Learn the tricks of the mortgage industry, and you'll be more likely to get the best deal possible on your loan.
This article by Nicholas Pell comes from partner site Mint.
With mortgage rates at an all-time low and home prices still considerably lower than their 2006 peak, now might be the time to buy.
But, if you want to buy a home, you will most likely have to get a mortgage. Having a little insight into some of the secrets of the mortgage industry will help you to get the best deal possible on your loan.
Credit score requirements can vary
Gone are the days when just about anyone could get a mortgage. Truth be told, your chances of getting a mortgage are significantly diminished if your credit score is below 680.
Your bank actually has very little to do with this. Freddie Mac and Fannie Mae, who supply the lion’s share of mortgage funds available in America, establish the guidelines.
Still, if you have less-than-ideal credit, don’t despair. Instead, look into a Federal Housing Administration (FHA) loan. The minimum credit score required is 620, which is significantly below the 680 cutoff for more traditional loans.
Another piece of potentially good news? Down payments on FHA mortgages are lower than those for traditional mortgages and the rates are competitive.
There are always closing costs
If you’re looking for a home or paying attention to advertisements from mortgage lenders, you’re likely familiar with the phrase “no closing costs.”
What you don’t pay in “closing costs” is going to get paid somewhere else, sometimes in the form of higher interest rates. It’s a bit like when a landlord says utilities are “free.” No they aren’t. They are included in the cost of rent.
The market isn’t a monolith
Some lenders bank on the idea that you aren’t shopping around for the best rate in town. In truth, there are as many variations in the cost of a mortgage from one bank to another as there are in the price of gas from one filling station to another.
Not only do mortgage rates vary, so do origination fees, credit report fees, title search fees, and other closing costs that quickly add up to a hefty bill. Shopping around for the best rates and fee schedule available is a necessary part of doing your due diligence before you buy a house.
The end of the month is the best time to close
You are free to close on your home whenever you like. However, the closer to the beginning of the month you close, the greater your “prepaid interest” fees are going to be at closing.
Here’s how this works: You buy a house, close escrow, and then the first mortgage payment is due sometime down the line, usually the month after the first full month after you buy the house.
Interest, however, starts running on the day you close. You have to prepay the interest on the remainder of the month you close the mortgage, further adding to the up-front burden of owning a home. You can avoid this by closing toward the end of the month. Close on the last day of the month and you won’t have to prepay any interest.
Get the best deal on your new home
Lenders are not out to get you, but they are businesses and businesses need to make money. By knowing some of the inside secrets of the mortgage industry, you can avoid paying more at closing or over the life of the loan.
Take whatever money you save and put it into your retirement account, pay down debts, or even fund an improvement project on your newly purchased home.