How to Shop for a Mortgage Loan?

Continuing from yesterday’s rental property investment post, this is second of the two post series on real estate investment/ownership. If you are shopping for a home loan, it is only natural that you want to find a low interest rate mortgage loan. The surest ways to find the best deal are to:

• Be a prepared borrower
• Shop around

How to Be a Prepared Borrower

It takes time and effort to find and qualify for a low interest rate mortgage loan. Being prepared is important whether you are looking to buy a home or refinance your current mortgage, but it is even more important when you are buying a home. If you aren’t prepared in advance, you may see the home you want to buy disappears, because you couldn’t secure financing in time.

To make the process as efficient as you can, start your loan shopping after you know where you stand on each of the following factors:

• Finances- Making a lot of money may improve your chances of getting the best rate available on a loan, but it is not enough.  The key is your debt-to-income ratio (DTI). Your DTI is a comparison of your gross monthly income to certain monthly expenses. The main monthly expenses included in your DTI are: your new mortgage’s principal and interest, property taxes, and homeowner’s insurance; your required minimum credit card payments, your monthly payments for auto loans, student loans, or other loans; and any required payment for child support or alimony. To calculate your DTI, divide your gross monthly income by your total monthly expenses in the categories listed above. In general, you want a DTI of no more than 36% in order  to qualify for the lowest interest rates on the market.
• Credit Score– Your credit score and credit history are very important factors in qualifying for a low-rate loan. For conventional loans, you need a FICO score of 720 or greater. If you don’t know your score, find it out before you start shopping. Also, review your credit report for errors and dispute any inaccurate information you find.

Quick Tip: If your credit score is just below the level needed to get the lowest rate, speak to your loan officer about the rapid rescore program. In a Rapid Rescore, you take a few quick actions, based on recommendations of your loan officer. Then, your credit report is pulled again, usually with very positive results.

• Loan Size- Your loan-to-value ratio (LTV) is another crucial component in determining your interest rates and the total costs of your mortgage payment. To calculate your LTV, divide the fair-market value of your home by the size of your loan. For example, if you want a $150,000 loan on a home worth $200,000, your LTFV would be 75%. The lowest rates are offered to borrowers with an LTV below 80%. Not only will your interest rate be lower, but you avoid the need to pay for Private Mortgage Insurance (PMI), with an LTV below 80%. If you’re looking to buy a home, the lowest interest rates and costs will be available if you have a down-payment of 20%.

How to Shop for a Low-Interest Loan

Once you’ve taken the steps to be the best prepared borrower you can be, it is time to focus on how you go about finding the lowest interest rate loan you can. Here are some basic tips:

• Don’t Focus Only on Your Rate– While it makes some sense to search for the lowest rate you can find, you need to pay equal attention to the costs associated with your loan. You need to compare the rate and all the fees the lender charges you. Some loans come with a lower interest rate because you pay fees to buy down your rate. That may or may not be a good decision. You need to think about how long you expect to keep the loan. The longer you hold the loan, the more sense it makes to pay fees to bring down your interest rate.
• Shop Around– You need to comparison shop, in order to find the best loan. Only by comparing different lenders side-by-side, will you see what is actually offered to you. The rates you see in advertisements are often “teaser rates,” published to grab your interest. Your task is to find the best loan for yourself that you can. The low rate that your friend or co-worker gets may be better than the rate that you can get. If that happens, don’t let that bother you. Focus on the different offers you receive. If you can improve your financial position, that is more important than whether you got the best deal of anyone you know.

Quick Tip #2 Compare different lenders and different loan options for free, without obligation, by using the Bills.com lending network.

• Don’t Be Paralyzed– It is easy to get so focused on finding the best rate possible. Different lenders apply different lending standards. When you have a loan approval in hand from one lender, it can be tempting to move to another lender if rates drop below the rate at which you locked your loan. Keep in mind, however, that something could occur that causes the new, lower rate loan to fall apart. Maybe a collection account will appear on your credit report from out of nowhere or the new lender simply has a stricter underwriting process. Only a lucky few are going to get their loans at the absolute bottom of the market. Don’t let a good or very good deal disappear because you’re chasing the best deal out there. Remember, rates rise faster when they start going up than they fall when they’re going down.