Real Estate Buying & Investing
Beyond the decision of what house to buy, the next biggest decision in the home buying process is which lender to work with. After all, you are entering a relationship with them that will probably last decades. The mortgage industry is full of individuals and companies that help people get access to financing, including mortgage brokers and direct lenders. While a mortgage broker acts as an intermediary to help you identify the best lender for your situation, a direct lender—a bank or other financial institution—decides whether you qualify for the loan and, if you do, hands over the money directly.
There are often multiple options when it comes to getting a mortgage. Knowing what questions to ask your potential mortgage lender before you commit will keep an over-eager lender at bay and help you find a mortgage broker or lender you feel comfortable with. Knowing what personal information to share is also important, including permitting the lender to run your credit report.
Before you borrow, it’s wise to become familiar with some key terms that are associated with loans like principal, interest rate, and term. To keep from taking on too much debt, understand how loans work and how lenders make their money. When you know what your finances will allow, it is also good to know what your mortgage entails. From unanticipated fees to the right type of loan for you, years of your life can depend on where you sign on the dotted line.
Our Agents Know Good Lenders
This is a delicate chicken before the egg process so having an agent guide you away from pitfalls can be crucial. Before showing you properties, they will go through financials with you. What you don’t want to do is find a house first, even if that seems to make the most sense. It’s also worthy to mention that your buyer’s agent will help you find a mortgage lender much easier and faster than a lender can help you find a good agent. You probably won’t be privy to that type of information on your own. Our agents have a plethora of lenders in their referral database, and a group of lenders that they’ve personally worked with in the past.
Our buyer’s agents can be trusted to refer a mortgage lender with a proven record and who can close loans, while mortgage brokers might only refer agents who send them business. It’s not necessarily a declaration of professionalism or experience, rather than business. It is also important to know that The Real Estate Settlement Procedures Act (RESPA) prohibits agents from receiving a “thing of value” from a lender in exchange for sending you its way. This inhibits agents from entering quid pro quo arrangements that might not be best for you. Your agent will know which lenders perform and which can be counted on to hold up closing, and this is something you can trust.
Interest Rates and Fees
Popular banking websites dangle great interest rates and annual percentage rates (APR) in consumers’ faces, but the interest rate and loan fees aren’t the most important factors to consider when you’re choosing a mortgage lender. Most lenders charge approximately the same rates. They have access to the same money. All national institutional lenders compete against other institutional lenders, and their rates are highly competitive.
They’re also limited in the types of loans and terms they can offer, and they often quote only in-house rates. A mortgage broker might have access to larger pools of money from a wider variety of sources. Rates change more than once daily, so that interest rate can vary until your loan rate is locked. A rate promised in the morning could be higher by afternoon. Don’t be lured by increments of a percentage point that can swing up or down.
If you don’t have the means to purchase a house for cash, you will need to qualify for a mortgage. It is good to know your debt-to-income ratio, because this is what the lender will use to calculate what you can borrow.
The forty-three percent debt-to-income ratio standard is generally used by the Federal Housing Administration as a guideline for approving mortgages. This means all your regular debt payments, plus your housing-related expenses—mortgage, mortgage insurance, homeowners association fees, property tax, homeowners insurance—shouldn’t equal more than forty-three percent of your monthly gross income. This ratio is used to determine if you can make your payments each month. Some lenders may be more lenient or more rigid, depending on the real estate market and general economic conditions.
Front-End Debt-to-Income Ratio
You also need to consider the front-end debt-to-income ratio. This calculates your income in relation to the monthly debt you would incur from housing expenses such as mortgage payments and mortgage insurance. Lenders like that ratio to be no more than twenty-eight percent. Lenders don’t like you living on the edge because financial misfortunes happen like you losing your job, a medical disability prevents you from working for a while. Since most mortgages are long-term commitments, you’ll need to be prepared to be making those payments every month, and your lender will want to be confident you can.
Affording Your Down Payment
If you can, it is best to put down twenty percent or more of your home price to avoid paying private mortgage insurance. Usually added into your mortgage payments, these payments add up with no benefit to you. There may be some reasons that you might want to put down less toward your purchase, such as you aren’t planning on living in the home very long or have long-term plans to convert the home into an investment property. You also might not want to put that much cash down for other reasons, and if that’s the case, buying a home is still possible.
Some lenders will allow you to put down as little as a few percent, but that doesn’t mean it’s a good deal. Being able to afford a new house today is not nearly as important as your ability to afford it over the long haul. Being able to afford a house and having a down payment doesn’t answer the question of whether now is a good time to act on that option. You’ll want to make sure your commitment to the mortgage is well considered.
Be Weary of Special Deals
A mortgage lender might also advertise special deals, such as free appraisals, but the cost of that appraisal might be buried elsewhere. Similarly, a lender might offer you a free home security system when the cost is actually absorbed into the monthly fee you’re required to pay to for ongoing service. It’s always helpful to read through and understand the details before you commit. At the end of the day, the most important thing a mortgage lender can do for you is process your loan quickly, efficiently, without errors, and close on time.
Loyalty to Your Bank
Many mortgage loans are sold after closing. Don’t assume that your loan will remain at your bank if you choose a bank out of loyalty because you maintain accounts there. Also don’t expect that you will get special treatment because you have a savings account and some investment with them. When it comes to working with a lender, they are all reading the same numbers and information that is used to calculate the risk of offering you a mortgage. You’re unlikely to get special treatment because you’ve known the banking staff for twenty years. You’ll want to sign with the lender that you feel offers you the best mortgage for you.