Whether you’re purchasing your first home or refinancing an existing mortgage, finding the optimal loan for your needs is critical. The right home financing can save you tens of thousands over the lifetime of the loan. Follow these top 7 steps when making this major financial decision:
1. Check Your Credit Health
Your credit scores directly impact the mortgage rates and loan programs for which you’ll qualify. Request free credit reports from AnnualCreditReport.com to understand your current standing across the three bureaus. Then access your free credit scores. Implementing a credit boosting action plan can significantly expand financing options.
2. Get Pre-Approved
Shopping for pre-approval letters from multiple mortgage lenders exposes you to different loan products and rates for which you qualify. Online pre-approval only requires a soft credit check minimizing score impact but gives you strong negotiating leverage when submitting home offers.
3. Know Your Budget
Crunching household income and expense numbers allows you to accurately determine the mortgage amount and payment you can truly afford each month. There are free online mortgage calculators to experiment with different down payments, rates and loan terms to find the optimal balance.
4. Compare Loan Types
Choose from popular options like conventional, FHA, VA, USDA, and jumbo loans depending on your down payment capacity, property type, income verification method and more. Understanding the pros and cons of each mortgage type ensures you find the most favorable one for your situation.
5. Lock Down the Best Interest Rate
Minute rate differences greatly impact total interest paid over decades of home ownership. Thoroughly vet lender rate quotes both online and from local banks on identical loan scenarios. Discount points can also further reduce rates for creditworthy borrowers willing to buy down the rate at closing.
6. Estimate Closing Costs
Origination charges, application fees, title insurance, property appraisals and mandatory third-party services encompass closing costs that run 2-5% of your loan amount. Compare detailed fee estimates across multiple lender disclosures to minimize out-of-pocket expenditures.
7. Read the Fine Print
Never sign a loan agreement without first scrutinizing the terminology in the note. This includes examining the interest rate structure, loan-to-value limitations, annual percentage rate (true cost of borrowing), payment flexibility provisions and any risky features like prepayment penalties or balloon payments.
Choosing your home loan wisely from the start allows you to reap financial benefits for many years to come in the form of equity accumulation and savings on interest costs.
FAQs on Selecting a Home Mortgage Lender
Q: How many lenders should I apply with when mortgage shopping?
A: It’s wise to submit complete loan applications to around 3 lenders for side-by-side comparisons on loan costs, fees, and rate quotes before selecting your preferred financing option.
Q: Is it better to apply with lenders online or in person at branches?
A: Online lending now delivers significant cost savings and convenience benefits versus brick-and-mortar banks. However personal guidance can still prove useful for unique financing situations.
Q: Can mortgage lenders sell my loan after closing?
A: Yes, it’s quite common for lenders to sell loans off to investors after origination, but this does not impact your borrowing terms or monthly payments. Your loan servicer may change post-close which manages your payments/documents.
Q: How can I determine mortgage affordability?
A: Aim to spend no more than 28% of your gross monthly income on total housing costs including your mortgage principal/interest, property taxes, homeowners insurance and any HOA fees. This keeps home expenses at a comfortable, sustainable portion of your earnings.