Going for a Mortgage - Tips

You have found the home you want, you have a signed purchase agreement, you have read the considerations and options in this section of the website, and now you actually have to get the money to pay for the home at closing. Here are a few tips to get this done. All this should take less than a week.

• Write down exactly what your mortgage needs and desires are.
• Have all your personal documentation ready.
• Get quotes from at least 3 reputable lenders.
• Do not pay any up front fees until you have received enough information to determine which lender you want.
• Ask for a package that includes interest rate and closing fees that are guaranteed. At a minimum get a documented "good faith estimate offer" from the lender.
• Get a truth in lending statement from the lender. This will provide the annual percentage rate (APR) which includes the loan interest rate and the costs to obtain the loan.
• If you are paying less than 20% down, get your PMI costs and the requirements to remove them documented.
• Compare and decide which offer is best for you. Be sure to consider all costs and services involved not just the interest rate.
• Contact the lender you choose and get the deal locked in.

Interest Rate Considerations

Interest rates for mortgage money is one of the major considerations for most people planning to purchase a home. There is practically a loan and associated interest rate for almost anyone wanting to purchase a home. There are ways to purchase with no money down, piggyback loans, no document loans, marginal credit scores, and many other situations, however, the interest rate is adjusted to account for the risk associated with the loan.

 HomeBuyerConsultants.Com Inc. consultants cannot make this decision for the buyer, but provides the following information for the buyers' consideration.

Interest Rate, Now versus Later

Interest rates are seldom constant but vary day to day. The general feeling is a desire to get a very low rate and buyers often procrastinate purchasing a home hoping the rate will go down. However, it is just as likely to go up. The real objective should be to shop the current market for the lowest rate available at the time you desire to purchase a home. There is a leveling effect in the real estate market since demand for housing increases when rates are low and home prices are bid up; demand decreases when rates are high and home prices decrease to attract buyers. If you purchase when interest rates are high, you may buy at a lower price and still have the option to refinance at a lower rate if interest rates drop significantly. The conclusion is that interest rates probably shouldn't be as large of a consideration as most buyers perceive it to be.

Fixed versus Variable Interest Rates

There are a wide variety of mortgages being offered today. There are fixed rate mortgages with typically 15 to 30 year payoff periods. There are a number of Adjustable-Rate  Mortgages (ARMs) that have a variable interest rate based usually on some Federal index. There are also combinations of fixed rate for an initial period followed by a variable rate or balloon pay off. Be sure you consider the maximum and minimum rates you may have to pay. Choices are available for almost any situation. Consideration should be given to your specific situation - need lowest payment; plan to own for less than 5 years; plan to own long term; desire a fixed known payment; need low initial payments with higher affordability likely in the future, etc. The best option is to define your needs and discuss the best option to meet those needs with mortgage providers.

Points to Lower Interest Rate

Points are cash paid up front to the lender at the time that you get your loan to lower the long term interest rate. Points basically are pre-paid interest. Each point costs one percent of your total loan amount and lowers your long term interest rate by 0.125 of a percent. Points should be considered as an option if you plan to own the home for a long period of time. Points are tax deductible in the year the loan is taken out.

Again as another option, investment of the cash being paid for the points should be considered. 

Interest Rate versus Lender Fees

Decisions on choice of lenders should not be based only on the interest rate quoted. Be sure to have the lender furnish you a statement of all finance costs including pre-paid fees and those you pay at closing. Consider these costs as a percent interest paid upfront and add it to the quoted interest rate to determine which lender is providing the best overall offer. It pays to shop around.

Mortgage Size versus Investing

Many people focus on making as large a down payment to minimize the size of the mortgage and strive to pay off the mortgage as quickly as possible. One should discuss this with a financial advisor since better options may be available. A major consideration is that interest paid on a mortgage is tax deductible, effectively reducing the interest rate by your marginal tax rate. If money not dedicated to the mortgage can be invested for a higher return than your effective mortgage interest rate, you may want to invest your money and make your mortgage as large as possible. This is a consideration that is often overlooked by most home buyers.

Down Payment Size versus Private Mortgage Insurance (PMI)

If you purchase a home with less than 20% down payment, mortgage companies usually require a PMI policy to reduce their risk level for the mortgage. (Some mortgage companies offer an 80% mortgage plus a 10% to 15% second mortgage to help the buyer avoid PMI.) A PMI policy for 10% down costs approximately 0.05% of the mortgage amount per year (about $42 a month for a $100,000 mortgage). This rate is usually less if more than 10% is put down and more if less is put down. The rate is also usually higher for an ARM mortgage. Some PMI policies can be paid in a lump sum amount up front, but it is more commonly paid monthly. It may be possible to drop the PMI policy after a period of time if the remaining mortgage amount is 80% or less of the current appraised value. Be sure to discuss how PMI can be removed with your mortgage providers. It is not recommended to accept a higher interest rate in lieu of PMI since this is locked in for the duration if the mortgage.

Be sure to investigate investment possibilities for your down payment funds. Money not dedicated to the down payment may be able to be invested for a higher return than your effective mortgage interest rate plus PMI. You may want to invest your money and make your down payment as small as possible. 

Pre-Qualifying and Pre-Approvals

"Pre-qualified" is not the same thing as getting "pre-approved" for a loan. These are completely different, carry different weights when making an offer on a home, and provides different levels of assurance that you will get the loan.

Pre-qualified means that a lender has calculated your affordability and in no way guarantees that you will get a loan. Pre-approval means that the lender (not a mortgage broker) has calculated your affordability, gained information about you, checked your credit , and has committed in writing to make the loan providing the appraisal of the home's value is sufficient. Some lenders are now doing instant approvals, which require only a credit check. Instant approvals allow you to know within minutes whether or not you're going to be approved for your loan. (If you have any doubt about your credit rating, you should purchase your credit reports and credit score in advance, check them for errors, and clear up any problem areas. - click here)

This difference can be important to the seller. The seller is assured that the home buyer who is pre-approved will get their mortgage if the appraisal and inspections are okay. In most cases if a seller has multiple offers, they will take the pre-approved buyer first.

HomeBuyerConsultants.Com Inc. recommends that you at least get pre-qualified before you start your search for a home and get a pre-approval letter before you submit an offer on a home. Before you start looking at homes you need to know how much you can get a mortgage for, how much you can add to that for a down payment, and if you are willing to spend that much for a home.

Contact a lender for a pre-approval to get you started. Here are some web sites to explore to find lenders.

FHA (Federal Housing Authority) Loan

This is a type of government insured loan administered by the Federal Housing Administration (FHA) that insures 100% of the loan made by approved lenders. This allows the lender to make loans to people with higher risk factors. The home buyer pays an upfront insurance premium which is approximately 2.25% of the loan amount which can be financed in the loan amount with no out-of-pocket cost. The borrowers also pay a monthly premium of about 0.05% of the loan amount until their equity in the home exceeds 20% of the home's value. Down payments can be as low as 3%. Down payment money can be a gift and requires a gift letter from the giver. Closing costs can usually be financed in the loan amount.

Borrowers must provide proof of sufficient income to carry the mortgage obligation, however, FHA has more relaxed credit guidelines. FHA interest rates are competitive with conventional rates.

FHA backed loans do have a maximum loan amount that depend on the location of the home. To check for the current limit where want to buy a home, types of FHA loans, FHA rates, etc. browse 'FHA Today'.

Lender Sources

There are many sources of mortgage lenders, local and national - Mortgage Companies, Savings & Loan Companies, Credit Unions, Banks, etc. They offer a variety of loan programs and interest rates. 

HomeBuyerConsultants.Com Inc. recommendation in this area is to shop around to find the lender that has a program that meets your needs with a competitive interest rate and low up front costs.

Here are some web sites to explore to find lenders.

Mortgage Application Checklist

Land Contract

There are several ways to purchase a home without using a lending institution. Home owners sometimes offer their property for sale by Land Contract. The buyer makes payments to the owner per the contract agreement and generally does not hold title to the property until all conditions in the contract are met. If any condition in the contract is not met, the owner can get the property back. There are many risks to the buyer and Land Contracts are very complex non-standard arrangements. For this reason, a buyer should have an attorney review the contract, fully explain all conditions, and point out all the risks involved.

Rent To Own

Sometimes home owners offer their property to a prospective buyer by 'Rent to Own'. The prospective buyer leases the home and a portion of the rent goes toward the price of the home. This method allows the buyer to build up sufficient equity to cover the down payment, obtain a mortgage, pay off the owner, and obtain title to the property. Since the owner retains the title until this is accomplished and risks are involved for the buyer, an attorney should be retained to review the lease and purchase agreement, fully explain all conditions, and point out all the risks involved.