Thinking of buying a home?
Chances are, you’ve probably already begun combing through the homes-for-sale listings on Zillow, Realtor.com, or your local realtor’s website. Fun, isn’t it? Comparing neighbourhoods, kitchens, and floor plans and imagining moving into your dream house is the best part of shopping for a new home.
But before you get too deep into your explorations, consider that no matter which house you hope to buy, you’re going to need a mortgage. Understanding the wide range of home financing options available to you and how you can secure a great mortgage deal is equally as important as falling in love with a house.
First-time homebuyers may need more education on the mortgage industry than seasoned homeowners. But the mortgage landscape has changed dramatically in recent years. So even if you’ve taken out a mortgage before, a refresher course may be in order.
Traditional and Not-So-Traditional Lenders
Once upon a time, you had two choices. You could speak to a loan officer at your local bank or credit union about your mortgage options or work with a mortgage broker. Starting the mortgage shopping process with a financial institution you already have a relationship with can also be a smart move. Banks are anxious to increase the amount of business they do with their existing customers.
Brokers have relationships with multiple mortgage lenders and are often able to find you a mortgage, even if you’ve had trouble qualifying for one before. They also do the complicated number crunching for you and lay out your most economical options.
But nowadays, the internet has made it possible to comparison shop from the comfort of your couch—no branch visit or even a phone call necessary in many cases. Traditional banks have gone digital. Many now offer a fully digital lending experience from application through loan closing. There are scores of mortgage marketplace websites that aggregate offers from multiple lenders based on the property and financial information you provide. Many lender websites provide mortgage calculators to help you compare your monthly payments under various mortgage scenarios. When you receive several offers, these handy widgets can help you figure out which will best suit your needs.
Financial Technology (Fintech) Companies: Upstarts in the Mortgage Market
Starting several years ago, the mortgage industry was disrupted by a new breed of mortgage company: financial technology businesses that offer a streamlined mortgage experience to take the hassle out of getting a mortgage. Using proprietary digital technology, fintech companies, which may be direct lenders themselves, P2P lenders that rely on investors for cash, or partner with funding institutions, offer borrowers a 100% digital mortgage process. Online application, which many traditional banks now offer, is just the beginning when you work with a fintech lender. These companies use data analytics, complex algorithms, and machine learning to speed such processes as digital document uploading, evaluating your income and credit qualifications (also known as underwriting), pre-approving your loan, and, finally closing on your loan electronically. By carefully limiting risk to themselves and relying on technology to do work that was previously handled by live employees, fintech companies operate more efficiently. In some cases, they pass the savings on to borrowers in the form of lower interest rates.
Credit Unions Can Lower Your Mortgage Costs
Credit unions—some of which operate locally, regionally, or nationwide—are not-for-profit membership-based organizations that offer a wide range of banking services, including mortgage lending. Their mission is to serve their members, not make millions for stockholders. Joining a credit union is easy. You can simply open a small savings or checking account to take advantage of the benefits of membership. Most credit union checking accounts require a tiny initial minimum deposit and have no minimum monthly balance. Opening an account is an inexpensive, no-risk proposition. Compared to for-profit banks, credit unions often lend at lower interest rates. So when you’re shopping around for your best mortgage rate, be sure to visit a couple of credit union websites or consult with a credit union loan officer in person.
Mortgage Rates Are Driven by Your Credit History
Banks are all about limiting financial risk. They don’t want to lend to people they fear might default on their mortgages. So having a history of using credit responsibly—that is to say, paying your credit card, auto loan, and other bills on time—is reassuring to them. Banks offer their lowest rates to the most creditworthy borrowers.
Do you know what’s in your credit report? If you haven’t reviewed yours recently, download a free copy of your report from each of the three major credit bureaus, Experian, Transunion, and Equifax. Some banks also provide you with your FICO credit score as a courtesy, which aggregates information from the three credit bureaus mentioned. Your FICO score is the one mortgage lenders use to evaluate your creditworthiness.
Ideally, you will have looked at your credit report and taken steps to improve your score long before you apply for a mortgage. You can improve your score by making sure you’re up to date on all your credit account payments. Pay down high-interest credit cards first if you can. That will improve your debt-to-income ratio, which is another factor lenders consider before making you a loan offer. Many credit reports contain mistakes, such as misrecorded late payments or accounts you’ve closed and, if you catch any discrepancies, you should officially dispute them. You’ll have to contact all three credit monitoring bureaus in writing. That can be a time-consuming undertaking. Some individuals hire a credit repair company to manage the process. Experts from the real estate, banking, and financial counseling industries advise borrowers to become well-versed with their credit histories and, unless your score is the top tier (800 or above), it’s best to undertake a credit repair campaign. Moving into a higher tier can shave percentage points off of the interest rates you’re offered and save you tens of thousands of dollars over the lifetime of your mortgage. Even a half of one point makes a difference when you take into account 30 years of payments.
Investigate Government-Guaranteed Mortgages
The federal government offers several programs designed to help US residents become homeowners. You needn’t be a US citizen to take out one of these loans, but there are eligibility requirements you must meet. Government-guaranteed loans are administered by the same financial institutions that offer private loans. Because lenders see government-backed mortgages as inherently less risky—should a borrower default on a loan, the government must fulfill the obligation to repay it—these loans often come with lower interest rates than private loans. And they offer some other perks, too.
VA loans are available to veterans and active members of the US armed forces and their spouses. If you serve or have served, don’t neglect to investigate VA mortgages. For eligible borrowers, VA loans frequently turn out to be the lowest interest rate option. VA loans can also help vets who have struggled with saving enough for a large down payment. Many VA loans are written for borrowers who are unable to put down any money at all towards their home purchase.
The same is true of USDA loans. Originally designed to encourage development in rural areas of the US, USDA loans are typically available on homes located in towns with 20,000 or fewer residents. It may surprise you to learn how many homes that amounts to. It turns out that 97% of the US map is USDA-loan eligible, including many of the suburbs that surround large cities. USDA loans do come with some income restrictions. Their intent is to support low-to-middle income borrowers.
FHA loans are the most widely available government-guaranteed mortgages. They’re not reserved for service members, restricted by location, or subject to income qualifications. They’re a good choice for people who’ve saved enough for a small down payment. Typically you can get an FHA loan if you put down only 3.5% of your home’s purchase price.
Top Mortgage Shopping Tips
There’s no single journey towards homeownership. Every homebuyer will have a unique experience. But if you follow these five steps, you’ll be better informed and better equipped to secure a low-interest mortgage that suits your needs:
Start your journey online.
There’s a wealth of free, objective information on mortgages out there. Start with objective sources such as the Consumer Financial Protection Bureau to get a feel for your options. Many financial institutions and fintech companies publish blog articles on the ins and outs of mortgage lending, too. You can also chart average mortgage rates and interest trends among all lenders by consulting news publications that track the mortgage industry.
Do whatever it takes to raise your credit score.
There are many steps you can take to do so. We’ve provided a few, but talking to a not-for-profit credit counseling organization can help you tailor your credit repair activities to your specific credit report.
Investigate several lender types.
You may want to start an in-person conversation with your local bank’s loan officer or credit union, peruse the websites of digital-only banks, look into lenders that specialize in government-guaranteed loans, and explore the streamlined mortgage application processes fintech companies provide.
Most mortgage lenders will give you a non-binding quote on how much money they’d be inclined to loan you and at what interest rate. Knowing how much money you’d be able to borrow can help you narrow your home search to only those homes you can afford to finance.
- Compare multiple mortgage scenarios to customize a mortgage to suit your needs. You can often lower your monthly payments by putting more money down on a home purchase, selecting a longer-term loan, or paying upfront points when you close on your loan. But also be sure to understand the lifetime cost of any mortgage you’re considering.
Is Now the Right Time to Buy a Home?
Home prices are high. The real estate market is still being hampered by an inventory shortage. Inflation is fueling rising costs on many products and services. But interest rates are still near historic lows. It’s possible to spend less and get more house for your monthly payment.
Many experts are hesitant to make predictions on where the housing market is headed, but most agree that a slight market correction is inevitable. Home values will continue to rise, but at a significantly slower rate than we’ve seen since the beginning of the global pandemic. Consider all of these factors before deciding to buy a home now.
Buying a home is a big step and, since the real estate market is subject to volatility pretty much always, let your personal and family needs drive your decision. But if you do decide to buy, buy smart. Do your homework and explore your full range of mortgage options before signing on the dotted line.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide range of topics including personal finance and family life. Her work comes to us courtesy of Money.com. Follow Susan on Twitter @branddoktor.