When you embark on the search for a new home, you may think you know the steps to take: read the listings, visit some open houses, sign on with a realtor, make an offer. In fact, there’s a biggie missing from that list — a step as important financially as the house you decide to buy itself: get a mortgage.
It’s widely understood that most houses and apartments are purchased using mortgage loans, which the Consumer Financial Protection Bureau defines as “an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest.” Sounds serious — and it is. Mortgages come with a wide variety of lengths (called the term), repayment provisions and interest rates. Locking in the one that’s best for you means getting something of an education. Especially if you are a first time home buyer, it pays to learn the ins-and-outs of mortgage financing so you’ll know what to expect.
Before you even start to look for a mortgage, you’ll want to understand how they work. The most common type of mortgage is what’s called a 30-year fixed rate loan. As it sounds, you have three decades to pay the money back with the rate of interest that you lock in initially fixed for the entire time. You’ll also see 15-year and sometimes 10-year fixed rate loans. These require you to pay off the home in a shorter period of time, but because the financial institution is lending the money for a shorter term, the risk you won’t repay the money is lower. That’s the reason interest rates on shorter-term loans are lower than those on longer-term ones.
Qualify For the Best Rate on a Mortgage
Getting the best rate on a mortgage involves two things: shopping around (there are often significant interest rate differences among lenders) and your own credit. Before you begin shopping for a house, do your own homework to determine your creditworthiness and prepare for a conversation with a lender.
First, gather tax returns, pay stubs and other paperwork that documents your income for the past two years. You’ll also need documentation of liquid assets, cash on hand, as well as credit history and your current income. That may include credit union, bank, and investment account statements. If you’re not familiar with your credit rating, request a free copy of your credit reports from the three major credit bureaus, Equifax, Experian and TransUnion and pull a free copy of your credit score. If you find an error on your credit report, file an error report with the bureau in question on the bureau’s website. They typically have a month or two to correct it. You can also do this by logging into your Town & Country online banking account and visiting Credit Score by SavvyMoney.
What Lenders Look For
As you gather information, keep in mind what mortgage lenders are looking for from you when considering making a loan. Here are a few things to keep in mind.
- A credit score of at least 660. (Some lenders accept scores as low as 620.)
- An explanation of any late payments in the past two years.
- Credit card balances at or less than 30 percent of the credit limit.
- A two-year work history and income.
- A history with financial institutions such as credit unions, and collateral such as checking and savings accounts, investment accounts, retirement accounts, life insurance policies and automobiles.
- A debt-to-income ratio of 30 percent for housing and 43 percent total.
- A down payment as low as 3 percent, depending on credit score.
Better yet, sit down with a loan officer at Town & Country and talk through your specific situation. We may or may not be the lender you go with in the end, but it’s a terrific first step and we will help you get an education (and credit unions are often very competitive when it comes to interest rates.)
Get Pre-qualified (Then Pre-approved) for a Mortgage
When you’ve found a lender with whom you feel comfortable, it’s a good idea to get prequalified before you start shopping. Pre-qualification involves discussing the various loan program requirements and determining whether you will have the minimum down payment, employment and income history, credit history and payment reserves.
A lender shouldn’t have to check your credit to pre-qualify you for a loan. In most cases, an underwriter (the loan professional who determines whether you qualify for a certain loan) will review the file and issue a conditional loan approval. The formal pre-approval process is the next step, where your loan application and credit report are submitted for review, along with income and asset documentation.
Understand the Real Costs
Once you’ve made an offer for a home and it’s been accepted, you can move on to scheduling a closing date. Just keep in mind there are costs there as well. By law, all lenders must provide a good faith estimate of closing costs, but that list doesn’t include all the charges you’ll face. For instance, the title company, which researches the title or deed to the home to ensure that no one else has rights to it, will determine its own fees (for “title insurance”) as will the home inspector, and a homeowners’ association if applicable.
Don’t Make Big Changes Before Closing
If you’ve gone through a loan pre-approval process, don’t make any big changes – like switching jobs – until after your loan is closed. If you do, all the employment and salary data that your loan was based on is no longer accurate and you may no longer be approved.
And finally, if you don’t qualify for a home loan right away, don’t panic. There are things you can do to move the needle on your credit score. It won’t happen overnight, but with hard work and diligence in paying your bills on time, every time, it can happen.
If you feel the time is right to purchase a home and have questions about a mortgage, contact Town & Country’s Mortgage Team here to learn more.