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5 Tips for Choosing the Best Mortgage for You

The type of mortgage you choose could save you thousands of dollars over the life of your mortgage. Take your time and make sure you have all the facts before making a final decision.

Download Your Home Loan Toolkit  for a free step-by-step guide with worksheets that help you work through each step in the process listed below and get the best mortgage for your situation.

  1. Define what affordable means to you
    A mortgage lending rule of thumb is that your total monthly home payment should be at or below 28% of your total monthly income before taxes. Lenders may approve you for more or for less depending on your overall financial picture, but how much are you comfortable paying each month for your total home loan? The total home loan cost includes the mortgage principal plus interest, mortgage insurance, property taxes, homeowners insurance, and any HOA or other neighborhood fees.  See pages 3-5 in Your Home Loan Toolkit (YHLT) for more information and worksheets.
  2. Understand your credit score
    Your credit, your credit scores, and how wisely you shop for a loan that best fits your needs have a significant impact on your mortgage interest rate and the fees you pay. To improve your credit and your chances of getting a better mortgage, get current on your payments and stay current. About 35% of your credit scores are based on whether or not you pay your bills on time. About 30% of your credit scores are based on how much debt you owe. That’s why you may want to consider paying down some of your debts. See page 6 in YHLT for more information.
  3. Pick the mortgage type that works best for you
    There are many different types of mortgages with the main differences being loan term, interest rate type, and loan type. Loan term indicates the length of the loan such as 30 years, 15 years or other. Interest rate type generally refers to either fixed-rate or adjustable-rate mortgages. Loan type includes categories such as conventional, FHA, VA, and USDA. Government programs often include low down payment or no down payment options. See page 7 in YHLT for more information.
  4. Understanding the difference between points and interest rate
    Points are a percentage of a loan amount. For example, when a loan officer talks about one point on a $100,000 loan, the loan officer is talking about one percent of the loan, which equals $1,000. Lenders offer different interest rates on loans with different points. There are three main choices you can make about points. You can decide you don’t want to pay or receive points at all. This is called a zero point loan. You can pay points at closing to receive a lower interest rate. Or you can choose to have points paid to you (also called lender credits) and use them to cover some of your closing costs. See page 9 in YHLT for more information.
  5. Choose your mortgage and avoid pitfalls
    Once you’ve done your homework and figured out how much total loan cost you can afford each month, reviewed your credit score and decided on the type of loan you want, it’s time to shop for a mortgage. This important step could save you thousands of dollars over the life of your mortgage. Take your time and make sure you have all the facts before signing any documents.

    • Make a list of several lenders you will start with
    • Get the facts from the lenders on your list
    • Compare Total Loan Costs

See pages 10-15 in YHLT for worksheets and more information on choosing the best mortgage for you as well as avoiding common pitfalls and handling any problems that should arise.

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Financing Your New Home

Once you’ve decided to buy a new home, there are a number of things you need to do before looking at houses including planning for financing your new home. In order to make an offer on a home, you need to be pre-approved by a mortgage company for the amount of your offer or higher. Whether or not you can get pre-approved for the loan amount you need will be partially based on your credit rating. Checking your credit score, and correcting any mistakes, is an important first step in getting the best interest rate on the mortgage for your new home.

Checking Your Credit

The three credit bureaus are required to provide individuals a free copy of their credit score once every 12 months. Visit www.annualcreditreport.com to view your credit score and to get information on how to file a dispute if you find a mistake. Taking care of any mistakes in your credit score before applying for a loan or looking for a home will save time and help you move through the process much more quickly, without any unpleasant surprises.

Once you have your credit report, and have fixed any errors, it’s time to shop for a loan. First and foremost, you must determine how your mortgage payment will fit your current budget and, to some extent, your future obligations 15 to 30 years down the road. Lenders are apt to put your loan application in the best light and qualify you for as much as they are willing to lend, which can be more than you can afford. It’s up to you to take stock of your income and expenses, both current and projected, to determine what you can comfortably manage each month.

Along with your mortgage payment, don’t forget to include related insurance, taxes, homeowner association dues and any other costs rolled into the mortgage payment. Use the McKee Homes loan calculator to get an estimate of your monthly payments including mortgage, insurance, and taxes. It’s not accurate to the penny, but will give you an approximate monthly payment based on the loan information you enter in the input fields.

Types of New Home Mortgages

There are many different types of loans available so it’s a good idea to know which type of loan will work best for you.

Conventional Mortgage. This is the most commonly used type and usually has the best rates.  You’ll typically need at least 10% of the purchase price for a down payment and good credit.  A conventional loan can be for 15 or 30 years.

FHA Mortgage. Thought of as the first time home loan program but is actually available to anyone and is more forgiving of lower credit scores. Includes a government charged funding fee of 1.75% which must be paid up-front. This amount goes back onto the loan amount after the buyer makes a 3.5% down payment. There is also a 1.25% annual fee for mortgage insurance on this loan. The interest rates are not as attractive as a conventional mortgage, but qualifying for the loan isn’t as tough either. Not all lenders can offer FHA Mortgages.

VA Loan.  Zero down payment loan. You must be an active duty military service member or a veteran to qualify and a certificate of eligibility will need to be granted. VA loans include an upfront charge of 2.15% VA Funding Fee for first time use and 3.3% VA funding fee for multiple use.

USDA Rural Housing Loan. Zero down payment loan.  The USDA mortgage loan can only be used in designated areas and towns, but their definition of rural is fairly flexible. You will probably need to ask your lender if a particular home or area qualifies for a USDA loan.

Adjustable Rate Mortgage (ARM). These have rates that start out lower than the current rates, but can change after one, two, or five years – usually upward! Many home owners got into trouble when their rates went up faster than expected on their adjustable rate loan.

Types of Lenders

When you are ready to shop for a loan you can choose between direct lenders and mortgage brokers.

Direct lenders have money to lend and make the final decision on your application. Brokers are intermediaries who, like you, have many lenders from which to choose. Lenders have a limited number of in-house loans available. Brokers can shop many lenders for each lender’s available loans.

In addition to choosing the source of your loan, you’ll also have to check on loan costs, including the interest rate, broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal and others. Ask your lender for a list of all the fees and terms of any loan you are considering so that you know all the costs and make intelligent comparisons between loans.

Once you have chosen a lender, they will supply you with a list of all the documents you must submit in order to secure the loan. They will ask for information such as your job tenure, employment stability, income, your assets (property, cars, bank accounts and investments) and your liabilities (auto loans, installment loans, mortgages, credit-card debt, household expenses, etc.). The lender will run a credit check to determine your credit status, but you will have to supply additional documentation such as paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and other documentation. If the lender deems you creditworthy, they will likely hire a professional appraisal to make sure the value of the home you wish to buy matches the asking price.

Conclusion

Knowing the process involved in obtaining a home loan, can help you be prepared, so when you find the home of your dreams, you won’t miss out on the opportunity to put in an offer and get the loan you need to finance your new home.

More Information

For more information about getting pre-qualified for a new home mortgage and what mortgage options are best for you, please visit our new home financing page or give us a call at 910-672-7296