As the real estate market begins to perk up, many people find themselves in a good position to start looking for a home. Even though interest rates continue to hover at the lower end of the spectrum, shopping for a mortgage is still a tricky process, especially if you’re doing it for the first time. But don’t fret. These seven steps will help you navigate the treacherous waters of mortgage shopping, and they’ll save you time and money in the process.
1. Have your credit report ready
Lenders use your credit score as one of the major factors in determining if you will get approved for a loan, as well as what kind of interest rates you qualify for. That is why it’s important to review your report at least once a year to make sure everything is in order. If there are any errors that affect your credit score, you could be missing out on a few points here and there that will make a huge difference when you walk into a loan office. Interest rates could skyrocket, or you could even be denied a loan if your score is lacking.
If you can, try to get a credit report at least six months prior to applying for a loan. You will have time to review it and get in touch with a credit agency if you find any errors. You also can use this time to start sprucing your score up a bit by avoiding big purchases that put your finances in jeopardy and not opening up any more lines of credit.
2. Work on improving your debt-to-income ratio
Your debt-to-income ratio is the amount of money you make versus how much you owe. Lenders also take this into consideration when you apply for a loan, so it might be a good idea to try to reduce your debt or increase your income. Make bigger payments on credit card debt to boost your ratio, or pay off any outstanding loans you may have. You will be a more desirable candidate, and you might save some money in the long run.
3. Plan for a big down payment
A big down payment saves you lot of money. Save up for the biggest down payment you can afford so you can take advantage of bigger loans, smaller interest rates, and more attractive closing fees. It also helps lenders determine your property’s loan-to-value ratio. Most loan programs usually require a down payment that falls somewhere between 5 percent to 20 percent. In some cases, if you can’t afford a 20 percent down payment, your lender might require you to pay for mortgage insurance because they’re increasing their loss risk by loaning you more money.
4. Decide between a fixed or hybrid mortgage
If you think you’ll only be in your new home for a few years, you might consider a hybrid loan. Many home buyers think the traditional fixed rate for a 30-year plan is the best choice for them, but that isn’t always the case. According to experts, if you know you are only keeping your house for a few years, a hybrid loan nets you a lower interest rate for the fixed period than a typical 30-year mortgage. For example, a homeowner who’s planning to sell their house after three or four years could opt for a 5/1 hybrid mortgage and pay about 1% less in interest. Of course, plans sometimes change. Since we can’t predict the future, there’s risk involved with the hybrid mortgage. If you end up staying longer than you planned, then interest rates could spike, or the housing market could be in a different place by the time you’re ready to sell. If you aren’t comfortable with that possibility, a more traditional 15- or 30-year mortgage might be a better option for you.
5. Shop for lenders
The right lender can completely transform your mortgage-buying experience. Shop around online, by phone, or in person for a straightforward lender who’s willing to work closely with you. Real estate agencies often suggest an affiliated lending bank, but it isn’t a good idea to make a decision based solely on a recommendation from an agency. While it’s entirely possible that the agency’s lender has competitive rates, you will want to cover your bases to make sure you can negotiate the best deal possible. An easy way to quickly gather lender information is requesting online quotes from local lenders. Provide each lender with the exact same information and compare the rates they send back to you. When you narrow it down, call the lenders or meet with them to see who you feel most comfortable with.
6. Submit a thorough application
Provide your lender with all the necessary documentation needed to quickly and accurately process your application. The form itself is fairly simple to fill out, and your lender will be able to do most of it. You’ll hand over the right papers, though, so gather all documents like tax returns, pay stubs, bank statements, and real estate contracts.
7. Lock in your interest rate
It’s finally time to make a commitment, and this means locking in your interest rate. You can choose between a couple of different options at this point. When your application is finished, you can opt to lock in your rate immediately if it looks attractive enough and be done with it. Or, you could choose to float your rate. In this case, your rate moves with the market until you are ready to close. You could end up paying less if the market is where you want it by the time you close, but you also risk paying more if the market rate increases. Buying a home is often one of the most important things a person does during his or her lifetime. While that implies a certain degree of heaviness, this process doesn’t have to be so scary. Enter into it well-prepared and confident, and you should have no problem.
JT Ripton is a freelance writer in Tampa who covers a myriad of real estate topics, including personal finance and home improvement.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
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