You have picked your dream house. You want it desperately, and now you need to determine how to pony up the cash. If you’re like most people, you need to find a mortgage… Stop right there.
Nearly half of American homebuyers don’t take the time to shop around for the best deal on a mortgage, according to government statistics. This is a mistake that can cost tens of thousands of dollars over the term of the loan.
So, even though you may be chomping at the bit to buy a property, get your financing in place before you set out to look at houses. Here’s how:
1. Polish your credit score
Having an excellent credit score gives you access to lower rates because you’re considered less of a risk to lenders. So make sure yours is as good as it can be before applying for a mortgage.
“You want to make sure you keep that score as high as you possibly can,” says Tina Mulligan of The Mortgage Firm, based in Orlando, Florida. “And you want to be able to keep your credit clean of any blemishes at least two years before searching for a house.”
Check your credit reports for problems or errors. It can take time to fix mistakes, so start this process as much as a year in advance.
For tips on how to proceed, Money Talks News has plenty of resources: Check out 7 Fast Ways to Raise Your Credit Score and How to Repair Your Credit. For additional help, visit our Solutions Center section on Credit Restoration.
The key element in learning whether your credit has improved is your FICO score, which is now accessible for free through a variety of sources. Check out “Hallelujah: 5 Ways to Get FICO Scores for Free.”
2. Focus on affordability
The most common mistake homebuyers make is finding the home before getting financing for the purchase — or even before figuring out what they can comfortably afford.
There are expenses associated with home ownership and mortgages that are not immediately obvious. These include: taxes, insurance, homeowner fees, bank fees, repairs, appliances, maintenance and improvements.
Money Talks News founder Stacy Johnson offers tips for thinking through the whole package here: “How Much House Can You Afford.” You also can get a good idea of your upper price limit by using one of the numerous online calculators; MSN has one.
3. Shop with gusto, starting online
Most people spend more time shopping for TVs than they do comparing mortgages, according to the Consumer Financial Protection Bureau.
But think about it. Say you borrow $300,000 on a 30-year mortgage. Lock in a 4 percent interest rate, and over the next 30 years you’ll pay $215,000 in interest. But lock in a 5 percent rate, and the tab swells to $280,000. That’s $65,000 more: enough to retire a year earlier or send a kid or two to college.
The Internet makes it easy to comparison-shop the mortgage offerings of many lenders, including commercial banks, thrift institutions, mortgage companies and credit unions. As a starting point, go to the Mortgage page in our Solutions Center.
Pick the four lenders offering the lowest APRs, or annual percentage rates.
Many people opt for a traditional 30-year, fixed-rate loan. But there are other common loan structures — including adjustable rate mortgages (ARMs) and hybrids — that could make more sense, depending on your circumstances. See How to Choose the Right Mortgage Option for You to get familiar with the different products.
When comparing deals you can get from competing lenders, make sure that you are comparing apples to apples. So, be sure you’re getting the cost of mortgage products with the same terms — say, a 30-year, fixed-rate loan of $250,000 with no points, for instance. (Points refers to a percentage of the loan amount paid up front in exchange for a lower interest rate.)
Which leads you to the next step.
4. Negotiate with lenders
Play one lender against another. One way to do this is to start with a spreadsheet of the competition’s online rates. You can then call the lenders and ask them to verify the fees and start comparing the terms.
If one lender quotes a 5 percent rate, see if that lender will match the lower rate offered by a competitor. If one charges an $800 processing fee, look for a lender who charges zilch.
On that note, be sure to get an explanation of fees: A mortgage with a lower interest rate often will have higher fees for a variety of things, such as loan-origination or underwriting fees, broker fees, and settlement or closing costs. Ask what each fee covers, and find out which ones can be dropped or reduced.
Once you get the best possible terms, go ahead and do the deal — but also look at the settlement statement to make sure all that was promised is in writing.
If you reach an agreement, ask for a written lock-in that includes the rate you agreed upon and states how long the lock-in lasts. There are cases in which the originally quoted lock-in rate expires before the papers are signed.
5. Get pre-approved for the loan
Most Realtors recommend you get a letter of pre-approval for your loan before you start home shopping, according to realtor.com.
Note that lenders can provide pre-qualification letters and pre-approval letters — both show that you’re on track to get financing, but they are not one and the same. Pre-qualification is usually based on a cursory look at your overall financial picture, including your debt, income and assets. Being pre-approved for a loan, which involves an exhaustive look at your finances and credit, means a lender has already agreed to a loan up to a certain amount. Pre-approval carries more weight.
Being pre-approved is especially crucial if the market is competitive and the properties you’re looking at may draw multiple bids. When you see what you want, you are ready to pounce. On the flip side, pre-approval saves you from wasting time looking at houses that turn out to be out of your price range.
Now that you have a way to pay for it, go find that dream house. Almost without a doubt, house shopping will be more fun than mortgage shopping. But if you have done the mortgage shopping right, it will prove to be time extremely well-spent.
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