13 of the Best Expert-Approved Mortgage Tips You’ll Ever Get
Buying a home will likely be the biggest purchase of your life. So, it makes sense: You’ve got a lot of questions about how this whole process works.
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Should you go with a fixed-rate mortgage or an adjustable-rate mortgage (and are we still afraid of those ARMs, post-recession)? How much of a down payment do you need to buy a home? How can you trim down the interest that you pay on a home?
We’re glad you’re here. Welcome to this special edition of what we like to call “Mortgage Therapy”. Here are some of our most popular, expert-approved mortgage tips that will make the whole home-buying process easier.
1. You don’t need perfect credit to qualify for a mortgage
An “exceptional” credit score that’s 740 or above will likely get you the best rate on a mortgage. But you can still qualify for a mortgage with a much lower score. In fact, if you can put 10 percent into a down payment, you could qualify for an FHA loan with a score as low as 500. This could be an instance of “not letting the perfect be the enemy of the good.”
2. An adjustable-rate mortgage might be good if you’re planning to move soon
If you love stability, and the idea of knowing exactly what your mortgage will be for 30 years, a fixed-rate mortgage may be the best bet for you. More than 9 out of 10 homebuyers go with fixed rate mortgages. But, there may be some scenarios when an adjustable-rate mortgage makes more sense, like if you are confident you’ll be selling within the introductory period while rates are still low.
You can tell how long the rate will be fixed in the title of the loan, i.e. if you have a 5/1 ARM, that means the loan’s lower introductory rate will be good for five years and then is subject to adjusting on an annual basis. And know this: There are more safeguards in place for borrowers than there were prior to the housing crash.
3. Shop around for loans
It may be tempting to just walk into your longtime bank and apply for a mortgage. But it’s a better idea to shop around for loans and compare rates. Buying a home will likely be the biggest purchase you’ll ever make, after all!
Considering multiple lenders is something that first-time home buyers do better than repeat buyers, according to a study from Lending Tree. Fifty-two percent of first-time buyers consider more than one lender, compared to 48 percent of repeat buyers. But, only one in four first-time home buyers were familiar with the different types of mortgage loans available to them.
4. Don’t trust the mortgage calculator
You’ll find all sorts of mortgage calculators on the internet. Some are bare bones and will just tell you information about principle and interest. Others are far more elaborate, layering in factors like property taxes, HOA fees, and Private Mortgage Insurance.
While these calculators can give you a ballpark estimate of how much owning a home will cost, the numbers start firming up once you go through the application and qualification process. Before you close, you’ll get a Loan Estimate that tells you exactly how much you’ll be paying on your mortgage. Here are experts’ favorite mortgage calculators.
5. Honesty is the best policy
Mortgage fraud is on the rise. It occurs when you lie or omit some key information on your mortgage application. Occupancy fraud is the most common type, and it occurs when an applicant provides false information about their plans to live in a property and use it as their full-time residence (rather than rent it out as a full-time Airbnb) so they qualify for a lower-rate mortgage. Mortgage fraud could land you in some hot water. We’re talking criminal charges and big fines.
6. Don’t make any large purchases when you’re in the process of getting a mortgage
While your home loan is being underwritten, treat your credit like a fragile item and handle it with care. That means you don’t want to do anything major, like taking out a car loan or maxing out a credit card on a big vacation. Doing so before closing can affect your credit scores, which could change the terms of your loan or cause your financing to fall through altogether.
7. Pay your mortgage on time
This might sound like a no-brainer. But if you slip behind, the stakes are high as your home could go into foreclosure. While guidelines vary by state, lenders typically begin the foreclosure process around the 120-day mark.
To be sure you pay your mortgage on time every month, keep a couple months’ expenses in your savings account as padding and set up reminders for when your mortgage is due.
8. Round up on your mortgage payment every month
If you’ve got enough of a cash flow, and it’s within your budget, round up to the next hundred dollars on your mortgage every month. Be sure that you notate you want the payment to go towards the principal.
Because mortgages are amortized, this will help lessen the amount of money you pay interest on and by employing this strategy, you can cut months (maybe even years!) off of your mortgage.
9. Learn about first-time homebuyer programs
There’s lots of assistance out there for first-time homebuyers who need help coming up with a down payment. Your mortgage lender should be in the know when it comes to what programs you may qualify for.
For example, the Fannie Mae HomeReady program will allow you to put down as low as 3 percent and your mortgage insurance can be canceled once your home equity reaches 20 percent. On the flip side, mortgage insurance can’t be canceled on FHA loans if you put down less than 10 percent (although, you could refinance through a non-FHA loan). You can also check with your state’s housing finance agency to find out if you qualify for an assistance program.
10. Get pre-qualified before you shop for homes
Pre-qualification will help you better understand what homes are in your price range. Also, a lot of real estate agents will want you to have a pre-qualification letter in hand before they start showing you homes. It signals that you’re serious about home buying.
If you don’t have a lender, your real estate agent can make referrals. Ask about lenders who have expertise working with buyers like yourself, whether you’re a first-time buyer or have served in the military and qualify for VA loans.
There is a big difference between being pre-qualified and pre-approved. Pre-qualification happens when you self-report information about your income and credit score and savings to a lender. All of that information gets verified during the pre-approval process, which is when lenders verify your income and credit score and look over W-2s and bank statements.
11. Budget for closing costs
Saving for a down payment may be front of mind. But don’t forget to also budget for closing costs. On average, they cost about 2 to 5 percent of your loan, and include all types of costs associated with securing your mortgage, including appraisal, home inspection, and loan origination fees. You could roll these closing costs into your mortgage, but you’ll be paying interest on them.
12. Keep your debt-to-income ratio below 36 percent
In addition to keeping your credit in tip-top shape and saving for a downpayment, having a reasonable debt-to-income ratio will help you secure a mortgage. The magic number that most lenders are looking for falls below 36 percent. Debt that’s included in this calculation includes your housing charges, plus monthly debts like your credit card payments, car loan, student loans, and any personal loans you may have.
13. Don’t forget about property taxes or insurance
When you’re budgeting for a home, you need to think beyond the costs of mortgage. Oftentimes, first time homebuyers forget to factor in property taxes and insurance costs. Also, these costs are likely to fluctuate. When you get a quote for property insurance, ask how much rates have gone up over the last year. You can also research how much property taxes have increased for the property over the years by looking on Zillow.