Effective Shopping for a Mortgage
5 questions to ask when shopping for a mortgage
(BPT) – Buying a home is a major financial commitment. It’s exciting, but can also be confusing and overwhelming. Choosing the best mortgage that fits your needs is an important first step and first-time home buyers in particular should research the many options and know the right questions to ask. Here are some questions to ask a lender when shopping for a mortgage that will help you make an informed mortgage decision:
* How much can I afford? A home affordability calculator can help you get an idea of what you may be able to afford and keep your monthly payments within your budget. In addition to recurring expenses like car payments, student loans, credit cards and disposable income, be sure to consider other monthly expenses related to the new home, like association fees, homeowners’ insurance, utilities and property taxes. Further, some types of mortgages have firm eligibility cutoffs related to the ratio between a buyer’s total debt amounts and their monthly income.
* How much do I need for a down payment? It’s a common misconception that a 20 percent down payment is required to buy a home. Let’s face it, a 20 percent down payment is a lot of money, and often the largest obstacle for home ownership, especially for first-time buyers. You can qualify for a conventional mortgage with as little as 3 percent down. Conventional mortgages originated with a low down payment, which is defined as less than 20 percent, require private mortgage insurance (MI) until approximately 20 percent equity is established through either monthly payments or home price appreciation.
When mortgage insurance cancels, your monthly mortgage bill is reduced. It is important to know that not all forms of MI are created equal – private mortgage insurance is temporary and cancelable but the overwhelming majority of mortgages backed by the government’s Federal Housing Administration (FHA) contain insurance that cannot be canceled.
* What is the interest rate and is it fixed? Most first-time home buyers shopping for a mortgage go with a 30-year fixed-rate mortgage, which locks you into an interest rate with steady, predictable payments. Different lenders may offer different rates, so make sure to contact several lenders to ensure you’re getting the best option available in the market when shopping for a mortgage. A rate lock protects you from rising interest rates while the loan is being processed and lasts for a specific amount of time.
In addition, make sure you know whether the rate is fixed or “adjustable.” Adjustable rate mortgages, commonly referred to as “ARMs,” result in periodic adjustments in the interest rate based on the lender’s cost of credit, and can be detrimental to homeowners in rising interest rate environments. Finally, ask if you are paying for “points” to reduce the interest rate. It’s an added upfront cost paid at closing, but it results in a lower rate for the life of the loan.
* Does my credit score matter? Yes, generally stronger credit scores (FICO 720 and above) come with better interest rates, but fortunately there are mortgage options for those with imperfect credit scores too. When you apply for a mortgage, your credit record is used to help determine your approval and mortgage terms, but it is not the only thing lenders consider. A lender will also look at your debt-to-income (DTI) ratio, cash reserves and other factors to help gauge your overall creditworthiness. Should I get pre-approved for a mortgage? Absolutely yes.
* Should I get pre-approved for a mortgage? Yes. Pre-approval means you receive a conditional commitment from a lender up to a specific loan amount. In a seller’s market with tight housing supply, being pre-approved demonstrates that you are a serious buyer with access to mortgage financing. To become pre-approved, you’ll provide your lender with information on your income, assets, debts and credit history to analyze your financial profile and determine your creditworthiness and amount you can borrow to purchase a home.
Make sure to know your options and choose the one that works for you when shopping for a mortgage. Check out lowdownpaymentfacts.org to learn more.
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10 responses to “Effective Shopping for a Mortgage”
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Gust Lenglet – Platinum Author
I’m getting ready to buy my first home and these questions to ask a lender are very helpful to me. I met with a Realtor to get an idea of home costs in my area and she did recommend that I get pre-approved for a mortgage before we start house hunting. I was surprised that she didn’t mention the other points in your post.
Thanks for your comment, Carolyn, and glad that you found this post helpful.
When my wife and I were looking to buy our first home, debt was a big factor in getting the lowest interest rates. Luckily we didn’t have hardly any debt and were able to get a fantastic rate. Of course our mortgage broker was amazing and helped us all along the way. Thanks for the post.
You’re correct, Charles. Having an experienced broker who helps every step of the way is essential. Also, reducing your debt goes a long way in getting a lower interest rate.
Great info Gust! This is a severely overlooked step in the home buying process, most people put forth more effort going to the grocery store than a mortgage. Being in this business for a long time, it is critical to find a reputable lender that can accurately explain loan programs and find one to best suit the borrowers needs, along with understanding the borrowers full loan profile. A lender is one of the most important if not the most important piece of the puzzle to successfully make it to a closing table as smoothly as possible! Have a wonderful day!
Anyone interested in Florida real estate, I’m your man. Call me at 239-470-0725 or e-mail [email protected]
It’s very reassuring to hear someone in the real estate business agree so strongly with the points mentioned in this post. I have heard some stories about lenders that were not ethical and to steer clear of them. Thanks for your advice Branden.
My husband and I are planning to buy a new home next year, and to get a better interest rate, we plan to work on getting out FICO score higher. In addition to that, we are also going to reduce our debt (student loans) as much as possible. This post helped us to get going in the right direction. Many thanks.
Thanks for your comment Lauren, it’s much appreciated. Also glad to hear that we were able to help.
Our real estate broker insisted that my wife and I get pre-approved before we began looking for a home. As it turned out, it’s a good thing that we did. We found the house that we wanted and submitted an offer but another couple was bidding on it too. I don’t know why, but the other couple didn’t have the pre-approval and the seller accepted our offer the very next morning.
Yes, Ben, having that lender pre-approval letter makes the seller’s decision a no-brainer.