By Broderick Perkins
Once a simple task that meant comparing the fixed interest rate mortgages of a dozen or so lenders, the mortgage search today is more like finding your way through a maze. There are dozens of loan types, hundreds of loan programs and thousands of mortgage brokers, bankers, lenders, finance companies, credit unions, even stock brokerage firms originating loans.
Because there is so much to learn, finding a mortgage that fits doesn't begin with an application, but education. If there's but one aspect of the home buying transaction you take the time to learn in detail, make it mortgages. Discover too late that you can't afford your mortgage, and you could not only lose your home, but also be unable to purchase another one for years.
Obtaining information is easy. Mortgage information sources are as numerous as mortgage types. Web sites, topical newspaper articles, mortgage books, consumer seminars and workshops can help. Professionals, including financial planners, real estate agents, mortgage brokers and lenders, can also assist you.
Examine your finances
First, compare fixed-rate mortgages with adjustable rate mortgages to determine which type best fits your current financial lifestyle and, to some extent, your future obligations 15 to 30 years down the road. Learn how much of a mortgage you can afford. Lenders are apt to qualify you for as much as they are willing to lend, which can be more than you can really afford. It's up to you to take stock of your income and expenses, both current and projected, to determine what you can comfortably manage each month.
Along with your mortgage payment of interest and principle, remember to add related insurance costs, taxes, homeowner association dues and any other costs. Also, obtain copies of your credit reports from all credit reporting agencies. Obtaining your credit report in advance gives you time to challenge missing information, errors, or other discrepancies. If necessary, you can put a statement on your credit report to explain any blemishes you can't cure. Lenders likely will ask you to explain problem areas on your credit record anyway. Your attention will let the lender know you are conscientious about your finances.
Shopping for lenders and loans
When you are ready to shop for a loan you have two basic choices -- direct lenders and mortgage brokers. Direct lenders have money to lend. They make the final decision on your application. Lenders have a limited number of in-house loans available. Brokers are intermediaries who, like you, have many lenders from which to choose. If you have special financing needs and can't find a loan to suit them, an experienced broker may be able to ferret out the financing you need.
Along with shopping the source, you'll also have to shop loan costs, including the interest rate, broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal costs and a host of others.
Before you actually apply for a mortgage on or off line, gather documents necessary to prove claims you'll make on the application. The application will ask for information about your job tenure, employment stability, income, your assets (property, cars, bank accounts and investments) and your liabilities (auto loans, installment loans, mortgages, credit-card debt, household expenses and others).
The lender will run a credit check on you, but you'll have to supply supplemental documentation including paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and other documentation. If the lender deems you creditworthy, it will likely hire a professional appraiser to make sure the value of the home you are about to buy is commensurate with your loan amount.
Lock it down
During your loan application, get a rate lock - an essential document in a rising mortgage rate market. On or offline, a rate lock -- in writing - guarantees you a certain interest rate and terms for a given period.
- Lock in all the costs you can, the interest rate, and points.
- Set the lock ''on application'' rather than ''on approval.'' On approval means you won't have a stab at rates until the loan application is approved. In a rising market, a lock on approval would cost you more in higher interest rate.
- Along with shopping around for the best mortgage, shop around for both the terms of the lock contract and its cost. Both can vary.
- Your lock-in period should be long enough to allow for settlement, contingencies imposed by the lender or the purchase contract and other factors that could delay the process. Consider all factors that could delay your settlement, including the time it will take you to provide requested materials about your financial condition, unanticipated construction delays on a new house and the like.
- Most lock periods range from 15 to 60 days. Anything longer could be cost prohibitive. Ask your lender to estimate (in writing, if possible) the average time for processing loans. Once you lock-in a rate, you must make sure that your loan is approved and closed before the commitment expires. Follow up on your loan application to make sure you don't delay sending additional documents the lender requires.
- Get preapproved. Once the lender approves your loan & you've been prequalified for a certain amount, understand that there is no guarantee that you will get the loan. Prequalification simply indicates you are creditworthy enough to obtain a loan and it lets you know how much the lender is willing to lend you based on your income and debts. Often, the lender has yet to pull your credit report. It's wise to take the next step and get preapproved for a specific amount the lender will actually lend you. A preapproval - in writing - is the amount the lender guarantees it will lend you, based on a thorough analysis of your application. The preapproval not only gives you the security of shopping for a home you can afford, it tells the seller you are a serious buyer ready with solid financing. That's a negotiating edge you want in any market.