By now, you’re probably aware that buying a house is a complex process with many moving parts. As such, it shouldn’t surprise you to hear that when it comes to shopping around for the best possible rates and deals, even the most ideal mortgage should be scrutinized.
The following article tackles much of what you need to know when shopping for a mortgage, from preparation to execution.
First Thing’s First: How To Secure A Mortgage
Before you can compare mortgages and ultimately shop for the ideal loan arrangement, you need to be a viable candidate for receiving a mortgage in the first place. Now, we could write an entire article on how to become a model applicant for a housing loan, but there are a handful of basics that any would-be homebuyer should master first.
Mind Your Credit
Chief among them is the most difficult: maintaining a good credit score. As investors, lenders need to wage safer bets (i.e. issue loans to people with good credit) for the sake of their own survival. Naturally, this means that any financial institution worth applying for should check your credit as a first course of action—after all, your credit should tell them most of what they need to know about your financial history and capacity to pay off debt.
Maintaining good credit is a matter of foresight and discipline. The most reliable strategy is simply keeping a forward-looking attitude by paying your bills on time and avoiding debt you can’t handle. Keeping a strict regime over your budget and spending today enables you to improve your budget and spending tomorrow: precisely what you need if you want to own a home.
A good credit score is only as useful as knowing what to do with it, which is why the next set of tips involve how to make the most out of mortgage pre-approval. You can’t get a mortgage without undergoing the basic process of getting pre-approved—that is, being vetted and given a soft approval by the lender you’re consulting.
For one thing, the whole deal is made easier by knowing what documents you need ahead of time and getting them ready at least a week or two before your planned date of application. Be prompt and professional during the process; a good impression counts when applying for a loan, and your potential financiers are looking for as many reasons to distrust your capacity to pay off a debt as then can find. Efficiency and punctuality can win you the benefit of the doubt when their opinions of you are on the fence.
If your credit score is at or a little above average, try and look back at any major financial gaffes you may have encountered in your history. It isn’t unheard of for applicants whose scores beat the cutoff to be denied on account of one or two major dips in their credit —be prepared to account for these with a comprehensive explanation of how the event was a one-off incident, and why it shouldn’t affect their overall impression of your safety as an investment.
The last bit of advice is the most general (though nonetheless important): do what you can to get informed. Beyond the scope of this article, there exists a world of advice and preparatory details that you’d do well to familiarize yourself with. Put in the effort to look, and you’ll find a wealth of comprehensive guides on how to make it through the hunt for a mortgage like a champ.
If you’re ever in doubt, remember that the surest way to get informed is to ask people in the know. Don’t shy away from consulting friends who’ve succeeded in the past, or better yet, specialists who have years of experience in the field. Ignore this piece of advice and you risk missing out on many tips and tricks that apply—things you’d never get if you do all your homework online.
The golden rule of “never be afraid to ask” applies every step of the way: ask about every last detail of the quote or the final arrangement, ask about the processing costs, ask about the interest rate and down payment —make sure you know why and how each part of the loan looks and why they look that way. This is likely the largest debt you’ll ever incur in your lifetime, so make sure to understand it inside and out.
Notable Players In The Mortgage Industry
Knowing what kinds of firms offer mortgages can make all the difference when shopping for the best deal. Likewise, it’s good to know the difference between the two kinds of agents you might encounter when trying to scout for the ideal loan.
Mortgage Bankers vs. Mortgage Brokers
Seeking expert assistance is almost always the right choice when it comes to Mortgages. Odds are you’ll run into one or both of the two types of professionals directly involved in helping you. While both count as ‘loan officers’ under the Bureau of Labor Statistics, there’s a major distinction between a mortgage banker and a mortgage broker.
A mortgage banker the actual lender responsible for funding your loan—while they may offer advice on how to snag an optimal rate, they’re more concerned with making good investments than helping consumers navigate the market. They’re the go-to people to ask for in-depth information about loans from a particular firm, but won’t be quite as helpful in directly comparing local offerings.
On the other hand are mortgage brokers who don’t work for any specific financial institution. You’ll want to ask a broker about finding a lender that’s most likely to work with your given situation.
Opting to find a broker means you’ll be paying for the work of shopping for rates. This can be ideal for buyers who are too busy to scope out a good deal themselves, and are willing to pay for the service of both shopping for a mortgage and handling a significant portion of the paperwork on their behalf. They’re also fairly reliable when it comes to hashing out a reasonable set of expectations regarding what kind of mortgage is available given your credit history and the present market.
Alternately, buyers with more time and confidence can consult with a variety of mortgage bankers themselves. This allows for a greater degree of control over the process, since you won’t be relying on a broker to squeeze out the best quotes and arrangements from your local lenders. Those with the time can save money and practice their negotiation skills firsthand.
A final note on the subject is that some lending institutions offer both lending and brokerage services. It’s important to know which role your contact is assuming, lest you be surprised to find that brokerage fees have snuck themselves into your list of dues when you’ve found a mortgage that satisfies you.
Different Types of Lenders
There are so many types of lenders that it can make people who haven’t already studied the field scratch their heads and leave the whole mess to a broker. Still, it’s a big help to understand how each stands out —and don’t fret, it’s much simpler than some make it seem.
The type of lender most likely to come to mind when you think of a mortgage is the commercial bank. These are your large, national or multinational lending institutions that cater to businesses and private consumers alike. They tend to be one-stop shops for financial services and offer an extensive slate of products. Along with mortgage brokers, large banks have gotten a bad rap in the wake of the 2008 Financial Crisis, but are generally reliable in today’s market thanks to the passage of Housing and Economic Recovery Act and other regulatory reforms.
Savings and loan associations, or thrift banks, are similar to commercial banks but much smaller in terms of size and the set of products offered. They’re designed to cater to private consumers rather than businesses, and offer both higher interest rates on deposit accounts and greater liquidity for mortgage loans, since they have the option to borrow directly from the Federal Home Loan Banks.
If you happen to qualify for membership, a credit union can also be a potential source of financing on a home loan. The concept of a credit union is simple: a community of private individuals pooling their resources and acting as a sort of financial co-operative offering savings, loans, and sometimes even financial services like current accounts and mortgages. Mortgages from credit unions are generally offered at lower rates, and are often accessible to borrowers with less-than-stellar credit scores.
Other non-conventional mortgage lenders deserve consideration as well. The Federal Housing Administration offers mortgages up to a certain limit, and are on the more generous and forgiving side when it comes to things like your credit score and other financial circumstances that would leave banks pointing you to the door.
Its parent agency, the U.S. Department of Housing and Urban Development offers similar arrangements, but mainly for multifamily units.
Finally, among the benefits offered by the Department of Veteran Affairs is a partial guarantee on private housing loans, allowing lenders to offer more appealing deals.
Shopping For A Mortgage
For the remainder of this article, it will be assumed that you’re familiar with the basics of securing a mortgage (hyperlink to Getting Pre-Approved for a Home). We’ll be alluding to some of the various players and steps involved that weren’t touched upon in the previous section, so keep a search engine handy.
Having said that, shopping for a loan isn’t all that difficult to understand when you boil it down to general terms. You want to scan the market for a broad range of offers, compare the size of the offers (i.e. how much money each firm is willing to lend you), compare interest rates, compare the salient terms of the deal, and compare the associated costs you’ll be expected to shoulder along the way.
Looking for Offers
Searching your local listings for institutions that offer mortgages is the easiest part of the job. It’s easier still given the fact that almost everything you ever wanted to know can be found online. In fact, if you’ve decided to enter into a contract with a mortgage broker, then this step essentially completes itself.
You can start by casting a wide net, or by asking friends and family about their experiences with their own mortgages and doing your own digging into the lenders that serviced them. However you choose to go about it, it’s good to keep in mind the different kinds of lenders mentioned above, and see what options are available to you beyond the most obvious ones.
Negotiating Your Offers
Lenders are generally open to negotiating a fair portion of the loan, provided you have strong enough leverage (i.e. solid credit and a stable financial situation).
Interest rates and lender fees can and should be talked down. Make sure you know what constitutes a fair but favorable set of terms, and come in strong—show them you know what to expect, regardless of whether or not you’ve already pulled a mortgage in the past. You can apply the same tactic to your title insurance, but know that it can end up protecting you as much as it protects your lender.
Comparing Loan Amounts
Depending on their appetite for risk, different lenders will offer you principal loan amounts of varying sizes. Shopping around allows you to get a sense of their risk-aversion, and a set of quotes that will serve as your price range when purchasing a home.
When comparing loan sizes, bigger isn’t always better. In fact, the quality of your options is best pegged to the price of the home you have in mind, or the average rate of a home that suits your needs. It’s also important to note your plans for a down payment, or how much equity you intend to have upon closing.
Comparing Real Costs
Understanding how much you’ll have paid by the end of your loan is more complicated than simply multiplying the principal amount by 1 plus your interest rate. A better metric would be your APR, or annual percentage rate, which factors in most of the salient factors that affect how much you’ll be parting with each year until you’re all paid off. Two loans of the same amount and with the same interest rate can have different additional costs in the forms of closing costs, mortgage insurance, origination fees, and the like.
The Truth in Lending Act has it such that lenders are required to disclose the APR along with interest rates and other costs in order to save consumers the trouble of doing the math themselves. It’s a good point of comparison for simple loan models (i.e. a fixed monthly interest scheme), but doesn’t factor in compounding or the kinds of fluctuations that occur with adjustable-rate mortgages (ARMs).
In the event that you have to compare the costs of ARMs, make sure you’re aware of how you should expect your rate and payments to change over time. This and refinancing are issues that you should be familiar with moving forward, however they’re complex to the point that they fall out of the scope of this article. You might be best off looking for third party help in the form of an expert or consultant.
Finally, make sure you’re aware of each fee being heaped onto the loan, and whether or not any of them are optional. Naturally, the fewer added costs to your loan, the better. And while lenders conventionally handle a number of logistics-heavy requirements such as title searches and hiring appraisers, there’s a chance that some would be amenable to letting you shoulder the burden by hiring specialists of your own—though we admit the chances of this are rather slim.
Comparing Loan Terms
The last major point for comparison would be to compare the terms of the loan.
Depending on your financial priorities, you may prefer loans which run for longer periods of time than shorter, or vice versa.
Other terms can be categorically better or worse, such as the lack of prepayment penalties which charge you for making loan payments earlier than the scheduled date, down payments that are better suited for your financial capability and equity needs, and a later deadline for rate locking (basically, locking in the particulars of your rate while settling the mortgage commitment) so as to give you more time to weigh out your needs and negotiate accordingly.
Setting Your Priorities
How you value each aspect of a loan offer depends entirely on you, and there’s no universally applicable hierarchy for them.
Make sure you spend a sufficient amount of time considering your financial priorities. Talk to an adviser if necessary, but come the time to pick through your offers, you should have a clear idea how you feel about:
- The amount of financing you need
- The monthly rate you’re comfortable paying
- The level of flexibility and adaptability you want for your loan
- How long you want to spend paying off the debt
- The amount of time you’ll need to spend evaluating and negotiating each offer before locking in
Settling a mortgage commitment is as much an exercise in self-awareness and honest introspection as it is negotiation and number-crunching. Be smart and prudent in gauging what you can handle, and you’ll be in a much better position than the majority of loan applicants out there.