Don’t Make These Mortgage Mistakes
For most buyers, the mortgage is the largest monthly expense they will have. Yet most borrowers do little to prepare themselves to get the best mortgage rates. Don’t make the same mistakes. Here’s some quick shorthand of what you’ll need to know.
One of the biggest challenges for homebuyers is coming up with enough of a down payment to get the home they want at the best mortgage rate. Housing loans are available with as little as zero down through the Veterans Administration for veterans and active-duty military. The Federal Housing Authority guarantees programs as low as 3.5 percent down for qualifying borrowers who buy within maximum loan limits, between $356,362– $822,375. Ceilings vary by counties and their cost of living.
Borrowers with less than perfect credit can get loans, as well. Credit scores are derived from credit reports; they help qualify borrowers for better rates. For example, if a buyer has a credit score of 720 or better, they can qualify for a good mortgage rate, but poor credit scores, less than 620, will deny the borrower a good rate.
The rule of thumb is simple – if you put less money down, you’ll need a higher credit score to get a great rate on a loan. Lenders can offer different rates according to the risk ratios they consider. The credit score will tell how much money you’ll be required as a down payment, and it’s a factor in your interest rate. If you put 20 percent down, you can get a loan even if you have a low credit score of 580 or 620. If you have a 740 or 760 score, the lender will happily go with less money down.
A down payment is simply your way of showing the lender that you are willing to risk your own money to buy the home you want. The larger the down payment, the more likely the lender is to make the loan at a better rate. It also matters where the down-payment money is coming from. Lenders expect first-time buyers to get help from family to buy a home, so there may be limits to the size or percentage of any gift that the lender will allow. Down payment assistance can also come from grants, which you can find through your local housing authority.
Besides not being prepared with your credit and down payment requirements, here are other mistakes that can cost you:
Not getting prequalified. You have to know exactly what you can spend before you begin shopping for a home. Your lender will qualify you at the beginning of the transaction, and then run your credit again a day or two before you’re supposed to close on the home and loan. If there’s been any change in your debt-to-income ratio, your rates will go up.
Not comparing lenders. Loan officers work for their own banks. A mortgage broker can prequalify you just like a loan officer and shop your deal around to various lenders. Whether you choose a bank loan officer or a mortgage broker, you’ll share your personal financial information in order to get a rate. Compare lenders and their offers at the same time to get the best rate.
Not paying attention to terms. When you get your good faith estimate, ask the reason for each fee. For example, a loan origination fee is paid to the loan officer or the broker. One lender may charge more for an appraisal or for pulling your credit than another lender might charge. Keep this in mind - all fees are negotiable.
Waiting for a better rate. It’s great to have bragging rights aton a low rate, but you don’t want to lose the home of your dreams over a quarter of a point in interest. Instead of focusing so hard on the percentage rate, make one extra payment a year. Today, rates are near all-time lows so if rates go up a bit, you’re still way below long-term averages.
Choosing the wrong type of loan. Current market conditions favor fixed rates, because rates are near all-time lows. Yes, they cost more than hybrid loans or adjustable rate loans, but the base amount is fixed and doesn’t change. Only your taxes and hazard insurance will cost you more over the years to come. If you get an adjustable rate mortgage, you’re at the mercy of market conditions. While there’s a cap on how high your interest rate can go, it’s still a risk.
Don’t assume that you know everything you need to know. Talk to several lenders and ask them to explain their loan programs and which types of loans you’d best qualify for. Ask them to explain the risks and benefits of the types of loans available.
The best deal for you is a mortgage loan that gets you the home you want at an affordable rate.