Ready To Get Financed?
Financing is your first step as a home buyer. Financing lets you know how much home you can afford, what sort of home you need to purchase and it also lets you make a better offer than someone who is not yet pre-qualified. Sellers look for that pre-qualification letter. Some seller will not even let you view a home without it! There are numerous reasons to speak with a lender but the majority of people in real estate agree that financing is a buyers first step.
Where to find a lender. They are everywhere! You can go online and search Find A Lender and Google can give you millions of options. Talk with friends and family. Talk to your local bank. If you have already spoken with an agent they can make recommendations.
NerdWallet's Steve NiCastro has some great advice for finding the best mortgage lenders for you.
1. GET YOUR CREDIT SCORE IN SHAPE
Not everyone can qualify to buy a home; you have to meet certain credit and income criteria to assure mortgage companies you can repay your loan.
A low credit score signals that lending to you is risky, which means a higher interest rate on your home loan. The higher your credit score and the more on-time payments you make, the more power you’ll have to negotiate for better rates with potential lenders. Generally, if you have a score under 580, you’ll have a tough time qualifying for most types of mortgages.
To build your credit score, first make sure your credit reports are accurate and free of errors. Get your report from the three major credit bureaus: Equifax, Experian and TransUnion. Each is required to provide you with a free copy of your report once every 12 months.
Next, try to pay off high-interest debts and lower your overall level of debt as quickly as possible. By lowering your debt, you’ll improve your debt-to-income ratio. Paying off credit cards and recurring loans before you buy a home will also free up more money for the down payment.
Get your credit score
2. KNOW THE LENDING LANDSCAPE
It’s difficult to discern who the best mortgage lenders are in a crowded field. Here are the most common types of lenders you’ll choose from:
Credit unions: These member-owned financial institutions often offer favorable interest rates to shareholders. And many have eased membership restrictions, so it’s likely you can find one to join.
Mortgage bankers: Bankers who work for a specific financial institution and package loans for consideration by the bank’s underwriters.
Correspondent lenders: Correspondent lenders are often local mortgage loan companies that have the resources to make your loan, but rely instead on a pipeline of other lenders, such as Wells Fargo and Chase, to whom they immediately sell your loan.
Savings and loans: Once the bedrock of home lending, S&Ls are now a bit hard to find. But these smaller financial institutions are often very community-oriented and worth seeking out.
Mutual savings banks: Another type of thrift institution, like savings and loans, mutual savings banks are locally focused and often competitive.
You can, and should, check if each lender you consider is registered in the state you’re shopping in through the Nationwide Multistate Licensing System Registry. Also, search the Better Business Bureau for unbiased reviews and information.
3. GET PREAPPROVED
Taking the time to get a mortgage pre-approval letter before you start looking at houses is important. It can put you head and shoulders above other buyers who may be interested in the same house you want to bid on. It does that by showing the seller that a lender has evaluated your finances and figured out how much you can afford to borrow, and therefore how much house you can afford.
The truth is, if you’re not pre-approved, you’ll probably be the only one at the open house who isn’t and will therefore face a big disadvantage when making your offer.
To get pre-approved, you’ll have to provide lenders with a fair amount of financial information. It’s worth the effort, because it shows sellers your offer on their home is likely to close. It can also make getting a mortgage a little easier, if you get your home loan from the same lender, because the lender will already have financial information about you that’s essential to getting a mortgage.
Here’s a list of what you’re likely to have to provide to get pre-approved.
Social Security numbers for yourself and any co-borrowers
Bank, savings, checking, investment account information
Outstanding debt obligations, including credit card, car loan, student loan and other balances
Two years of tax returns, W-2s and 1099s
Salary and employer information
Information about how much of a down payment you can make, and where the money is coming from
It’s a good idea to contact more than one lender during the pre-approval process. One might offer convenient online pre-approval, while your local credit union could help you overcome any pre-approval barriers you face. Getting pre-approved will help you find a mortgage lender who can work with you to find a home loan with an interest rate and other terms suited to your needs.
4. COMPARE RATES FROM SEVERAL MORTGAGE LENDERS
This is where homework and a lot of patience come into play. As noted, there are all kinds of mortgage lenders — neighborhood banks, big commercial banks, credit unions and online mortgage lenders. You have more options than ever.
You can search for the best mortgage rates online to start. Keep in mind that the rate quote you see online is a starting point; a lender or broker will have to pull your credit information and process a loan application to provide an accurate rate, which you can then lock in if you’re satisfied with the product.
Once you have several quotes in hand, compare costs and decide which one makes the most financial sense for you. Use your research as leverage to negotiate for the best mortgage rates possible.
While there’s more to finding a good lender than picking the lowest rate, that doesn’t mean it isn’t important. The total interest you pay over the life of the loan is a big figure, and a low rate can save you thousands of dollars.
5. ASK THE RIGHT QUESTIONS AND READ THE FINE PRINT
Picking the right lender or broker to work with can be tricky. Narrow your choices by asking for referrals from friends, family or your real estate agent, or by reading online reviews. Once you have some names, it’s time to ask:
Note: If you’re looking for low-down-payment options, a loan backed by the Federal Housing Administration, Department of Veterans Affairs or Department of Agriculture may be your best bet. However, keep in mind that more and more lenders are offering low-down-payment options on mortgages that aren’t backed by a government program.
Also, check with your mortgage lender or broker if buying points to lower your rate makes sense. If you buy points, you’re paying some interest upfront in exchange for a lower rate on your mortgage.
This might be a good move if you plan on living in the home for a long time.
Remember, principal and interest payments on a mortgage aren’t the only costs of homeownership; you should ask your lender about others, including closing costs, points, loan origination fees and other transaction fees. If you’re unsure of something, make sure you ask for an explanation.
Most mortgage lenders will require an “earnest money” deposit to start the loan process. Ask the lender to specify under what circumstances the earnest money will be kept, and if the answer is vague, keep shopping around.
Don’t forget to examine the fine print on your loan documents. These will tell you the exact finance terms, who pays which closing costs, what items are and aren’t included with the home, whether there’s a home inspection contingency, the closing date and other important details.