Four Mortgage Tips For Future Homebuyers
Whether you’re a first-time homebuyer, a young family that’s outgrown your first home, or an empty nester who has decided it’s time to downsize, there’s a best mortgage deal out there for you. But “best” doesn’t necessarily always mean the same thing for everyone. How much cash do you have for a down payment? How’s your credit rating? What’s the cost of the home you’re buying? The answers to these questions and more will define what kind of mortgage makes the most sense for you. Luckily, the mortgage market provides an array of choices—so many that some homebuyers are left more confused. So we’re sharing a list of five tips to make mortgage shopping easier and help you taper in on the right mortgage and mortgage lender for you.
Tip #1: Look Into Your Finances
Mortgage lenders do a series of numerical calculations when deciding whether to offer you a loan and at what interest rate. That process is called risk assessment. You can’t avoid it—it’s how banks and other lending institutions stay in business. So it’s best to understand what factors lenders take into account when figuring out how safe it is to offer you a mortgage.
First things first. Your credit score figures mightily in the calculous. Have you taken a look at yours lately? Ideally, you will have downloaded a free copy of your credit report before beginning to house-hunt. That’s because, if you need to do a little credit repair, it will take a few months to make progress in boosting it. Bringing all your accounts up to date, even if you can only make the minimum payment due, will help boost your score. So will closing credit accounts you don’t use.
Lenders also look at your debt-to-income ratio when making their assessment of your creditworthiness. So do what you can to bring down your total debt before applying for a loan. Landing a new high-paying job would accomplish the same thing, of course.
Finally, consider the size of your down payment. If you put down a large down payment, that changes the loan-to-value ratio on your mortgage. The more you put down on your home, the less “risky” it’s considered by lenders.
Tip #2: Talk to Different Types of Lenders
You may be surprised by how many kinds of lenders there are out there. Your local bank, where you might keep your checking account, likely offers home loans and may show you some extra consideration for being a loyal customer. Most credit unions offer mortgages to their members, too. Mortgage brokers work with a variety of lenders and may be able to find you a mortgage solution. Online lenders have proliferated in recent years and typically offer greater convenience and may speed up the application, pre approval, and approval stages of the mortgage process for you. But the point is to shop around. Just make sure the lenders you speak with will not make a hard credit inquiry on you before you actually apply for a loan. Each hard credit inquiry has the potential to lower your credit score.
Tip #3: See If The Government Can Help
For qualified borrowers, government-backed loans are often the most economical mortgage choice. Federal, state, and even local communities may offer cost-effective mortgage solutions. The foremost of these opportunities include VA loans which provide a wide variety of benefits for veterans, active service members, and, in some cases, military spouses. While these loans are administered by lenders, they’re guaranteed by the federal government, so they’re viewed by lenders as lower-risk. That means they usually come with comparatively lower interest rates, more lenient credit qualifications, and more down payment options than private mortgages. In fact, many eligible homebuyers elect to take advantage of the no-down-payment option that VA loans offer.
Tip #4: Establish Realistic Expectations
The last thing you want, particularly in today’s competitive market, is to be slowed down by being turned down for a loan. So make an accurate assessment of how large a loan you’ll be able to get before you start shopping for a house. Most lenders offer a pre qualification service: a non-binding estimate of how much you’ll be able to borrow and at what interest rate. That’s a good yardstick to use to narrow your home choices to only those you can afford. You can also get a rough idea by using a home affordability calculator. But many home sellers will only entertain offers from buyers who have officially prequalified with a lender. They don’t want to waste time, either.
Bonus insight: Even if you only plan to stay in your home for a few years, it’s important to assess your mortgage choices with an eye toward the future. While adjustable-rate loans often come with lower interest rates initially, that rate is subject to change in a few years. With interest rates near record loans right now, it may make sense to lock in a low rate with a fixed-rate mortgage.