Here's a motto that could be used by prospective homeowners who want to purchase a mortgage: "Be Prepared!"
But finding a good mortgage loan can be complicated, and if you're not ready, you could work yourself into a real financial bind.
"If you don't do your homework, you could pay a higher interest rate or be put in an inappropriate loan program that could cost you tens of thousands of dollars, literally," says Bill Burnett, president of the Virginia Association of Mortgage Brokers (VAMB).
Want to avoid these financial binds? These six expert tips can help you scout for the best mortgage.
Tip #1: Learn the Lingo
Do you know the difference between interest and an annual percentage rate (APR)? If you're shifting uncomfortably in your seat right now, think about how dazed and confused you will be when comparing mortgage loans.
Because the real estate business has a language of its own, Burnett says that familiarizing yourself with some basic terminology could be to your advantage.
"You don't have to become a mortgage expert, but you should be familiar with mortgage terms so that when you are speaking to realtors, lenders, brokers, or some other mortgage professionals you can keep up," says Dustin Hobbs, communications director for the California Mortgage Bankers Association (CMBA). "Not only will it protect your own interests, it will make you a better consumer."
So let's have a quick vocabulary lesson on the two aforementioned terms that Hobbs considers essential to know: interest and APR.
The website for the Virginia Association of Mortgage Brokers defines interest as the price that lenders charge borrowers for using their money. On the other hand, an APR is defined as the "total cost of the loan, expressed as a yearly rate." This total cost might include fees and closing costs.
As you can see, when comparing mortgage loans, it's helpful to speak the language. The VAMB website contains an entire glossary of real estate terms for you to study up on.
Tip #2: Get to Know Your Mortgage Professionals
Shopping for a mortgage loan should begin when you start shopping for mortgage professionals, the people who will advise you during the process and/or set up the actual loan. Hobbs says there are a number of ways to locate them:
- Seek referrals from people who successfully have obtained mortgage loans.
- Check with a group such as the National Association of Mortgage Brokers (NAMB), a professional organization for the mortgage broker industry.
- Consult your local chamber of commerce.
- Obtain background information on professionals from state or national mortgage regulators, such as the Nationwide Mortgage Licensing System and Registry (NMLS).
Burnett says you can choose a mortgage broker, a lender, or a combination of the pair in order to get the loan shopping process in motion. A mortgage broker may counsel you on available loans and process your application and loan, according to the Virginia Association of Mortgage Brokers. A lender, on the other hand, will underwrite the loan after assessing your risk.
Whether you enlist the help of mortgage brokers or work directly with lenders, both Hobbs and Burnett say you should be willing to investigate their business history through services such as the Better Business Bureau (BBB), the national nonprofit organization that tracks and reviews businesses, their practices, and their reputations.
Bottom line: "Know who you are dealing with," Hobbs says. "Take an active role in the process and get a second opinion."
Burnett also suggests consulting other professionals like your financial planner or accountant about a proposed mortgage. Make sure you're making the right decision from all of those viewpoints.
Tip #3: Keep Score of Your Credit
You've probably heard about it ad nauseum, but our experts are confirming: "Credit rating is everything on a mortgage," says Burnett.
Credit scores, which are maintained by credit reporting bureaus, are used by lenders to help gauge whether or not you'll be able to pay back the money you borrow, according to Burnett.
Known more specifically as FICO (Fair, Isaac and Company) scores, credit scores range from 300-850. The basic axiom, Burnett says, is that the lower your credit score, the more difficult it could be for you to obtain a mortgage loan.
"The lending requirements are so tight now, they take people out of the market who used to qualify," Burnett says. "Income and assets are important, too, but if you have a million bucks in the bank with a 660 credit score, you are going to get hammered with fees, points, or [interest] rates."
Hobbs suggests correcting any errors that might appear on your credit report. How, you ask? The website myfico.com provides a list of tips to help people repair their credit. Here are some highlights:
- Make your credit payments on time.
- Reduce the amount of debt you owe.
- Pay your bills on time.
- Pay off debt rather than move it around.
- Have credit cards, but manage them responsibly.
"You gotta make sure you can do everything to maintain good credit," Hobbs says. "Certainly a family looking into a home should be monitoring their credit closely." To keep tabs on your credit score, you can check with the three major credit bureaus - Equifax, Experian, and Trans Union.
Tip #4: Tabulate Cost Information
When comparing mortgage loans, there are oodles of numbers you have to consider before finalizing your choice. If you're not a math major, and you're unsure of how to deal with the matrix of numbers involved in the mortgage loan process, Hobbs suggests you get some backup from a knowledgeable source.
"Don't be afraid to get a second opinion," he says. "It will help you understand if costs are reasonable. You won't know if you're getting a great deal by doing Google search."
You also might want to get familiar with the difference between a fixed and adjustable-rate mortgage (ARM) - as well as daily interest rates - in order to properly use a mortgage calculator.
A fixed-rate mortgage has an interest rate and monthly payment that remains constant over the loan's duration, the Federal Reserve Board says. Conversely, rates and payments are adjusted periodically with an ARM because they are based on the movement of a financial index, according to the Virginia Association of Mortgage Brokers.
When it comes to interest rates, understand that they can change each and every day. You might want to check in with an online source such as mortgagenewsdaily.com, a news and social media site that monitors the mortgage and real estate industries and provides daily updates of interest rates.
Tip #5: Aim for Pre-Approval
If you would like to consider yourself a savvy shopper in the mortgage loan market, Hobbs says you should take aim at getting pre-approved for a loan amount.
Pre-approval, the Virginia Association of Mortgage Brokers says, is "a commitment by a lender to extend credit, provided that specific conditions are met."
The biggest advantage of getting pre-approved, Hobbs says, is that it gives borrowers some negotiating leverage when they start looking at homes to buy. Because they already know the amount and type of mortgage within their price range, borrowers are less likely to overspend for a home that's out of their price range or budget.
Tip #6: Wheel and Deal
Shopping for a mortgage loan is not just a figure of speech. So like any shrewd consumer, you shouldn't bite on the first offer made by a broker or lender, but be willing to ask questions and negotiate to get the best deal possible.
"You can always ask," Burnett says. "Ask whether there is an origination fee, which is a fee paid to the person originating the loan or the cost to do business with a banker or broker."
Knowing what to ask might get a bit confusing, too, if you feel rushed. The key to dealing with lenders and brokers, Hobbs says, is not feeling hurried to make a deal and sign paperwork.
"Are you fully aware of what you are signing up for?" Hobbs asks. "It's something you don't want to rush through because, for most people, it's the most significant and largest financial commitment they will ever make."
To get the best mortgage loan possible, the Federal Reserve Board recommends asking these questions:
- Will a lender or broker waive or reduce one of its fees or agree to fewer points or a lower rate?
- Is the lender or broker agreeing to lower one fee while increasing another one?
- Can lenders or brokers give better terms than the ones they quoted originally or ones you have found elsewhere?
If you come into the process prepared to ask these sorts of questions, Burnett says you might be ready to make some astute comparisons of mortgage loans.
"You want to make sure you are obtaining the program, rate, and strategy that best fits your financial needs," Burnett says. "You need to take your time, make a good decision, and look at all your options."