LOAN SHOPPING TIPS

 

How to shop for a Home Mortgage

Since real estate tends to represent the single largest investment most of us ever make, it is vital to secure the best financing available. Every borrower has different needs, every property is unique, and every lender has its own rules and programs. The difficulty for most people in shopping for their own loan is that they don't know all the right questions to ask. Adding to that difficulty is the fact that most lenders only have certain programs to offer, so their job is to sell you what they have, rather than find the program that fulfills your needs. Choosing the wrong loan can be costly and even, devastating.

The average consumer has the choice of shopping for a mortgage product online or by phone. If you are overwhelmed by the task, then online rate shopping is not for you. In fact, loan pricing has become so complicated; even mortgage professionals can error when quoting a rate. A rate is determined by a combination of factors such as your FICO score, the loan-to-value ratio, the debt-to-income ratio and the type of property being financed (i.e. single family home, condo, units or condotel). In addition, the occupancy will cause the rate to change. For example, non-owner occupied loans are generally more expensive that owner occupied loans. The problem most consumers have is not knowing what information really matters when qualifying for a mortgage. If one little factor changes, the rate and/or the program could change. Simply because a consumer gets a mortgage quote doesn't mean his credit or property profile will qualify for that program.

Our recommendation is to invest your energy finding a reputable mortgage professional that you can trust. Try to get a referral from a friend or coworker who was satisfied with his mortgage officer. It would be much quicker and easier to let the professional educate you and steer you in the right direction rather than being a "do-it-yourselfer". One advantage of speaking with a professional is they may have suggestions or ideas that you might not have even considered or knew existed. They could save you a lot of time and money.

But if you have the time, energy and temperament to educate yourself about the many programs available, then online rate shopping could be successful for you. The first step is determining the type of mortgage program that would work for your situation. Once you know what mortgage you want, then gathering quotes is the next step.

You want to be sure to compare apples to apples when shopping a mortgage. It is a very tricky industry so you need to be sure that you are being quoted the program that you are inquiring about. The rate, the term, the points, if any, and the fees would need to be compared. You would also want to know if a prepayment penalty or an impound account are required. If you are shopping an adjustable loan, then the frequency of adjustment, the margin, the index and the life cap come into play. In addition, you would want to know if the loan had the potential for negative amortization. And if so, how much negative amortization is allowed. Knowing one or two of these loan features without knowing the rest of them is pretty much useless in shopping a loan. It is also the easiest way to be deceived by an unscrupulous salesperson. The safest way to compare products is to request a written Good Faith Estimate from the lender. Seeing a quote in writing eliminates confusion and miscommunication.

The written estimate will disclose the costs and features of the loan. Since rates change often, you need to obtain the estimates on the same day to do a true comparison. In a volatile market, rates can change several times during the same day which makes shopping a rate quite difficult. Thankfully, rapid daily changes don't happen that frequently.

The biggest trap consumers fall into is thinking their rate is locked when it isn't. You need to know if the rate can be locked in at application and if so, for how long. If a rate can only be locked for 15 days and it takes the lender 30 days to process your loan, the rate lock is worthless. The rate may sound good, but you may not be able to get it. It is not uncommon in the mortgage industry for deceptive salespeople to deliberately quote unrealistic rates to entice customers to apply for a mortgage. Later on in the loan process the salesperson will tell the consumer that their rate was not locked and the rates have increased. You need to know when and if your loan is locked, so you don't end up in a bind. If you skip a step in the shopping process, your mortgage experience may not have a happy ending.

If you want a fixed rate mortgage, then shopping a rate should be pretty clear cut. Our recommendation is to check online with the well-known banks or a trusted mortgage broker or banker. When you compare the major players, you will see the rates really vary only slightly from lender to lender. The rates and the loan costs will probably be very similar from one company to another. Sometimes banks, mortgage bankers and brokers offer special programs for low income borrowers or certain zip codes. These special programs may result in savings such as ¼-½% in interest rate. You can pretty much figure if someone is quoting 2% and every other lender is quoting 6-6.125%, that something is wrong with the 2% quote. When an interest rate sounds way too good to be true, it probably is.

The first thing you should do before shopping for a loan is to obtain a copy of your credit report from all three reporting bureaus, Experian, Equifax and Trans Union. You can obtain a free copy of your report from www.annualcreditreport.com. This will give you a chance to see what is being reported and will give you time to take care of anything that is being reported incorrectly. Your credit score is one of the key factors that will determine the interest rate and program offered to you. DO NOT let each lender you speak to run your credit report. Too many inquiries can negatively impact your credit score.

How do you determine what mortgage is right for you?

First, you should ask yourself several important questions. Some examples of these questions are:

• How long do I plan on staying in the property? Will I move in 6 years when my children graduate from high school?

• How long do I plan on having this loan? Am I inheriting some funds and will pay it off in the next two years? If so, is a 30 year fixed rate loan really necessary?

• How much can I afford per month? This is different from what the lender thinks you can qualify for. This is your personal assessment based on your life circumstances. If you like to travel a lot, have ten children or a child with special needs, you may not be able to make the payments even if the lender says you qualify. You need to decide what payment is comfortable for you.

• What is the value of the home I am buying or refinancing? This will determine your loan-to-value ratio, which is important in determining your interest rate.

• How much of a down payment can I afford to make? If I can get a better rate by making a larger down payment, am I willing to do that? Does the benefit of a lower rate justify parting with the funds and the interest I would be earning?

• Can I afford larger payments in a few years and need lower payments for the time being? For example, will the family have extra income when the spouse finishes college and goes back to work full time?

• Do I intend to make larger payments than what is required and pay the loan off quickly? Would simply doing a 15 year fixed rate loan at a lower rate be a better way for me to accomplish paying my home off quickly?"

Once you have determined the mortgage program that fits your needs, you can begin shopping for a loan. Just remember to get the loan quote in writing so all your hard work pays off. There are many different companies that can provide home loans. Some are very efficient with good customer service and some of them are playing the "numbers game." They don't care if they see you again; they aren't looking for loyal customers. They are just looking for immediate income. Obtaining a referral from someone you trust is usually a far better way to obtain a loan then wading through the minutia of mortgage products. A mortgage is major purchase…make it wisely.