Finding the best home mortgage meeting your needs probably isn’t the same as it is for your brother in-law, your water cooler buddy, or even the loan originator that your real estate agent recommends. The one your agent recommends is probably worth at least talking to but before you commit to a loan be sure you do some of your own research. While most home loans aren’t customized to the individual, there are categories of loans fitting individual borrowers better than others.
Basic Home Loan Information
The best place to start is with your own finances and circumstances to
determine which category you should spend the most time shopping for the best
match to your needs. You can get started by gathering the basic information
needed for the preapproval process. First, determine the exact people that will
be applying for the loan. Typically, this includes yourself, your spouse, or a
co-borrower if you aren’t married to your partner. Using those names and social
security numbers, collect this information for each individual:
All banking, savings, checking, and investment account information.
Outstanding debt obligations, beginning with credit cards, car loans, student loans, child support, and other balances.
Two years of tax returns, W-2s, and/or 1099s.
Salary and employer information.
Information about how much of a down payment you can make and where the money is coming from. Include but keep separate the funding sources for other expenses such as closing costs, moving expenses, and opening new utility accounts.
All of this information is required but pay particular attention to how
much money you are working with for a down payment. This is the beginning point
to determine if you will need a low or no down payment loan or a conventional
It also helps you begin deciding how much you want to pay in monthly
mortgage payments, possibly for the next 15, 20, or 30 years. For instance, if
you take out a conventional loan but have less than a 20 percent down payment,
you need to be prepared to pay for private mortgage insurance (PMI) until you
own 20 percent equity in the home. Or if you’re looking for a zero down payment
and qualify for a veteran’s loan, you’ll want to focus your efforts on working
with lenders that specialize in these loans.
and Explanations of Different Home Loans
With your basic information in hand, you’ll be prepared to consider which
loan type(s) are most suitable for you. A mortgage broker can help with this
process but you’re best prepared when you have knowledge of what is widely
available. Here are the most common loans to consider.
Fixed rate loan. These are the most common and work in
conjunction with other loan types such as VA, FHA, and conventional loans. People
prefer these because they offer the lowest amount of risk. The interest rate
won’t change over the 15 to 30 years it takes to repay the loan. Each month a
portion of the outstanding balance is steadily repaid until you own the home
out right. However, there can still be small variations in your monthly
payments due to changes in property taxes, homeowner insurance, HOA fees (if
applicable), etc. These loans are best for people planning to remain in the
home for at least seven years or longer and when interest rates are as low they
Adjustable rate loans (ARMs) offer lower beginning interest rates
than most other loans. That means a lower beginning monthly payment and/or the
ability to buy a more expensive home. The interest rate typically remains the
same for the first three to five years but then changes (adjust) once a year
based on current interest rates. ARMs come in many variations. It could start
adjusting in two years. This means your monthly payment could go up in future
years. Your interest rate could go down but based on today’s low interest rates
that won’t likely happen. These loans are best suited to people that don’t plan
to own the home long term. People who want to take advantage of the low initial
interest rate but plan to sell before it adjusts upward.
Federal Housing Administration
loans (FHA), require down
payments of as little as 3.5 percent. These loans are suitable for people with
a small down payment (often first time buyers) but come with conditions such as
requiring private mortgage insurance and limited purchase prices that exclude
what would be considered a large or luxury home.
VA loans are for home buyers that
served in the U.S. Military. These require zero down and don’t require PMI.
Development loans are
sometime over looked because of their limited application. These are intended
for rural areas that are struggling economically. These are available for
zero down and even offer discounted interest rates. However, these do require
Bridge loans are an option if you're purchasing a home
before selling your previous residence. Lenders will wrap your current and new
mortgage into one payment. Once your current home is sold, you pay off that
mortgage and refinance the mortgage on your new home.
There are several other loan
types that you can learn about by explaining your specific circumstances.
Tips for Finding the Best Home Loan
Definitely shop around.
Today, online mortgage calculators and online application services make
comparison shopping quick and easy. There are many websites showing you
side-by-side comparisons of what different lenders offer for the most important
home features such as monthly payments, fees, and other costs associated with
getting a new loan. Find your preferred website or begin with http://www.bankrate.com/calculators or https://www.nerdwallet.com/mortgages/mortgage-rates. Take your best preliminary results from
three or more comparisons and then do another comparison among these to find
the best of the best.
Don’t limit yourself to one
type of lender such as big banks. Consider other lending sources such as neighborhood
banks, savings and loans, credit unions, online mortgage lenders, and private
lenders (individuals) .
Once you narrow your
preferences down to a few lenders, start digging deeper into other costs that
include points and fees. There are many variables with these and most are
negotiable. For instance, points are often quoted as a percentage of the loan
amount. Ask for these in dollar amounts also. Many fees can be paid in multiple
ways such as when the application is submitted, at closing, or wrapped into the
loan. The amount of the fees and when they are paid is negotiable. Understand
what you are being offered and what your options are.
Be aware that negotiations
can reduce the commission or income of a mortgage broker or loan officer. Your
preference is negotiating on a loan where the reduced costs apply to the lender
but not your broker. This keeps your broker’s interest aligned with yours.
The Loan Estimate is given to you within three
business days after turning in a mortgage application. It outlines the various
terms attached to the loan, including your interest rate, estimated monthly
payments, and the cash you need to close. Section C details the costs over
which you have the most control. You can comparison-shop for the services
listed. Your lender is required to give you a list of approved providers but
you can shop outside the list of approved providers and ask the lender to
approve your choice.
Please share your insights about shopping for mortgages by leaving a comment. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].
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