The process of finding the bestÂ mortgage loanÂ begins with finding theÂ bestÂ mortgage lender. They can ensure this process runs smoothly, you get theÂ best rates, and any issues are dealt with in a timely and satisfactory manner.
But with so manyÂ different lenders, how do you know which one is right for you?
How to Find the Best Lender and Get the BestÂ Mortgage Rates
The following tips should help you to find the bestÂ mortgage ratesÂ and lenders, potentially saving you a great deal of time, stress, and money.
1. Improve YourÂ Credit Score
YourÂ credit scoreÂ is an important part of theÂ mortgage processÂ and is considered for all loans and new lines of credit. It tells lenders what kind of borrower you are and is used to determine the likelihood that you will default on your debt. If the likelihood is high and yourÂ credit scoreÂ is low, you may be refused a new mortgage altogether.
There areÂ types of mortgagesÂ that don’t require highÂ credit scores, including those backed by the FHA. However, yourÂ credit scoreÂ will still be considered and will influence theÂ interest rateÂ you’re offered.
2. Improve Your Debt-to-Income Ratio
Can your finances bear the weight of a new loan, one that comes with a largeÂ upfrontÂ payment and a largeÂ monthly payment? By calculating your debt-to-income ratio you can find out.
Your debt-to-income ratio estimates your affordability by comparing your monthly debt payments to your gross monthly income. For example, if you have an income of $3,000 and monthly debt payments of $600, your debt-to-income ratio is 20%, as $600 is 20% of $3,000.
Anything under 43% should be accepted once your mortgage payments have been added to the total. SomeÂ mortgage lendersÂ will go as high as 50%. However, the higher it is, the more at-risk you are by adding new debt to your total, because once you add living costs and bills to the mix, you’ll be left with very little cash and will be one unexpected bill from complete disaster.
Reduce your debt-to-income ratio as much as possible before you apply for any new credit.
3. Reduce Your Budget
The rightÂ loan amountÂ is more important than theÂ rightÂ mortgage lender. The majority of borrowers overestimate how much they can afford, stretch their budgets to the maximum, and suffer the consequences years down the line.Â
Most homeowners have regrets and for many, the biggest regret is not buying a cheaper house and believing they can afford more than they actually can. YourÂ monthly mortgage paymentÂ shouldn’t stretch you too thin, nor should it leave you crippled financially. There should be some room to maneuver, some room to make extra payments when you can and to use that money for other bills and expenses when you can’t.
Think twice about spending big on your dream home and look at the benefits of getting a cheaper house. For instance, you’ll require a smaller mortgage total, could secure a betterÂ interest rate, can get a shorter term, and, therefore, will pay much less over theÂ life of the loan.
AÂ fixed-rate mortgageÂ over 15-years will cost less than the same rate over 40-years. With the former, as much as 60% of your initialÂ monthly paymentÂ could go towards the principal, and that will increase every month from there. With the latter, you could be paying just 20% to 30% towards your principal, which means you’ll clear equity at a snail’s pace.
4. Think About Your Options
You have more options than you realize when it comes toÂ mortgage lendersÂ andÂ loan programs. These options include:
A conventionalÂ home loanÂ is one that’s not backed by any government agency and typically requires a 20%Â down payment. These loans often used a fixed rate of interest but there are alsoÂ adjustable-rateÂ versions known as Hybrid ARMs.
Conventional loansÂ can be conforming, which means they are less than the maximum limits set by the Federal Housing Finance Agency and meet the standards required by Fannie Mae or Freddie Mac, or non-conforming. There are also lowÂ down paymentÂ versions where as little as 3% is required. However, in such cases, borrowers will be asked to payÂ PrivateÂ Mortgage InsuranceÂ (PMI) until 20% equity is attained.
âFHA loansÂ are backed by theÂ Federal Housing AdministrationÂ and offered by traditional lenders. TheÂ down paymentsÂ are smaller and there is built-in insurance protection to cover the lender in the event that the borrower fails to keep up withÂ monthly mortgage payments.
Borrowers need aÂ credit scoreÂ of 500 and aÂ down paymentÂ of 10% or aÂ credit scoreÂ of 580 and aÂ down paymentÂ of 3.5% to get anÂ FHA loan. As a result of these reduced requirements,Â FHA loansÂ may be better suited for mostÂ first-timeÂ home buyers, but that doesn’t necessarily make anÂ FHA loanÂ the best choice. What’s more, as they are offered by multipleÂ mortgage companies, you still need to find theÂ right lenderÂ andÂ lock-inÂ theÂ best rate.
Offered by the Department of Veteran Affairs, these loans make it easier for military veterans and active personnel to getÂ home loans. You can get aÂ VA loanÂ with noÂ down paymentÂ and 90% of borrowers do just that. However, as with all other types of loans, by increasing yourÂ down paymentÂ you can reduce your rate.
Offered by the United States Department of Agriculture, these loans don’t require aÂ down paymentÂ and can be used for homes in rural areas.
One of the most important aspects of theÂ home buyingÂ process is theÂ down payment, which is the amount that you payÂ upfront. The higher this amount is, the lower yourÂ mortgage loanÂ needs to be and the less interest you will pay as a result. What’s more, aÂ down paymentÂ can also take you above the magical 20% mark with aÂ conventional loan.Â
Not only will this massively reduce your total interest, but it will negate the need forÂ PrivateÂ Mortgage InsuranceÂ (PMI) which could cost you as much as $100 a month on the average house purchase.
Many borrowers overlook these benefits because they focus on the short term. They don’t care if they are paying 50% more over theÂ life of the loan, as the house is still technically theirs and the end result will be exactly the same. If they’re not paying much more per month and don’t notice the impact on a month to month basis, what’s the point?
The point it, you could save huge sums of money over theÂ life of the loanÂ and own 100% of your house much sooner. This gives you more options in the future with regards to equity loans, cash-out refinancing, and more.Â
It also prevents any issues for your heirs when if you die before the mortgage clears in full. This way, you’re leaving them a house that is fully paid off and can be passed on directly, as opposed to one that has debt attached and needs to be handed down with that debt and that responsibility.
5. Compare and GetÂ Pre-Approval
The next step is to work withÂ mortgage lendersÂ andÂ mortgage brokers, see which ones work best for you and can provide you with what you need. You can look intoÂ online lenders, banks, andÂ credit unions, checkÂ online reviews, speak with friends and family, ask experts, and generally do everything you can to find the best one. Ultimately, however, it all comes down to what they can offer you.
Once you find the one that is right for you, the one that offers the lowest rate and gives you what you need, you can get aÂ pre-approval. The lender will check yourÂ credit reportÂ and give you aÂ loan estimate, which will give you an idea of how much you can borrow and what you can expect to pay.
It’s worth noting, however, that thisÂ pre-approvalÂ isn’t set in stone. It is subject to additional checks performed prior to the loan. If you apply for a lot ofÂ credit cardsÂ and lose your job betweenÂ pre-approvalÂ and mortgage, you’ll likely be rejected and that contract will be ripped up.
6. Check the Small Print
Don’t let your excitement get the better of you, don’t be too eager. Read the small print, make sure you understand theÂ loan termsÂ and know what sort ofÂ origination feesÂ and otherÂ closing costsÂ you’ll be expected to pay. These differ from lender to lender and some of them can be negotiated, so don’t assume that they are standard across the board and can’t be changed.
If you’re not sure about any step of the process, ask questions. If you feel a little out of your depth, do some more research. We have countless articles on mortgages here and can help with everything fromÂ mortgage termsÂ to the actualÂ mortgage application, after which we can guide you towards the best strategies for paying off your balance.
Choosing the Best Mortgage Lender is a post from Pocket Your Dollars.