institutions. They can simplify the process of getting a mortgage by comparing loan programs for you and submitting applications on your behalf to multiple lenders in short order. It doesn't hurt your credit scores to shop for lenders when deciding to purchase a home.
As your real estate agent, I will probably recommend that you get pre-approved by one or more mortgage lenders before you start seriously shopping for a home. That’s a smart move for a number of reasons. Getting pre-approved involves documenting and submitting quite a bit of personal finance information to a lender. You’re going to have to do this homework eventually to get a mortgage anyway, so why not get it out of the way quickly? By reviewing your finances and credit history, lenders can give you an accurate estimate of how much money you will qualify to borrow. That can help you focus strictly on affordable properties. A pre-approval letter also signals to home sellers that you are a serious buyer who will eventually be able to secure financing. It’s increasingly common for home sellers to require pre-approval from buyers before they’ll even let you in the door. You will definitely need that Pre-Approval Letter to be submitted with any offers that you wish to make too.
Remember, your Texas Realtor can be a valuable counselor as you navigate the ins and outs of the mortgage market. So don’t hesitate to bring your questions—as we know you still have many—to the table next time the two of you sit down to discuss the whole home buying process, and the benefits of owning your own home.
Images via Shutterstock