When your parents got a mortgage on their first house, they did not have to face the sheer number of loan types and lenders that are available today. Home buyers who are getting conforming mortgages have various options of various kinds of mortgages – and the quantity of potential lenders can be overwhelming. Here are some steps to get you started.
- How much can you spend? The first step in finding a mortgage is evaluating your finances. Do a budget; learn where your money is coming from and where it’s going. Figure out how much money you have to put on a down payment. Be realistic about how much you can afford for monthly payments. Many lenders will require your monthly payments to be less than 28 percent of your total monthly income. No matter how nice a house you buy, at the end of the day you need to be able to keep up with the monthly payments.
- What type of Loan? Your best loan option when finding a mortgage depends on your personal situation. Interest rates are low right now, so it could be a good time to lock in a 30-year fixed mortgage. On the other hand, if you’re only going to be in your house for a few years, you might consider an adjustable rate mortgage (ARM), which starts out at a low fixed rate for a couple years and then adjusts annually after that. With an ARM, you can afford a more expensive house since they typically have lower interest rates than fixed mortgages.
- Where to get the mortgage? Today you can get your mortgage from many different sources. You can go directly to a bank or other kind of mortgage lender like a credit union. You can also contact a mortgage broker who will have access to loans from many different sources. Many internet sites can help identify mortgage lenders – often at lower fees than a regular mortgage broker would charge. However, you won’t get much hand-holding or have people to answer your questions when finding a mortgage.
- How to choose a lender? When finding a mortgage, be sure to spend some time shopping around to compare mortgage interest rates and other terms of the loan. But make sure you’re comparing apples to apples and that the terms of the mortgages are the same. You won’t learn much by comparing a 30-year fixed from one lender and an ARM from another. Even if you have less than stellar credit, it still pays to compare and get the best deal you can. Be careful to compare the fees charged by various lenders; these can add up. Don’t hesitate to negotiate; you may be able to have a lender waive some fees or offer better terms – especially if they know you’re shopping around.
- How do you apply? The application process will require a lot of paperwork. Most lenders will ask for recent paycheck stubs and last year’s tax return. They may also ask for proof of investments, alimony, or other sources of income.
- What factors influence the application? You should check out your credit report before you begin the process of finding a mortgage (you can get one free copy a year) and correct any errors. One of the first things the lender will do is to run a credit check on you; the score on your report has a big impact on what lender, mortgage and interest rate you can obtain. Today lenders are much more strict about your debt to income ratio, so most people are able to borrow less than they could a couple of years ago. Most lenders today require at least 3% to 5% down payment, but you will need to put down 20% to avoid paying private mortgage insurance.