There are five steps to take to find the best mortgage loan. The steps are slightly different if you buy a home compared to refinancing a home you already own.
It helps to prepare in advance before you are looking to purchase a home. In many parts of the United States, the real estate market is very active, and home prices continue to rise. Demand for the highest-quality homes in the best locations may make certain areas a seller’s market.
Potential homebuyers, who are pre-qualified, with a written loan commitment from a qualified lender, have the best chance of a seller accepting their competitive offer.
Here are the steps to take to get the best mortgage loan to buy a home:
- Credit Reports: Get your credit reports from Equifax, Experian, and TransUnion.
- Repair Credit: Repair bad credit and increase your FICO score.
- Save Money: Save money for the down payment and upfront costs.
- Budget Plan: Determine the purchase amount for a home that you can afford.
- Lender Shopping: Understand mortgage terms and shop for a home lender.
Skip steps three and four if you are refinancing. Refinancing aims to lower monthly payments, reduce loan interest costs, and perhaps take cash out.
Everyone is entitled to a free annual copy of their credit report from the three credit agencies of Equifax, Experian, and TransUnion. Lenders use the FICO score to set the loan rates. The range of FICO scores is from 300 to 850. Your goal is to achieve an excellent credit rating with a FICO score of 750 to 850 to get the best loan rate and terms. Having a FICO score of 620 or below may make it more challenging to get a loan, and the interest rate will be higher.
The lending industry pegs the loan interest rate based on a FICO score according to 20-point increments up or down. So, for example, if your FICO score drops from 760 to 740, you will likely see a slight increase in the interest rate offered by a lender.
The process of credit repair has the goal of increasing your FICO score. It is possible to do this yourself or pay someone to help you repair your credit. You will want to dispute any errors on your credit reports and consistently pay any monthly bills on time. It takes about six months for these efforts to reflect an improved FICO score. Most people use a monthly subscription service (which could be offered for free by your bank) to monitor their FICO score in real-time while working to repair their credit.
Better loan rates are available for those who can give a down payment of at least 20% of the purchase price. Some loans have lower down payment requirements, but usually, the interest rates are higher. Also, be sure you have enough for the upfront costs that you need to pay to conclude the purchase contract. Upfront costs may include earnest money to deposit in escrow when making a purchase offer and money to pay for any desired inspections of the home.
Make a detailed budget of what it will cost to own a home. Use a mortgage calculator to figure out the monthly costs of your mortgage. Be sure to include the expenses of insurance, property taxes, and estimates of utilities and maintenance costs. Include any homeowners’ association fees in your budget.
By doing this budget analysis, you will understand what price you can afford to pay for a home.
Length of the loan
Consider the length of the loan. A 15-yr mortgage has higher payments than a 30-year mortgage and saves a considerable amount of interest expense. Be cautious about variable loans and understand that your monthly payments may increase dramatically if interest rates go up.
A conventional loan requires 20% down, and the lender finances the balance. There are loans from the VA for the military (active, retired, and spouses). In addition, the USDA has a program for loans in rural areas. If you have bad credit, investigate an FHA loan. If the home price is above the standard guidelines, you may need a jumbo loan.
Be sure to understand all closing costs and lending fees to compare loan offers appropriately.
One of the best steps you can take to find the best mortgage loan is to work with a mortgage broker. A mortgage broker can evaluate your situation and look for the best program that fits your particular scenario. Then, when you find the loan you like best, a mortgage broker can give you a lending commitment in writing to have the most buying advantage when searching for a home to buy.