A mortgage is a major commitment that can have a decades-long impact on your finances. For that reason, you want to be properly prepared for the mortgage-shopping process to help you find the right lender and get the best interest rate.
Here are six rules to help you get the best mortgage deal…
Rule #1: Know your borrower profile. Mortgage lenders evaluate your suitability as a borrower and determine your interest rate by looking at, among other things, your FICO credit scores and the accompanying credit reports that provide the data used to calculate those scores. Each of the three major credit-reporting bureaus—Experian, TransUnion and Equifax—will have a separate FICO score for you based on the information that the bureau has on file. It’s especially important to make sure that there are no mistakes in any of the reports that hurt your credit scores.
You can buy more than two dozen versions of official FICO scores at MyFico.com. Or you can get free versions of some scores in several ways. Many credit card providers now give card holders access to a free version from a single credit-reporting bureau, so check with your credit card providers. You also can get some free versions of credit scores at Credit.com…CreditKarma.com…and Quizzle.com.
If you don’t receive a copy of the associated credit report with each score, you can request free reports from AnnualCreditReport.com. Check each report for errors such as duplicated debt, which you can correct by sending a letter and documentation disputing the inaccurate information to the credit bureaus. (Get a sample letter here.)
Tip: Paying off your credit cards in full each month improves your borrower profile. If you currently have any ongoing credit card balances, pay them down so that you are using no more than 50%—or, even better, 30%—of the overall credit available to you when you add up credit limits on all your cards. Then avoid making big purchases on credit, applying for new credit cards or taking out new loans in the two months before you begin mortgage shopping. These actions could lower your credit score in the short-term.
Rule #2: Make it easy for lenders to review your income and assets. Lenders will request documentation of your income and assets to determine what kind of loan you qualify for. But many borrowers overlook smaller details that help streamline the lenders’ review process. For example, make sure that you have written documentation to back up any large deposits, such as a gift from a family member, because your lender will need to see it before counting it as an asset. And if you have more than five bank accounts, consider consolidating some of them to provide a simpler view of your account history—but do so at least two months before you plan to apply for a mortgage. Moving a lot of money around right before applying for a mortgage might raise questions with lenders and delay approval.
Rule #3: Know what kind of mortgage you want. To avoid being steered into a type of mortgage that’s not right for you, know what type you’re shopping for before you speak with a lender or mortgage broker. For example, a 30-year fixed-rate mortgage is the best option in many cases, but an adjustable-rate mortgage will be a better deal if you’re planning to own your house for less than five years (and you actually do end up selling it around that time).
Rule #4: Request an informal estimate before you apply. Once you know what kind of loan you’re looking for, you can start comparing offers. But be aware that rates posted in advertisements might not be up-to-date…or might not reflect the rates that you qualify for. Lenders are required to provide a “good-faith estimate” that spells out your loan amount, interest rate and monthly costs—but only after you have completed an application. So ask lenders to provide you with informal estimates that include fee breakdowns before you apply. While these figures aren’t final, they are often accurate and can help you begin your assessment.
Comparing closing fees is important, but the interest rate is the most important factor to compare. In the long run, even an eighth of a percentage point difference in interest rates will cost you much more than typical differences in closing fees. And make sure that you are comparing apples to apples. When you ask for a rate quote, be specific about the kind of mortgage you’re seeking—ask, “What’s your 30-year fixed interest rate for a borrower with this credit score, paying this many points and this percent down?”
Tip: Also gauge how each potential lender makes you feel. If you feel pressured or think that you’re not getting straight answers, go elsewhere.
Rule #5: Lock in your interest rate for the right amount of time. A rate lock ensures that the rate you apply for is the rate you will be paying—but only if it doesn’t expire before you close your loan. Ask your loan officer how long it takes, on average, to close loans such as yours. Then make sure that your rate lock covers that period. Most lenders won’t charge for rate locks up to 60 days. If you need a longer lock, expect to pay a few hundred dollars.
Rule #6: Don’t make any big financial changes before closing. The week before you close your mortgage loan, your lender will perform a quality check to make sure that there have been no major changes to your financial picture. The lender will check your employment situation and bank balances and will look to see that there’s nothing new and troubling on your credit report. During the closing period (which starts when you and the seller sign the sale contract and you take it to the lender) avoid making any big purchases on credit or taking out a new loan, since that could further delay your closing.