With interest rates still low and the recession receding in the distance, plenty of people are window shopping the real estate listings and wondering, “Is now the time to finally buy a home?”
If you’re among them, or if you are thinking of refinancing your mortgage, don’t plunge in until you’ve watched Money Talks News financial expert Stacy Johnson explain the golden rules of mortgage shopping. After that, read on for more information that will save you money and heartache.
1. Check your credit
Your first move – long before you start home shopping – is to find out where you stand with mortgage lenders and how to improve your position. (Read: “This Tip Could Save You $50,000 on Your Next Mortgage.”)
Check your credit reports for problems or errors. It takes time to fix any errors, so get going as much as a year before applying for a mortgage.
A cleaned-up credit report can raise your FICO score. With a score above 760 (FICO scores range from 300 to 850), you’ll enjoy the best mortgage offers and interest rates. The lower your rate, the cheaper your house payments will be.
To see how much money a stronger credit score could save you, plug your numbers into this calculator at myFICO.com. You’ll also see the score ranges — 660-679, for example.
Suppose someone with a score between 760 and 850 gets a 30-year mortgage for $300,000 at 4 percent. The monthly payment will be $1,440 a month. (Interest rates change daily; watch current rates here).
Homebuyers with lower scores can’t get that great rate. With a score in the 620-639 range, you might pay about 5.6 percent. That’s a $1,729 monthly payment — $289 more.
2. Meet with lenders
Now you’re ready to meet with a mortgage lender or broker – or several — to ask their advice on how to boost your credit score. These early chats also prepare you for mortgage shopping, letting you see and compare lenders’ styles, knowledge and helpfulness.
Ask them what documents you’ll need to submit when you apply. New federal mortgage rules make it harder to get a mortgage. You’ll be judged on eight points:
- Income and assets.
- Child support or alimony obligations.
- Credit history.
- Monthly payments on debts.
- What you can afford to pay monthly on a mortgage.
- Other mortgage costs, like home and mortgage insurance and property taxes.
- Your remaining income.
For the best rates, all of your monthly payments must be less than 43 percent of your pretax monthly income.
3. Pull your credit score
Your FICO score is different from your credit report. You’ll need to know your score to see your progress improving it.
It’s hard to get a free FICO score. You’ll see ads for so-called free credit scores, but these aren’t the scores lenders see. They might do, though, if you only need a benchmark to watch how your efforts are improving it.
FICO charges $20 for your score, and it may not be exactly the same score that lenders see. Money Talks News founder Stacy Johnson suggests one way around the cost: Sign up for a free trial of FICO’s ScoreWatch to get your free score, and then cancel.
4. Beef up your score
There’s plenty you can do to quickly raise a low credit score. (See “10 Ways to Raise Your Credit Score Fast.”)
Making an effort to raise your score matters, especially if your score is near the top or bottom of a credit score range.
For example, with a score of 745, you’re near the top of the 700-759 range. With effort, you might gain enough points to move into the highest category, 760-850, giving you access to lower interest rates.
Or suppose your score is 766. Credit scores bounce around all the time; you don’t want yours dropping below 760, which puts you in the less desirable 700-759 category. Try to boost your score at least into the safe middle of the 760-850 range.
“Building a Better Credit Report” from the Federal Trade Commission can help.
5. First the mortgage, then the house
You’re probably itching to start shopping for a home. That’s fun, but keep your head on straight. Shop for the mortgage first. Looking for a home often gets emotions and fantasies all fired up, tempting shoppers to spend more than they can afford.
Don’t let emotions hijack your home purchase, causing you to overpay or stretch beyond your means. In this article, Stacy Johnson explain how to tell how much house you can afford.
Window shopping? Fine. But stay sober. Mortgage shopping first lets you know what you can afford, including all the other big expenses of homeownership — taxes, insurance, homeowner fees, bank fees, repairs, appliances, maintenance and improvements.
6. Get preapproved (not pre-qualified)
Here’s the difference, as the National Association of Realtors explains it:
Pre-qualifying is just a quick credit check based on the information an individual provides. A preapproval, however, means a mortgage professional has checked the employment history, verified funds, studied an individual’s credit record and so forth. Getting preapproved rather than pre-qualified saves a lot of heartache.
By preapproving your loan, the bank commits to lending you up to a specific amount. That can impress sellers. And it helps when you’re competing with other buyers for a home.
The bad news: Fewer banks are preapproving mortgages lately. But that doesn’t mean you shouldn’t try and shop around.
7. Now shop
Now that you know what you can afford to pay for a home, you can finally start shopping. Here are sources for guidance on shopping:
- Our “7 Things Every Homebuyer Should Know.”
- CNN Money’s 10 tips for homebuyers.
- About.com’s homebuying guide.
8. Hold off applying for credit
Applying for new credit is a tricky thing. It can help improve your credit score – in the long term. But if you open a new credit card or take out another loan too near the time of your mortgage application, your credit score could dip and affect your interest rate.
However, applying for mortgages won’t have much impact. MyFICO says:
Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
Also, obtaining your own credit score or reports won’t hurt, says personal finance expert Liz Weston:
A credit check could hurt you if you asked a friend at a bank or car dealership to pull your credit reports. Such transactions probably would be coded as “hard” inquiries, or as applications for credit, which could ding your scores.
But checking your own credit is otherwise a non-event.
9. Wait to make big purchases
Buying furniture, appliances, a car or any substantial purchase outside your regular monthly expenses could kill your mortgage loan. Before your loan closes, a lender makes a final credit check. New debts could change your eligibility. Says The New York Times:
“We tell our clients about this upfront, and keep reminding them through the entire process not to go buy a new bed or a refrigerator,” said Michael Daversa, the president and founder of Atlantic Residential Mortgage, which is based in Westport, Conn. “What you’re supposed to do is keep everything status quo.”
If you have experience with mortgage shopping, you probably have tips of your own to add. Share them in the comments below or at our Money Talks News Facebook page.