4 Tips on How to Get the Best Mortgage before Buying a House
Purchasing a home is a big investment. It’s very likely your finances will take a hit when you decide to take on this huge financial responsibility. Your ideal house may not be cheap; but if you’re looking to get the best deal possible, you might want to consider getting a mortgage deal so that you can finally close on that dream home.
With the property goal in mind, make sure you know these four tips that you should take into consideration before getting yourself a mortgage deal for your ideal house.
Self-check First Before Looking for Houses
The rule of thumb before you start house-hunting or approaching lenders for pre-qualification, is that you want to take a look at your own finances. Even with stricter regulations around mortgage lending, most banks would still allow you to borrow more than your financial capability would allow.
Always remember that you need to decide for yourself how much can you really afford for the house. Look at your current budget, then your constant and variable expenses, and any other financial obligations. After this, you may then start to research and project a more realistic total for your living expenses if you do become a homeowner. Keep in mind that a mortgage would still cost you the principal and interest on the loan. However, you cannot forget to account that you still need to pay homeowner’s insurance and property taxes.
Looking at your finances would also give you a lot to work on: you would know how much you can truly afford, and from there, you could determine how much you need to save for a down payment. Furthermore, you should pull up your credit report and get an estimate of your credit score since lenders always base their services on this major factor.
Make Sure that You Have Money for Down Payment
It would be safe for you if you could save up to 20% of your ideal home’s purchase price to use as your down payment. It’s a big number, but putting down this much in cash means that you only need to finance 80% of the purchase. As such, you won’t have to deal with private mortgage insurance (or PMI) and your monthly payments would be much more affordable.
Leading off with more cash also makes you a more appealing borrower for lenders. You would likely secure a better interest rate if you reach the 20% down payment threshold. Meanwhile, you could also have more flexibility in choosing a mortgage loan type; you won’t be limited to choosing a so-so property just because you only have a few thousand dollars or require adjustable rates to lower your loan payments in the first few years of ownership.
Again, this down payment may work out to be a large number for you. However, you need to do some saving for yourself with the money you earned. Most lenders do not like to see – and generally won’t accept – borrowed money as a down payment even if it was an informal loan from a family member or friend.
Improve Your Credit Score
As credit scores genuinely improve the deal that you can get when you avail of something like a life insurance, only credit scores in the “good” or “excellent” range receives the best interest rates available from lenders.
Whether or not the system is fair or favors you, you can take action to improve your credit score if it’s less than good or excellent before you apply for a mortgage. This can also help you secure a better interest rate. More importantly, it could give you a lower monthly payment and save you money over the lifetime of your loan.
Here’s what you can do to improve your credit score:
- Ensure you pay off all your credit card balances on time and in full.
- Don’t run up your credit card balances to their limits. This affects your debt-to-credit-limit ratio and that negatively impacts your score.
- Remember, improving your credit score can take some time. Be consistent in your actions and be patient. You can see the results if you stick with these good credit use habits.
- You’d also want to avoid applying for new lines of credit or taking out loans in the months before you apply for a mortgage. Don’t allow anyone to run a hard inquiry on your credit, either.
Having a good credit score always puts you in a better position, even at the worst case scenario where you won’t be able to pay for your mortgage at all. When things get ugly and you need to consider insolvency solutions like that of a trust deed, it would always be better if you’re off to a good start in terms of credit score.
Research Before Signing With a Lender
There are countless mortgage lenders out there and not all of them are big national banks. You can receive a mortgage with the really famous banks, but you can also go to credit unions and other institutions whose sole purpose is to underwrite home loans.
Keep in mind that setting up a mortgage is a business transaction with any institution. With that being said, lenders make money off mortgages via the interest payments, and they may court you for your business. Don’t feel obligated to go with one over another for any reason. You don’t have to choose the same bank where your checking account is, and you don’t have to go with a lender your Realtor says you should choose.
Conduct your own research, ask questions, and explore all your options. Thoroughly checking all possible avenues to effectively set-up your finances may open up more choices for you to have the best deal at the end of the day. It may take time, but the fruits are definitely worth it.
When choosing a lender, you can consider these factors:
- Get quotes on interest rates from the lenders you’re interested in working with. It is recommended to check with at least 5 different lenders. Be sure to ask for quotes from all of them (and go through any pre-approval processes) within a 14-day time span. All inquiries made in that time period should appear on your credit report as one, which shouldn’t impact your credit score.
- Ask about fees and closing costs and get a good faith estimate to compare overall expenses for originating your loan. Getting an estimated interest rate is important, but it’s not the only cost to consider.
- Make sure potential lenders answer all your questions and are transparent with their mortgage loan application and underwriting process. If someone refuses to answer your question, cross that lender off your list of prospects.
- Think about more than just money. If two lenders provide you very similar information on the financial side of things, consider their customer service and accessibility. The mortgage process is a long and tedious one, considering that you are about to invest a considerable amount of time verifying information, sending in documentation, and working with your loan processor. Choosing a lender with good customer service is no small consideration.
- Applying for and receiving a home loan is a big decision, and you should be prepared before you start this process. Understand what to expect and don’t shy away from asking questions and doing as much research as you can.
If you don’t know or understand something throughout the process, ask a financial professional or a trusted expert. A CFP, CPA, or attorney may be able to help, in the same way that financial resources and websites online can provide vital information in your upcoming financial engagement.