Conventional wisdom says there couldn’t be a better time to capitalize on the attractively low mortgage interest rates and lower prices on the real estate market. With that being said, here are some very important steps to consider for those in the market to buy a new home. The first and most important consideration is to determine if you are, in fact, in the financial position to buy a home. Therefore, it’s a good idea to check your credit report and FICO (Fair Isaac Corporation) score beforehand to see if you have the creditworthiness to go ahead with buying a home. Credit report and score
Your FICO score is a complex credit score formula that assesses a borrower’s risk of defaulting on a loan. It is derived from the three credit reporting agencies (Experian, TransUnion, Equifax) that appear on your credit report and will be indicative of the interest rate you will pay on your mortgage loan. The good news is that consumers are offered one free copy of their credit report per year, but the bad news is that actual FICO scores are not included in these free reports. So you’ll still need to pay for this score, which is highly recommended to see exactly where you stand. At the time of this proactive investigation, you may want to “clean up” your credit to help speed up your FICO score to make it easier to get the best deal on your home loan.
In general, FICO scores of 640 or higher are considered candidates for prime rate loans, while those below 640 are considered high risk. To get prime mortgage rates, a borrower must have a FICO of at least 740. When you decide to go ahead with a home purchase, your mortgage broker or lender will request an updated credit report to obtain your FICO, in addition to having you. Fully document your income, assets, and liabilities. This process will serve to “pre-qualify” you for a home loan.
Lenders will analyze this information and determine the amount of debt you can reasonably handle based on your income, employment history, and credit history. Based on their perception of this information, as well as specific underwriting policies, lenders may grant you credit even if your FICO score is low, or they may even deny your credit application even if your score is high. In the unfortunate event that you are turned down by a particular lender, you may want to shop around.
Choosing a Mortgage Professional
There are several options available for you to choose wisely who will help you get the best mortgage interest rate and loan product on the market. Your choice of lender and type of loan will influence not only your settlement costs, but also the monthly cost of your home loan. There are many types of direct lenders you can choose from, such as: banks, savings associations, mortgage companies, and credit unions. You may decide to work with a mortgage broker or one of these direct lending sources. Though as mentioned, being turned down by a direct lender could surely become a determining factor in needing to shop around.
Price comparison is the same as the process of obtaining a home loan, and a mortgage broker can be instrumental in serving as a trusted partner in helping you find the loan that meets your needs. Think about it; A mortgage broker only deals with mortgages and therefore has access to more loans than direct lenders and this can certainly be a critical factor in making the right decisions. The individual attention and flexibility of a mortgage broker is superior to that of a direct lender because interest rates change daily. Consequently, a broker can initiate a loan with one lender and quickly switch gears to another lender if rates are better.
By all means, make sure your mortgage professional guarantees your rate with a “rate lock” of a set interest rate for a specified period of time, usually 30 days. This ensures that even if interest rates increase, you will still receive the “locked” rate.
Types of mortgage loans
For borrowers who cannot meet today’s strict loan requirements, FHA-backed loans are an alternative. These loans require a minimum down payment of 3.5 percent; however, borrowers will pay an insurance premium for private mortgage insurance (PMI), as well as a slightly higher interest rate. The required down payment with non-FHA loans can vary by market, borrower, and property type.
There are fixed and adjustable rate mortgages available to borrowers and your mortgage professional will explain and advise which one may be right for you. They will further discuss associated costs with you which may include broker origination fee, application and processing fees, points, prepaid items, and title charges.
Federal law requires all lenders to provide a good faith estimate of your loan costs and a truth-in-lending disclosure within three days of receiving your loan application. Please review this carefully with your broker to clearly understand what goes toward principal and interest, as well as the cost of mortgage insurance and property taxes so you know exactly how much your monthly payment will be.
Here are the ABC’s of getting a home loan:
a) Be proactive; review your credit report and work to improve FICO if necessary.
b) Choose your mortgage broker or direct lender wisely to find the best deal.
c) Your mortgage broker will thoroughly investigate and search for loans and rates, revealing the mortgage payment and costs associated with you.
d) Next, you will decide which loan is best for you. Don’t forget to set your rate!
The American dream
Homeownership is still an integral part of the American Dream and the truth is; we may never again see the low interest rates and real estate prices that are reflected in our current economy. Buying a home can be a major investment opportunity and one of the most important decisions you’ll ever make. Bottom line, it pays to be smart when choosing a trusted mortgage professional to partner with you to find the right home loan that reflects your realistic financial goals and dreams.