Taking out a mortgage to buy a house is a huge step that is scary and stressful too. The amount and terms of the loan will have a major impact on your financial picture for decades. That’s why you should choose a lender carefully.
What to Do Before You Choose a Lender
In order to qualify for an attractive interest rate, you need to prove to lenders that you are a good risk. That means you need to get your financial house in order before you start applying for a mortgage. The first step is to get copies of your credit reports and have any errors corrected. If you have a lot of credit card debt, work to pay down the balances and lower your debt-to-income ratio.
If there are issues on your credit report or inaccuracies, a good lender will be able to help you resolve them. This is an important reason to talk to a lender early in the mortgage process. Generally you don't need to go to a credit repair company. Your lender can work through issues wtih you and get them resolved without charging you a ridiculous sum of money.
Take a hard look at your budget and figure out how much you can afford in monthly mortgage payments. A lender may approve you for a bigger loan than you can realistically handle. Write down all of your monthly expenses, look at your monthly income after taxes and figure out how much you can afford for a mortgage without stretching yourself too thin. Ramen noodles might have been "okay" in college but you really don't want a steady diet of them for the next year or two!
Applying for a Mortgage
Be prepared! Just like the Scouts! Gather all of the information you’ll need for lenders to process your application. This will include pay stubs, tax returns, bank statements, a list of all financial accounts, a list of all your monthly debt payments, proof of employment and income, and information on any accounts in collection, lawsuits or bankruptcies. Nonetheless, don't be surprised if your lender may have different requirements on how far back they want the records to go.
Talk to your friends and your realtor about whom they recommend. Give several lenders a call. Talk with them on the phone and see if you feel comfortable with him or her. You are going to be spending a lot of time working with this person. You need to feel comfortable and trust the recommendations as to which loan program is best for you.
Lenders offer a wide range of interest rates, fees, points and other terms based on each applicant’s specific circumstances. Some people get the best deal from a traditional mortgage lender, while others are offered better terms by a credit union, retail lender, correspondent lender or wholesale lender. The lender that offered your friend a great rate might not offer the same rate to you - because you are different people after all, but you could get a good deal somewhere else.
If you don’t shop around, you could spend thousands of dollars more than you have to over the life of the loan. If you don’t have the time to contact multiple lenders yourself, a mortgage broker can get quotes from several lenders in exchange for a fee. Then you can compare them to make a decision.
Getting preapproved for a mortgage can help in the home-buying process because it demonstrates that you’re in good shape financially and able to move forward quickly. Once you get preapproved, you still need to carefully manage your finances. The lender may review your income, assets and debts again before finalizing the mortgage.
Obtaining a mortgage is a significant step that will impact your finances for many years to come. You should not rush it or take it lightly. Do what you can to improve your current financial situation, be realistic about what you can afford and shop around to find the most favorable terms.