Assessing Your Finances and Selecting a Lender
Getting financially prepared is a key step to any home purchase. In addition to helping you understand what you can afford, assessing your credit and having financing in place, puts you in a better negotiating position when it is time to make an offer.
If you’ve already lined up a lender and received a loan pre-approval you can avoid a number of pitfalls along the road to closing. In the competitive DC Metropolitan-area housing market, it is essential to have a pre-approval letter from a qualified lender accompany any offer.
Mortgage options and requirements change frequently. Your 3930 Group buyer’s agent can help you navigate current developments, suggest qualified lenders in your area, and help answer questions you may have about different lending programs.
Determine Your Credit Status
Because lenders will review your credit history, it is a good idea to verify your credit score at the beginning of your real estate search. Even if you believe you have an excellent credit record, there may be blemishes in your credit history that you don’t know about. Identifying and resolving any credit problems to improve your credit score could provide benefits, such as preferred interest rates from lenders and home insurers.
Three major credit bureaus –Equifax, Experian, and TransUnion –compile consumer credit data, and the Fair Credit Reporting Act allows consumers to obtain one free credit report from each of the three major reporting bureaus every 12 months.
To obtain a copy of your report, you can visit annualcreditreport.com or call 877-322-8228. While you can find many other sources for credit reports, this is the only one authorized by the Federal Trade Commission.
Selecting A Lender
When selecting a lender, your goal is to obtain a mortgage loan with terms that are right for you. In order to find the best home loan for you, contact several lenders to discuss what products they offer, rates, closing costs, and other fees. If you already have a mortgage, contact that institution too.
Gather as much information as you can online and through phone calls, and be sure to ask lenders if they are willing to match other rates you have been quoted. Once you’ve done your homework and narrowed your options, it’s best to meet with lenders face-to-face. This allows you to ask specific questions and decide if this is the right lender for you.
Just as important as the terms a lender will give you, is the service they are willing to offer. During your meetings, ask the lender about customer service and daily availability to both you and your buyer’s agent. A lender who offers exceptional customer service in a timely fashion can make all the difference in the world, especially when you are placed in the competitive bidding situations common to our market.
In our experience, local lenders tend to offer the best mix of terms and service available. Many local lenders will also be willing to match the more favorable interest rates offered by larger national institutions. For a list of our recommended local lenders, please contact 3930 Group today.
Rates and Term
Two of the most important factors in choosing a mortgage product are the interest rate and term. Combined with the down payment and the amount you borrow, they will largely determine your monthly payment.
The interest rate is the percentage of the loan amount you are charged to borrow money; the higher the rate, the more you pay. A monthly payment is also tied to the term or length of your mortgage. Paying off the same total loan at the same rate over less time will result in a higher monthly payment but could save you a significant amount of money. To determine monthly payments for different rates and terms, use the mortgage calculator at www.realtor.com/mortgage/tools/mortgage-calculator/.
Mortgage rates fluctuate on a daily basis and are subject to various economic factors. To give yourself reliable payment estimations, consider locking in an interest rate when you apply for your mortgage. A lock means that the rate in the approved application will be valid for a set period of time—during which the deal must be closed
With fixed-rate mortgages, usually 15- or 30-year terms, you pay the same interest rate over the life of the mortgage. Other products are available, such as an adjustable rate mortgage or ARM. With an ARM, the interest rate changes after a predetermined number of years. Before committing to any mortgage, consult with your lender and buyer’s agent to discuss the pros and cons of each option based on your unique situation.
Pre-Qualification or Pre-Approval
Typically, you will first pre-qualify for a mortgage and then get pre-approved before you find the home you wish to purchase. It’s crucial to understand the difference and to clarify which one your lender is providing:
- Pre-qualification: An informal determination by a lender or mortgage broker stating the mortgage amount you can afford.
- Pre-approval: A written guarantee from a lender to grant you a loan up to a specified amount of money. This is subject to the lender receiving full documentation and your financial situation remaining the same as when you receive the guarantee.
There are two advantages of obtaining a loan pre-approval as early as possible in your home buying process:
- Sellers will find your offer more attractive if you are pre-approved for a mortgage
- The length of time before closing can be shorter if you’ve secured a mortgage approval prior to signing a contract to purchase property.
How Much Can I Afford?
Lenders look at a variety of factors when evaluating how much you can afford to pay for your home, but two factors are most important:
- Monthly mortgage payment, as a percent of gross (pretax) income.
- Total debt load, including mortgage payment, relative to gross income.
Another determining factor is the loan-to-value (LTV) ratio, meaning the amount borrowed relative to the appraised value of the property. Higher LTVs represent a higher risk to lenders.
Lenders can provide qualification details for various types of mortgages, including Federal Housing Administration (FHA) and Veterans Administration (VA) loans. Qualification guidelines are subject to periodic changes so be sure to obtain the most current rules.
If you need help finding a lender or determining affordability, contact your 3930 Group Buyer’s Agent who can suggest lenders and direct you to the best sources of information on mortgage programs, including online tools for estimating affordability.
Your typical mortgage payment is comprised of four components: principle, interest, tax and (homeowners) insurance, collectively called PITI. (See Step 6 for more details on homeowners insurance.) However, be sure to consider other expenses, in addition to your mortgage payment, that could also impact your monthly budget.
Beyond your PITI payment, other expenses commonly associated with homeownership include (but are not limited to):
- Mortgage insurance
- Home maintenance expenses
- Homeowner’s association fees (if you are part of a HOA)
- Parking expenses
Down Payments and Mortgage Insurance
Lenders almost always require a down payment on mortgages to ensure the buyer is committed to the loan. Typically, down payments range from 3 percent to 20 Percent of the purchase price of the home and are based upon the lending product being used.
If you are looking to obtain a mortgage with a smaller down payment, you will probably need to obtain mortgage insurance, which helps protect the mortgage underwriter from default. This is an additional monthly expense that you would need to consider when evaluating the total cost of homeownership.
When you are ready to make your mortgage application, several additional steps and documents will be required. Ask your lender to provide you a list of necessary documents ahead of time so you can get started on gathering what you need.