9 Golden Rules for Getting the Best Mortgage Loan You Can

Interest rates are still near historic lows — which cannot last forever. Meanwhile, as the cost of rental homes pushes into the stratosphere, in many markets it’s worth considering whether it’s time to get into the housing market instead of renting.

If you’re thinking of buying a house or refinancing your existing mortgage, read on for information that will save you money and heartache.

1. Check your credit reports

Your first move – long before you start home shopping – is to find out where you stand with mortgage lenders and how to improve your position. (Read: “This Tip Could Save You $50,000 on Your Next Mortgage.”)

Check your credit reports for problems or errors. This won’t give you your credit score, but the information in your credit reports is the basis for your score. It takes time to fix any errors so get going as soon as possible before applying for a mortgage.

A cleaned-up credit report can raise your FICO score. With a score above 760 (FICO scores range from 300 to 850), you’ll enjoy the best mortgage offers and interest rates. The lower your rate, the cheaper your house payments will be.

To see how much money a stronger credit score could save you, plug your numbers into this calculator at myFICO.com. You’ll also see the score ranges — 660-679, for example.

Suppose someone with a score between 760 and 850 gets a 30-year fixed-rate mortgage for $300,000 at 3.3 percent APR (annual percentage rate). The monthly payment will be $1,319 a month. (Interest rates change daily; watch current rates here).

Homebuyers with lower scores can’t get that great rate. With a score in the 620-639 range, you might pay about 4.9 percent. That’s a $1,596 monthly payment — $277 more each month.

2. Meet with lenders

Now you’re ready to meet with a mortgage lender or broker — or several — to ask for advice on how to boost your credit score. These early chats also prepare you for mortgage shopping, letting you see and compare lenders’ styles, knowledge and helpfulness.

Ask them what documents you’ll need to submit when you apply. Federal mortgage rules that went into effect in 2014 protect consumers better but they also make it a bit harder to get a mortgage — all a response to the subprime lending crisis. You’ll be judged on eight points:

  • Income and assets
  • Employment
  • Child support or alimony obligations
  • Credit history
  • Monthly payments on debts
  • What you can afford to pay monthly on a mortgage
  • Other mortgage costs, like home and mortgage insurance and property taxes
  • Your remaining income

For the best rates, all of your monthly payments must be less than 36 percent of your pretax monthly income, although FHA loans may accept total debt payments up to 43 percent of your income.

3. Pull your credit score

Now we’re talking about your actual credit score. As we said above, it’s different from your credit report. Even if you’re not ready to make a purchase, you’ll want to watch your score to monitor your progress improving it.

MyFICO charges $29.95 a month to provide your FICO score and credit reports. Although many competitor scores exist, the FICO (Fair Isaac Corporation) score is the one most widely used in lending and banking.

But why pay when you can get your score for free? That used to be difficult but, thanks to pressure by the federal Consumer Financial Protection Bureau, many avenues now exist to access your FICO score without paying a dime. Learn how to get your score for free here: Hallelujah! 5 Ways to Get Your FICO Score for Free.

A few examples:

  • Get it by making an appointment with a nonprofit credit counseling agency.
  • Some credit card companies give card holders a look at their FICO scores as a free perk.
  • Student loan borrowers and co-signers of Sallie Mae student loans have access to their scores.
  • Your credit union may allow members to see their FICO scores.

Caution: You’ll see ads for so-called free credit scores, but these aren’t the scores that lenders see. Better to get a free FICO score if you can.

4. Beef up your score

The reason to monitor your score is so that you can watch your progress if you are trying to raise your score in order to get better access to credit and lower interest rates on borrowing. There’s plenty you can do to quickly raise a low credit score. (See “7 Fast Ways to Raise Your Credit Score.”)

Making an effort to raise your score matters, especially if your score is near the top or bottom of a credit score range.

For example, with a score of 745, you’re near the top of the 700-759 range. With effort, you might gain enough points to move into the highest category, 760-850, giving you access to lower interest rates.

Or suppose your score is 766. Credit scores bounce around all the time; you don’t want yours dropping below 760, which puts you in the less desirable 700-759 category. Try to boost your score at least into the safe middle of the 760-850 range.

Building a Better Credit Report” from the Federal Trade Commission can help.

5. First the mortgage, then the house

You’re probably itching to start shopping for a home. That’s fun, but keep your head on straight. Shop for the mortgage first. Looking for a home often gets emotions and fantasies all fired up, tempting shoppers to spend more than they can afford.

Don’t let emotions hijack your home purchase, causing you to overpay or stretch beyond your means. This article will help you figure out how to tell how much house you can afford, taking into account the mortgage payment as well as all the other big expenses of homeownership — taxes, insurance, homeowner fees, bank fees, repairs, appliances, maintenance and improvements.

Window shopping? Fine. But stay sober while you run the numbers.

6. Get pre-approved (versus pre-qualified)

Getting pre-qualified for a loan usually involves a lender getting a cursory view of your assets and income — and can even be done by phone or over the Internet. As Investopedia explains the process:

You supply a bank or lender with your overall financial picture, including your debt, income and assets. After evaluating this information, a lender can give you an idea of the mortgage amount for which you qualify.

Being pre-qualified is in no way sufficient. It merely indicates the amount for which you are likely to be approved — after a thorough verification of your financials.

A pre-approval, by contrast, requires a thorough investigation by the lender, as the Investopedia article describes:

You’ll complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. (Typically at this stage, you will not have found a house yet, so any reference to “property” on the application will be left blank). From this, the lender can tell you the specific mortgage amount for which you are approved. You’ll also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock in a specific rate.

By pre-approving your loan, the bank provides a conditional commitment to lend you up to a specified amount. That can impress sellers and help you when you’re competing with other buyers for a home.

The bad news: Fewer banks are pre-approving mortgages lately. But that doesn’t mean you shouldn’t try to shop around.

7. Now shop

Now that you know what you can afford to pay for a home, you can finally start shopping. Here are sources for guidance on shopping:

8. Hold off applying for credit

Applying for new credit is a tricky thing. It can help improve your credit score – in the long term. But if you open a new credit card or take out another loan too near the time of your mortgage application, your credit score could dip and affect your interest rate.

However, applying for mortgages won’t have much impact. MyFICO says:

Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.

Also, checking your own credit score or reports will not have an adverse impact.

9. Hold off on big purchases

Buying furniture, appliances, a car or any substantial purchase outside your regular monthly expenses could kill your mortgage loan. Before your loan closes, a lender makes a final credit check. New debts could change your eligibility. Says The New York Times:

“We tell our clients about this upfront, and keep reminding them through the entire process not to go buy a new bed or a refrigerator,” said Michael Daversa, the president and founder of Atlantic Residential Mortgage, which is based in Westport, Conn. “What you’re supposed to do is keep everything status quo.”

 

Marilyn Lewis

 

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