Sun. May 19th, 2024

While approximately one-third of homebuyers in the US purchase a home with cash, most people need a mortgage loan to purchase a home. For many, the process seems daunting.

After all, it’s not just about getting a mortgage — it’s about getting the right one.

The good news is that there are some things you can do before you apply for a loan, that can make the process a bit easier.

If you’re thinking about buying a home and need a mortgage, here are seven tips for finding your best mortgage loan.

Know How Much House You Can Afford

Just because a lender pre-approves you for a million-dollar mortgage doesn’t mean you should buy a million-dollar home.

For most homebuyers, pre-qualification is the first step in obtaining home financing. During this process, the lender will consider your credit score, annual income, outstanding debts, and other factors to determine the maximum amount they will lend you. In many cases, your pre-approval amount may be much higher than you intend to spend.

Before you apply for prequalification, determine how much you think you can comfortably put towards a mortgage payment every month. Even if you’re pre-approved for double that amount, continue shopping for homes in the price range that you’re comfortable with, even if it’s far less than the lender is willing to give you.

Check Your Credit Score

The higher your credit score, the better your rates will be. People with lower credit scores usually pay higher interest rates because lenders view them as riskier.

Run a credit report to check your score before you apply. Most conventional loan lenders require a minimum credit score of 620. If your score is below 620, take measures to increase it as much as possible before applying for a loan. 

Learn Some Mortgage Lingo

It will serve you well to learn common mortgage terminology, such as:

● Adjustable rate mortgage

● PMI (private mortgage insurance)

● Loan-to-value ratio

● Debt-to-income ratio

● Earnest money

If you’ve never bought a home before, you’ll quickly learn that lenders and brokers will throw a lot of terms at you that you may not be familiar with. Learn the definitions of these key terms (and many more) from the Consumer Financial Protection Bureau, and the mortgage process can be much easier.

Explore Your Options

There are a variety of different types of mortgage loans. The most common types are conventional loans (offered by private lenders) and FHA loans (federally insured loans backed by the Federal Housing Administration).

But there are several other types of mortgages you may want to explore, especially if you haven’t saved enough money to make the 20% down payment that conventional loans require.

For example, if you are a low-to-moderate income borrower looking to purchase a home in a rural area, you might qualify for a USDA loan. USDA loans have relaxed credit requirements and don’t require a down payment or require you to pay PMI.

Even high-income earners, such as doctors, nurses, and pharmacists, can find loans that require low or zero down payments without having to pay PMI. 

The “physician mortgage” is a great opportunity for healthcare professionals who haven’t saved for a down payment or have high amounts of student loan debt from med school. Read this article to learn more about the benefits of doctor loan programs. 

Save Money for Closing Costs

Even with a zero down payment mortgage, you’ll still have to pay closing costs on your home. Closing costs typically range from about 3% to 6% of your loan amount, so be sure you have this money set aside beforehand.

“Closing costs” refer to a long list of fees that you’ll have to pay at different stages throughout the home buying process, such as:

● Appraisal fees

● Title fees

● Transfer taxes

● Origination fees

● Survey fees

● Recording fees 

You should also budget for the added expenses of home inspection fees, pest inspection fees, and legal fees (if you buy a home in a state that requires you to hire a real estate attorney to handle closing transactions).  

Compare Fees and Terms

It’s always best to obtain quotes from more than one lender so you can compare the fees, terms, interest rates, and other details.

Pay special attention to fees, including the ones we listed above that factor into closing costs. These can vary from lender to lender and while they may seem small in comparison to the home price, they can add up quickly.

Look for other loan terms that may differ as well, such as whether a lender charges prepayment penalties for paying off your mortgage early.

Compare Rates

Interest rates are a significant factor in how much you’ll ultimately end up paying for your home over the duration of your mortgage. When comparing interest rates, make sure you’re comparing apples to apples.

For example, don’t compare one lender’s rate on a 30-year loan to another lender’s rate on a 15-year loan. 30-year terms generally have higher rates than loans with terms of 15 or 20 years.

Also, consider whether the rate is fixed or adjustable. With a fixed rate mortgage, your interest rate will remain the same throughout the life of the loan. With an adjustable rate mortgage (ARM), your rates will fluctuate. They usually start out low and increase over time.

In Conclusion

Getting a mortgage might seem complicated, but it can be easier than you may think. If you identify the type of mortgage that’s best for you, understand the fees you’ll have to pay and how interest rates work, and have the credit and income to get approved for a loan, you could be in your new home in just a few short weeks. 

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