If you’ve never had a mortgage, it might feel overwhelming when you finally decide to buy a home, need to search for one and negotiate the terms. As there are many mortgage options, features, rates and mortgage rules, it can be confusing.
In the US, when you apply for a mortgage loan, you typically work with an underwriter. Most underwriters work with a bank. However, you may choose to work with a mortgage broker.
A good mortgage broker knows all the ins and outs of mortgages, as this is their profession. They are mortgage experts and should see their role as that of guiding their client to the product that best suits their needs.
A smart mortgage broker covers a wide range of lenders, helps their client understand mortgage rules and determine the size of mortgage that they can afford. They are on the hunt to locate not only the best rate, but the best rate combined with other features that suit your situation. For example, you might expect to be able to make prepayments at various times during the financing period. Your broker should ensure you have the ability to prepay without penalty, combined with the best rate for you.
Mortgage brokers can often help those for whom traditional financing is not an option, which may be the case for new immigrants, self-employed or first time buyers.
Broker vs. Bank
While your bank probably has a lot of your information on file making the application for a mortgage a little easier, in the digital world, paperwork is not nearly as difficult as it once was. That being said, your bank contact might try to push other products at you. These people do not have access to the wide array of offerings that mortgage brokers do and are perhaps biased to sell you one of their bank mortgages.
Are You Ready?
Before you reach out to a mortgage broker, prepare with the following steps:
Check your credit score
Get your credit report, review it closely and ensure that there are no mistakes in it. If you notice any mistakes contact the provider and have the issues resolved.
Credit scores range between 300 – 850
A higher credit score indicates the less likely you are to default on a loan and allows access to lower rates. Alternatively, the lower your credit score, the riskier it is for people to lend to you. Lenders will want a return for that extra risk, meaning you will pay a higher rate.
Not everyone will qualify to buy a home; a homebuyer must meet certain credit and income criteria to assure mortgage companies the loan will be repaid. Typically, if you have a score under 580, you’ll have a tough time qualifying for most types of mortgages and if you do qualify, you will be charged a much higher rate of interest.
Factors that influence your credit score include:
• Payment history: Do you pay your bills on time? Your credit score may take into account any missed or late payments, how long they went unpaid, and how often.
• Amount owed: This includes the total owed to all creditors, how much you owe on different types of accounts, and how much of credit available you’ve used.
• Types of credit: The more types of accounts you have (credit cards, retail accounts, mortgage loans, installment loans), as well as the total number of accounts you have, influences your credit score.
• New loans: Have you shopped for or received new credit recently? Applying for credit with different lenders within a short period of time may lower your score, especially if you have a relatively short credit history to begin with.
• Length of credit history: The age of your oldest credit account, the age of your newest account, and the average age of all your accounts each play a role in the calculation of your score.
If you are already carrying any high-interest debts, it is a good idea to pay them off to improve your debt-income ratio. By paying these off, you might have more money for a down payment and access a lower interest rate.
Get preapproved for your mortgage
With a preapproval in hand, you have an advantage against other bidders. It shows you are seriously ready, you have been evaluated to determine how much house you can afford and the deal is likely to close. It saves time when you’re ready to make an offer on a home as lenders will already have the information they need to process your home loan.
To get preapproved, below is a list of the information lenders typically require:
• Banking, savings, checking, investment account and any other financial account information
• All outstanding debt obligations including credit card, car loan, student loan and other balances
• Two years of tax returns, W-2s and 1099
• Salary and employer information
• The amount of the down payment you can make, and the source of the down payment (where is that money coming from)
• A credit check
• A list of your places of residence for the previous two years
In some cases, you may not be required to provide all of the above information. Some loans are referred to as low doc or no doc because they don’t require you to prove any of the statements that you make to your underwriter. These loans are normally more expensive, but can be easier to obtain.
Most mortgage loans in the US require a significant down payment. Traditional mortgages often call for down payments of 20 percent, but larger amounts are usually required for low doc and no doc loans. It’s also possible to obtain 100 percent financing if you qualify for it. Try to get preapproved by more than one lender. Then you can compare loan estimates from each one to determine who offers you the best rates and terms.
Ask your family, friends and other contacts for mortgage broker referrals. Or read online reviews.
When you’ve identified a few brokers you’d consider working with, ask the following questions:
• How they prefer to communicate with clients — email, text, phone calls or in person? How quickly do they respond to messages?
• How long are your turnaround times on preapproval, appraisal and closing?
• What lender fees will I be responsible for at closing? (Fees may include commission, loan origination, points, appraisal, credit report and application fees.)
• Will you waive any of these fees or roll them into my mortgage?
• What are the down payment requirements?
• Most mortgage lenders will require an “earnest money” deposit to start the loan process. Ask the lender to specify under what circumstances the earnest money cannot be returned, and if the answer is vague, keep shopping around.
Compare rates from several mortgage lenders
There is a lot of competition for mortgage business in the United States so it is crucial you spend the time to compare your options.
Start by searching for the best mortgage rates online. Keep in mind that the rate quote you see online is the posted rate which will be further customized depending on the individual situation.
You should also inquire about the use of mortgage points, also known as discount points. The points are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments.
One point costs 1 percent of your mortgage amount (or $1,000 for every $100,000). Essentially, you pay some interest up front in exchange for a lower interest rate over the life of your loan. In general, the longer you plan to own the home, the more points help you save on interest over the life of the loan.
A lender or broker pull your credit information and process a loan application to provide an accurate rate, which you can then lock in if you’re satisfied with the product.
Once you have several quotes in hand, compare costs and decide which one makes the most financial sense for you. Use your research as leverage to negotiate for the best mortgage rates possible.
Read the contract thoroughly
Once you have chosen a broker and the right mortgage, read the mortgage document thoroughly. Any time you sign a legal agreement you need to read and understand the terms contained within. In this case, reading the mortgage document will disclose
• how the mortgage closing fees will be paid for, including home inspection fees
• closing date
• items included in the home purchase
• loan origination fees
• other transaction fees
Regardless of who you decide to negotiate your mortgage with, do your homework before you begin the process. Compare rates online, secure a preapproval, ask family and friends for broker referrals and interview a handful of possible brokers. You also need to understand the critical contract details around cost sharing, closing dates and inclusions. By taking this methodical approach to mortgage negotiations, the task is no longer crushing, but empowering.