Buying a home and obtaining a mortgage is probably going to be the largest financial investment most people will make in their lifetime. As with most major goals in life, this process will deal with a variety of rules and complex issues. Your best approach to obtaining a mortgage is to not stress yourself out too much and divide your process into easy tasks, including gathering your documents, determining the amount you want to borrow, and understanding various mortgage options.

Most mortgage professionals would also suggest to make sure you review your credit report prior to applying for a home loan. The Fair Debt Collection Practices Act (FDCPA) allows you to obtain at least one free credit report a year. You will want to review your report to make sure all informaiton listed is accurate. If you have found any mistakes on your report, it is important that you try to get the mistakes fixed right away. In today’s housing crisis it is crucial that you have an impeccable credit score when applying for a loan.

Before you go looking for a home, you should determine how much home you can afford. Most lenders will prequalify you to borrow up to a certain amount. Prequalification allows you to focus in on a realistic price range and makes you a more attractive buyer. Whether or not you want to prequalify, eventually you’ll need to complete a loan application and it may take some time to gather and assemble the required information.

How much house you can buy also depends on your mortgage’s term and interest rate. The term is the length of time (usually 15 or 30 years) over which payments will be paid. The rate can be fixed (meaning it doesn’t change over the loan’s term) or adjustable (it fluctuates with market conditions). Thirty-year fixed-rate mortgages remain the most popular. The longer term lowers the monthly payment, while the fixed rate provides stability over the life of the loan. Given relatively low interest rates, these mortgages are attractive to buyers planning to stay at least six or seven years in their new home. The drawbacks are low principal payments in the early years, and the risk that market rates will decline over the term. However, if your credit history is sound and you have sufficient income, you can usually refinance your mortgage when rates decline.

Which type of mortgage is best for you?

A 15-year fixed mortgage comes with a low interest rate, reduces the number of total payments throughout the term, and increases the amount aid towards principal. However, this will also increase your monthly payments as well. If you feel you cannot afford higher payments now, than opting for a 30-year term may be a better solution. If there are no pre-payment penalties on the loan, you can start paying extra towards principal if your income increases. these are good loans if you plan on staying in your home a long time.

If you are only planning on living in the porperty for a few years, you may want to go for an adjustable rate mortgage (ARM). ARMs will almost always come with extremely low starting rates, but at some point the rates will tie to today’s current market rates and will typically increase a decent amount. Most ARMs will have a cap on the interest rate increases in a certain year, as well as the life of the mortgage. Many mortgage professionals would suggest to be wary about this type of loan unless you are confident you can afford the mortgage when the interest rate adjusts.

Another well-known type of home loan involves a balloon payment. This is a lump-sum payment that is to be paid once the loan has matured. Generally, this type of mortgage will come with rates slightly lower than that of a traditional thirty-year fixed loan. Once the loan is due to be paid off the borrower can either pay off the loan if full or shoot for a refinance. This option can also be decent for those who are wishing to sell before the loan has been paid off. However, because home values end to fluctuate, you may not be able to sell your property at the time you wish.

3 Steps to finding the right mortgage

1. Determine how long you wish to live in the home. If you are only considering living in the home for less than five years, an ARM may be a good option because it will start out with a lower interest rate. However, if you plan on living in the home for longer than 3-5 years, a fixed-rate mortgage would be the better option because you will not be faced with rate increases.

2. Make sure to shop around for the best rate. Banks, credit unions, and mortgage agencies all offer their own mortgage products. It would be wise to compare at least 5-8 different lenders in your area. Get a list of their current mortgage rates and make sure to write it down so you can keep track.

3. Take all costs from each lender, including fees, points, closing costs and add them together to get the total price.

Can’t afford a conventional mortgage?

If you cannot afford a conventional mortgage, there are a variety of alternatives. An anxious seller will sometimes offer owner financing. Federal Housing Administration (FHA) loans offer down payments as low as 3%, but may require the buyer to purchase mortgage insurance. (The FHA is a government agency responsible for insuring affordable housing mortgages.) The Veterans Administration (VA) offers no-money-down mortgages to qualified veterans of the U.S. military. Finally, there are local affordable housing advocates that offer low-cost, low down-payment loan alternatives. For further information, contact the FHA, VA, Fannie Mae, or your local mortgage lender or real estate broker.

Obtain information from various lenders:

“Home loans are available from several types of lenders—thrift institutions*, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price. You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can
mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions. Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers. And most brokers’ advertisements do not use the word “broker.” Therefore, be sure to ask whether a broker is involved. This information is important because brokers are usually paid a fee for their services that may be separate from and in addition to the lender’s origination or other fees. A broker’s compensation may be in the form of “points” paid at closing or as an add-on to your interest rate, or both. You should ask each broker you work with how he or she will be compensated so that you can compare the different fees. Be prepared to negotiate with the brokers as well as the lenders.”

Warning:

“Avoid Predatory lending: Over the last several years, our nation has made enormous progress in expanding access to capital for previously under served borrowers. Despite this progress, however, too many families are suffering today because of a growing incidence of abusive practices in a segment of the mortgage lending market. Predatory mortgage lending practices strip borrowers of home equity and threaten families with foreclosure, destabilizing the very communities that are beginning to enjoy the fruits of our nation’s economic success.

If you believe you have been a victim of predatory lending practices there are Federal agencies that can help. Please contact one of the agencies listed below to direct your issues.”

StopFraud.gov

Office of the Comptroller of the Currency (OCC)

Office of Thrift Supervision (OTS) Consumer Affairs

The National Association of Attorneys General

U.S. Dept. of Housing and Urban Development (HUD)

Related links:

Local homebuying programs: http://www.hud.gov/buying/localbuying.cfm

Sources:

U.S. Department of Housing and Urban Development

http://www.hud.gov/buying/booklet.pdf

Erik Sandstrom
LoanSafe's Mortgage Expert
I'm a Senior Loan Officer and LoanSafe mortgage expert. If you need a live rate quote, or need help getting a new mortgage, please call me direct anytime at 619-379-8999.