Are you ready to buy your own home? That may sound like a bit of a weird question; however, many homebuyers are just not prepared when it comes to buying their first or a new home.
On the surface, it may seem that taking out a mortgage is going to be easy. Often, the opposite is true. There are many people out there who are poorly prepared when it comes to taking out a loan. It's essential to understand that getting ready to procure financing is a process, and an important one at that.
Choosing an exceptional mortgage lender is crucial to making the home-buying process go smoothly. Remember, like any other industry, there are going to be those you immediately recognize as professionals and others you might have your doubts about. Make sure you don't pick the latter. Here are some things to keep in mind when choosing a lender:
Your Credit Score Matters
The mortgage lending process starts way before you even step into the bank. You first need to make sure that your credit score is in great shape. That doesn't happen overnight, and it's better to be safe than sorry. Before you even begin looking around for your first home, you should check your credit score.
Consider it good financial housekeeping to know your credit score. You can check it once a year for free with leading credit agencies such as Experian, Equifax and TransUnion. Make sure your credit report is correct and doesn't contain any errors. You should also have an understanding of the reasons a credit score can drop.
All mortgage lenders will check your credit score to qualify you for a mortgage. An outstanding credit score will help you get the lowest interest rate and other important mortgage terms.
What Kind of Organization Is Going to Lend You the Money?
The mortgage lending business forms a significant sector of the financial industry. Today, you can obtain loans from a variety of sources. If you have a good working relationship with your bank, you certainly want to talk to them first—but, don't jump the gun. This is all about getting the right deal for you, and making sure your mortgage costs you as little as possible in the long run.
Apart from your bank, check other financial institutions such as credit unions, mortgage banks, savings and loans, and correspondent lenders. Also, don't forget to check out mutual savings banks—many of them offer excellent rates for well-qualified borrowers.
Get Pre-Approved Before You Start Looking For a Home
Getting pre-approved is something that anyone looking to obtain a mortgage from a lender should do. Lending organizations love documentation, so be prepared to show them everything in writing when the time comes.
Here's a top tip: You don't want them pulling your credit report too often. Too many lenders pulling your credit report can affect your credit score—it's as simple as that. Once you've found the deal that's right for you, then it's okay for a mortgage lender to pull your report.
It's best to supply your copy during the pre-approval process; however, some lenders may insist on your credit report being pulled again.
Other required paperwork includes:
- All financial information, like savings and pensions
- Social Security number
- Any outstanding debts, such as car loans and credit card balances
- Salary and the name of your employer
- At least two years of tax returns
You also need to inform a potential lender of the funds you have available as a down payment. Here are a few more things to keep in mind:
- A pre-approval is not the same as a pre-qualification letter. You need to make sure the lender is verifying your income and employment along with checking your credit history. If the lender doesn't do these things and hands you a pre-qualification letter, it's worthless. Top agents will insist on a pre-approval.
- If you're getting a conventional mortgage and are making less than a 20 percent down payment, you'll be paying what's known as private mortgage insurance. PMI is a type of insurance the lender charges you that provides them with some protection in the event you default on the loan.
Research the Rates From Several Lenders
It's vital that you check out the rates from multiple lenders. You can use online mortgage calculators to help you make the right choice. Creating your own record is a good idea, and the best way to do so is to create an online spreadsheet.
Check both interest rates and the final amount you'll end up paying to your mortgage lender. What would happen if you were to make more substantial payments than just the customarily charged amount? Would that save you money in the long run?
Many borrowers would love to take out a 15-year mortgage rather than the more typical 30-year mortgage. For many, though, that's impossible because they don't qualify. The alternative is to either make larger monthly payments or to make one extra payment a year. Doing so will help you pay off your mortgage quicker
It's advisable to speak with a financial advisor to see if making extra payments makes sense for you or would you be better off investing the money elsewhere.
Read the Contract Before You Sign
Your mortgage agreement with your lender is a contract, and you should never lose sight of that. Many lenders include additional fees such as commission, appraisal and loan applications fees. Be sure to include these and others that you may come across in your spreadsheet.
The costs of a mortgage can quickly add up, and you need to stay on top of them. Explore all options and never feel embarrassed to ask questions of your lender. That's the only way you're going to find out the true cost of your mortgage.
Never become enamored with a low interest rate if all the other terms make the loan more expensive in the end. The best mortgage reps never take advantage of their clients for their own financial gain. If you have already started working with an agent, use them as a resource for picking a lender!
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell Metrowest Massachusetts real estate for the past 32-plus years. He has been one of the top RE/MAX REALTORS® in New England for the past decade. In 2018, he was the No. 1 RE/MAX real estate agent in Massachusetts.