(Photo credit: christitzeimaging.com/Shutterstock)
By Oliver Jones
After looking at more pictures of recessed lighting, granite countertops and open floor plans than you can shake a clipboard at, you’ve finally found the perfect place. The shopping part of your home buying experience is over, right?
Not so fast.
Experts will tell you that the same dedication, research and thoroughness you devoted to finding a new home now needs to be applied to finding the mortgage that will allow you to pay for it.
Here are some tips.
Know your type. “Let’s start with the obvious,” says Dave Heard, a Sacramento-based loan officer with more than 30 years of experience. “The more options you explore, the better you can take advantage.”
There are two basic categories of loans: fixed rate and adjustable rate.
· Fixed rate loans have a consistent interest rate over the life of a loan.
· Adjustable rate loans typically begin with a low introductory interest rate that will change to an unknown (but typically much higher) interest rate at a specified point in time. (Some adjustable rate loans are hybrids—they start out fixed, then become adjustable.)
Then there’s the length of the repayment period—which can vary but is typically 15 or 30 years.
As you’re mortgage shopping, keep your eyes open for programs and opportunities that could end up saving you a lot of money—including government-backed loans, which are different from conventional loans.
“Many homebuyers are unaware of the amazing low-down payment Federal Housing Administration (FHA) [loans] and zero down Veterans Affairs (VA) [loans] that may be available to them,” explains Julie Aragon, a mortgage lender based in Santa Monica, California. “They can offer some fabulous rates, terms and benefits across the board.” (Another government-backed loan comes from the USDA to help rural borrowers)
You may come across any combination of fixed-rate, adjustable, government-backed or conventional loans. Another differentiation among loans depends on the amount of money involved. Across most of the county, a conforming loan is limited to $424,100 (although the limit is higher in higher-cost areas, like New York City or San Francisco). Loans larger than conforming loan limits are considered jumbo loans, which typically require larger down payments, higher credit scores and other factors, all of which vary from lender to lender.
And then, of course, there’s the ever-important interest rate. Said Heard, “The best reason to shop around for a mortgage is that rates and fees charged to consumers can vary on particular days.”
Empty the filing cabinet. To get a loan estimate, you only need six key pieces of information:
· Your name
· Your income
· Your social security number (so the lender can check your credit)
· The address of the home you plan to purchase
· An estimate of the home’s value (which is typically the sale price)
· The loan amount you want to borrow (the sale price minus your down payment)
But for pre-approvals and the loan itself, there’s paperwork—a lot of paperwork. When you’re shopping, it can help to have all your documents in hand—and expect this to take longer than you think it should.
Said Heard, “The extent of the documentation is much more cumbersome now than it was before the mortgage meltdown.”
For a pre-approved loan, expect to haul in no less than 30 days of pay stubs, your last two months of bank statements and two years of W-2s and federal tax returns—down to the last page. And remember, while a pre-approval can make the purchase of a home proceed more quickly, it doesn’t mean you are locked in with a particular lender.
Look for more than a low rate. Once you’re armed with a mountain of documents and ready to hear some offers, keep in mind what exactly you are shopping for.
“When you shop for a home loan, it’s not just about finding the lowest quoted rate,” says Aragon. It’s about the best overall value.
Prepare to do a fair amount of legwork, checking with brokers—who sell loans from a lender—as well as the lenders themselves. When you do, confirm their estimates are for the same type of loan so you are always comparing apples to apples.
Also, keep your eye open for hidden costs. If your loan requires you to pay only the interest before you pay down the principal, how will that effect the overall cost of the loan? And what if you pay the loan off early? Will you be penalized?
Bottom line: Getting loan estimates from multiple lenders increases your bargaining power.
Shop local. After all that shopping around, be sure to consider an option that is close by.
“When shopping for mortgages, I always suggest that people go with a local lender,” said Mary Hurlburt, a counselor for Lifespan, a National Foundation for Credit Counseling member agency based in Ohio. "If you have a problem, it’s always better to be able to walk into someone’s office and deal one-on-one with a human being that you know. You have to be careful and go with a person and financial institution you believe in.”
Stay nimble. While the real estate market can feel volatile, it’s nothing compared to the turbulence you come across in financial markets. Rates and offers can shift on a dime. In other words, don’t expect the killer rate you were quoted on Monday to still be in play Wednesday afternoon.
“The first lender’s price will probably have moved with the market,” said Heard. “The challenge with mortgage shopping is that the consumer has to really do it all on the same day to ensure the rates are the same on multiple loan estimates.”
Know your numbers. Doing your research and shopping around doesn’t mean that your credit needs to be run hundreds of times.
“You can find out the terms without them having to run your credit report,” said Hurlburt, who herself faced hurdles when trying to refinance her third home, which was underwater after the mortgage meltdown. “We have excellent credit—in this line of work, I know how important that is—so I could walk in and tell them our score was above 780, and ask them what kind of interest rate they could give us.”
Phone a friend. It’s a lot to keep in mind, which is why, along with all that paperwork, you will want to bring a mortgage calculator and the phone number of someone who is looking out for your bottom line, not their own.
“I would seek out a third party to help, either a local housing or credit counselor,” said Hurlburt. “Don’t just get your advice from your realtor or loan officer. Find someone who doesn’t have a stake in the game and is there to help walk you through the process so you can decide what ultimately is best for you.”