LOAN SHOPPING 101
Before you make an offer on a home, it’s imperative that you’ve first done some shopping for a good loan, have secured a great rate, and are pre-approved for a mortgage. This write up willl delve more into the details and specifics, and walk you through the process of shopping for a home loan, or a mortgage.
People often have no problem spending months looking for a home and taking their time in the home-search process, eventually finding “the one,” but tend to avoid doing the same when it comes to getting a loan. Researching homes is usually fun — looking up available homes for sale online, finding homes that match your needs and budget, imagining yourself in a new home and a new neighborhood, etc. Then, if a buyer finds their dream home, whether online or at an open house, they become so attached and anxious to get the process started that they don’t bother with doing enough financial research and preparation, thinking they can just make it all work, even if they don’t know if the home is affordable for them.
When it comes to the “nitty-gritty,” which includes home loan shopping, home buyers, whether they’re first-timers or not, like to just get through it as quickly and painlessly as possible. Sometimes, they do very little research and grab the first offer given, regardless of the rate or considering what else might be out there. But this approach can often be harmful and costly in the long run.
The reality is many buyers fail to understand the important of shopping for a loan, finding a loan, and finding a good loan. When this happens, the new homeowner might have a great home, but a bad mortgage deal. You definitely want to avoid this happening to you.
WHY GET PRE-APPROVED
What’s the big deal about getting pre-approved for a mortgage in the first place? What’s wrong with going through the home-search and home-buying process first, and then getting the loan later? There is plenty wrong with waiting until the end for loan approval, and plenty of advantages in getting pre-approved for a mortgage first, before you get too far into the home-search and home-buying process.
In fact, one of the most common mistakes made by buyers, especially if they’re first-timers, is not getting pre-approved for a home loan, as we discussed in Chapter 6.
For example, many sellers and listing agents won’t want to work with you or even consider your offer if they find out you don’t have mortgage loan pre-approval and you’re promising that you can pay a certain amount when you can’t prove you can keep that promise. You will most certainly lose out on getting that home you had in mind. As I wrote in Chapter 6, “Your own assumption about what you can afford — both the down payment and the monthly mortgage payments, among other costs — can contrast significantly with what the bank is willing to lend you.”
Getting pre-approved for a loan is also a fantastic method for gaining the upper hand in multiple-offer situations. A big part of presenting a strong offer is being pre-approved for a loan beforehand. If you and your agent come to the negotiating table confident, presenting a strong offer with a mortgage pre-approval letter in hand, you’ll already stand out from the other buyers interested in the same home.
What can you do to ensure loan pre-approval? Go back and read Chapter 1, with a focus on the steps you need to take to make sure you’re actually ready to buy a home and start shopping for a home loan. To refresh your memory, the steps are:
- Improve your credit score.
- Save for a down payment.
- Build up your savings account.
- Research recent home sales in your area to see what’s affordable.
Again, make sure you have official pre-approval for a home loan before searching for homes, visiting properties, and placing any offer. Your buyer’s agent can help you make sure everything is in order. Otherwise, you’ll end up wasting everybody’s time, including your own, if you make an offer, enter into a contract, and only then learn that the bank won’t lend you what you need.
SHOPPING FOR A LOAN
For the majority of buyers, getting a mortgage is part and parcel of purchasing a home, simply because not very many people actually have the ability to pay for a house upfront, in full. Because lenders know this basic fact, there is a lot of competition out there — banks, mortgage brokers, and other mortgage lenders and companies vying for buyers’ business.
What you need to do is take your time actually researching and shopping for home loans and the best loan deal you can find for yourself and your situation. There are different types of loans out there, and it’s in your best interest to check out several of them, and then compare them. That way, you’ll have a better chance at securing a mortgage that’s not only affordable now, but also something that won’t be burdensome to you down the road.
Further, you’ll have the opportunity to save some money at the end of each month. Finding the best mortgage deal can be time-consuming and a bit tricky/complication, because mortgage rates change frequently — even from one day to the next, the rate can vary significantly, and sometimes, depending on the market and bank rates, mortgage rates can even change several times in one day. This is why it’s prudent for you to go into this process carefully, so you can find the right rate at the right time, and then lock it in, in order to get your best deal. You can find home loans through mortgage brokers, banks, and companies that specialize in mortgage lending, or offer loans as part of their services.
Note: Something important to keep in mind is that even if you receive approval for a home loan that you know deep down isn’t affordable in the long run, you don’t have to accept it. Getting pre-approved for just any home loan actually isn’t the end goal; finding the best mortgage deal for you and your situation is! Some lenders can “trick” you into thinking you can afford more than you really can, and then offer you a loan that in the end, you can’t pay back. What a lender claims you can afford and what you actually can afford aren’t necessarily the same thing.
This is another reason that you need to take your time and shop around for the best deal, and find something affordable that you can live with for years. Part of this involves ensuring you have an accurate budget and saving up ahead of time for a down payment, etc., and part of this involves taking the time to shop around.
HIRE A PROFESSIONAL
You might assume that you need to shop around for a home loan — and the best home loan — on your own, which can feel overwhelming at best, and impossible at worst. No matter how daunting this experience might feel, know that you don’t have to go it alone.
To overcome the challenge of shopping for the best home loan, I recommend that you hire a mortgage professional, or mortgage broker. This is not your buyer’s agent, although you can use your buyer’s agent as a source of information for referrals/ recommendations to qualified, experienced, and well-known mortgage professionals in your area. If possible, you should engage the services of the mortgage professional before you begin searching for your new home.
As mentioned, you can find a great mortgage professional, someone who comes highly recommended and has the experience and the credentials to back him or her up, from your real estate agent, and from other real estate agents, colleagues, co-workers, neighbors, friends, and family.
In general, banks are known for having the fewest mortgage options available because their products are specifically geared toward the bank’s professional interests, which won’t necessarily match your own. However, banks can also be more flexible, as they are the ones who are lending the money for a home. Further, if you, the buyer, own other substantial assets, this can work to your advantage in making a deal with the bank, as it gives you leverage, making the process smoother and less complicated and lengthy.
But in working with a mortgage broker, you will likely find that you have the largest number of mortgage options that you wouldn’t necessarily have been able to find otherwise. This is because mortgage brokers work independently — meaning they aren’t tied to a specific bank or mortgage-lending company — and often work with a significant number of financial outlets. This gives you many more options, and the broker can help you find the best loan and deal from many different lenders.
RESEARCH HOMES WITHIN YOUR BUDGET
There’s no point in spending a good chunk of your time looking for something that you ultimately can’t afford. This is why it’s so important that once you’ve got your finances in order and you’ve hired a professional mortgage broker, you search for homes that are within your budget. Don’t waste your time looking for homes that aren’t affordable for you, and for which you will not get approval for a loan — especially if you just so happen to find your “dream home” — a dream that will always be just out of reach. Better to stick to your budget!
Researching homes that are for sale on the market is easy today, since you can find, and then view, most of them online. Further, many online tools can help you with calculations. These tools will give you a general idea of what you’d be getting yourself into by factoring in your income, expenses, and overall mortgage affordability. However, don’t forget to include your mortgage broker in this process, as he or she is the one who will be able to give you the best advice and options, as well as help determine the best loan for your needs after the calculations are complete.
Now that you’ve identified the house that you want to buy, and you have a professional mortgage advisor, how do you get the best mortgage deal?
COMPARE INTEREST RATES
When shopping for home loans and looking for the best deal, the first step involves a comparison of the different interest rates. As mentioned, rates can (and do) change regularly, and sometimes quite quickly, so it’s important to stay on top of this. If you’ve hired a mortgage broker, you’ll already be at an advantage for finding a good deal based on their current, up-to-date knowledge of the housing market and changing interest rates.
It’s fairly straightforward to get mortgage interest rate quotes from banks and mortgage lenders, since most of these companies offer their services, including updated interest rates, online. Generally, you want to be looking for low interest rates, but your broker can advise you re: more of the specifics. However, it’s important for buyers and their brokers to compare not only the different interest rates, but also all the associated fees, along with the interest rates, including origination fees, points, and any other fees that the lender might include in the deal.
For example, any loan that’s regarded as a “no-fee loan” means that all fees have been included in the rates.
Even if you’ve hired a mortgage broker to help you sort all this out, and to help you compare interest rates and find the best home loan and mortgage deal for you, you still need to be involved in the process and do your own due diligence. This means it’s your responsibility to ensure you understand every aspect of the mortgage deal. You should do some thorough research and investigation, which includes interviewing whoever is handling the loan, and asking him or all important and relevant questions.
CHECK (AND FIX) YOUR CREDIT
Another task you should undertake before you begin looking for a new home is organizing your credit issues. It’s important to ensure your credit is in order, because making any mistakes at this juncture can take months to correct and might even end up sinking your dream of homeownership.
Be sure to obtain your credit report as part of this process. This will provide you with much-needed information in knowing where you stand, and giving you a chance of getting the best bargaining terms.
Fix your credit if you need to. If your report shows you aren’t creditworthy for a mortgage, then there’s no point in searching for homes and applying for a loan — at least right now. Use a credit repair company, but do some research first to make sure you find a reputable and affordable company. Some are not qualified to properly fix your credit; others will overcharge. A reputable company will not only help you fix your current credit score, but also help in fixing any mistakes that show up in the report.
CONSIDER ALL EXPENSES
As a new homeowner, remember that the down payment and the monthly mortgage payments aren’t the only expenses that you’ll be responsible for. Many buyers, most notably first-time buyers, make this mistake of forgetting to consider all expenses associated with continued homeownership. As a new property owner, you’ll be paying closing costs, property taxes, homeowner’s insurance, and maintenance costs. Please ensure that you’ve budgeted for all these items when shopping for a home loan and more.
Don’t forget to stay involved throughout the process of shopping for a home loan, researching interest rates, comparing interest rates, and looking for the best mortgage deal. Real estate agents and mortgage brokers have complicated jobs in ensuring their clients get the best deal. Therefore, as a buyer, you should also make efforts to ensure you’re also part of the whole process and that you’re involved in every step of the deal.
Research has shown that most people spend more time shopping for cars than they spend shopping for home loans. As a result, many buyers end up paying more in closing costs, or higher interest rates than they might have because they didn’t bother doing enough research or they didn’t adequately shop the mortgage market. Real estate mortgage interest rates can move up and down quickly due to various financial and market factors. The ever-changing rates can confuse almost anyone, and timing is important. For instance, one day the rate might be 5% and the following day it could rise to 6%.
Many people overlook the shopping aspect and tend to approach a single lender to avoid going through the “hassle” of looking for the best deal. As a result, these buyers could very well end up with their “dream” home, but it might come at a steep price, like a significantly higher monthly mortgage payment.
LOCKING IN A RATE
“Obtaining the lowest available interest rate on a mortgage should be every prospective homeowner’s objective,” says Lisa Smith from Investopedia. The reason is simple: Lower interest rates mean lower monthly mortgage payments, which can mean affordability in the short team, and lead to significant savings over the long term.
It’s very important that you know when to lock in your mortgage rate. Mortgage rates change from day to day, and sometimes within the same day. “While advertising may have lured you in with an impressively low mortgage rate, that rate might not be available months from now when you close on your mortgage,” says Smith.
The housing market is constantly changing, both up and down, and you don’t want to put yourself in the position of being at the whim of the market. You don’t want to miss out on a great rate, or cost yourself a lot of money down the road, should the market take a turn for the worse and you’re stuck paying a higher interest rate for a time, waiting and waiting for the market to settle and you can afford the rate again.
If you’re concerned about the state of the market in your area, or worried that rates will climb even further before closing, your best bet is to lock in a mortgage rate, which is called a “mortgage rate lock.”
WHAT’S A MORTGAGE RATE LOCK?
First, let’s take a look at what a mortgage rate lock is.
A mortgage rate lock is “an agreement between a borrower and a lender that guarantees the borrower a specific interest rate on a mortgage,” says Smith (Investopedia). Bankrate.com expands on this definition of a rate lock as “an interest rate on a mortgage for a period of time. The lender guarantees (with a few exceptions) that the mortgage rate offered to a borrower will remain available to that borrower for a specific amount of time.”
This way, the borrower — which is you, as the buyer — won’t have to worry if rates do go up, which is a very real possibility, in between the time you and your agent present an offer and when you close on the home.
How long do mortgage rate locks last? Typically, they last anywhere from 30 to 60 days, but they can also last up to 120 — and sometimes even longer. Sometimes, you can find a lender who will offer a rate lock for an agreed-upon length of time for free, but often they will charge if you request an extension of the lock. Also, many lenders operate within a tiered system.
For example, in general, rate locks of 30 days or less are usually free; some lenders offer free rate locks up to 45 days. Generally, after 45 days, the rate lock will start to cost you in incrementally higher fees, often in 30-day increments. Further, it’s common for each 30-day extension to also cost a quarter-point in additional fees, although specific fees can vary significantly from one lender to the next.
KNOW WHEN TO LOCK IN A RATE
So how do you know exactly when to lock in a mortgage rate? First, you should know that you can’t lock in a mortgage rate until after you’ve been approved for a loan. This is another reason that getting pre-approved for a loan is so important.
As many home buyers do, you might decide to wait to lock in a rate until you’ve found a home you’d like to purchase and put in an offer for.
This is often recommended — wait until you’ve found a home that interests you, and that meets all of your needs and most of your wants. This is because you won’t know how long it will take, after home loan approval, to not only find a suitable and desirable home and make an offer, but also to have the offer accepted. Some buyers are lucky and find — and land — the home of their dreams, but others take longer, and this is more typical for the average home buyer.
Plan and prepare for the process to take some time, and accordingly, wait to lock in your rate. If you lock in the mortgage rate too early, before you’ve found the right home, and the process takes longer than you planned for, than you might miss out on the opportunity for a better rate that could come along before you complete the purchase — or get stuck paying more in order to extend the mortgage rate lock once it expires, as I explained above.
The longer you hold a rate lock, the more expensive it becomes. For example, according to Bankrate.com, “a borrower who chooses a 30-day lock on a loan may pay a 4.875% rate and zero points, while a 60-day lock might cost 1 point (equal to 1% of the loan) or a slightly higher rate with a half-point.”
However, this doesn’t paint the whole story. Sometimes waiting is not the name of the game. As some buyers do, you might also consider “jumping” on a low rate as soon as you find one and as soon as possible (after home loan approval, of course). Yes, you risk having to pay more in order to extend the mortgage rate lock in case you don’t find the right home in the amount of time you’d hoped and planned for, but as mortgage rates are expected to rise, locking down a low rate as soon as you’re able to might not be a bad idea. Because, when you do the math, even a small hike in interest rates, such as a quarter of a point, can make a major difference in the long run — even hundreds — or thousands — of dollars in interest every year.
According to Bankrate.com, Randy Hopper, senior vice president of mortgage lending at Navy Federal Credit Union, says that “in this current environment, it makes the most sense to start the process quickly.”
How would this work? “The borrower would contact the loan officer and say, ‘Hey, I’ve got a contract on a place,’ and then the loan officer locks in the rate as soon as they review the contract,” explains Hopper.
Then again, you don’t necessarily want to rush. “Because of the fear of rising rates, many borrowers rush to lock in a rate as soon as possible,” Lisa Smith explains. “While this might seem to be a good strategy, it isn’t necessarily the best course of action in all situations.”
TALK TO YOUR LENDER
So, what’s the best course of action? You need to talk to your chosen lender and ask some specific questions before you lock down a rate.
First, make sure that you know your lender’s rules when it comes down to their mortgage rate locks.
“Policies vary by lender,” says Smith (Investopedia), “but borrowers often have the opportunity to lock in a specific interest rate either at the time the loan application is filed, at some point during loan processing, or once the application has been approved.”
Different lenders will have different rules, and this could also be one of the determining factors when you’re doing your home loan shopping regarding which lender to ultimately select.
Be absolutely clear about the lender’s mortgage rate lock rules. If you’re unsure about something, then ask. For example, ask if your locked rate can or will change in certain situations. For example, says Bankrate.com, find out if the rate would change “if mortgage rates drop, if you change from a 30-year fixed-rate mortgage to an FHA loan.”
Keep in mind that locking in a low interest rate — even though lower rates help save money — can often come with a cost. For example, some lenders will charge a mortgage rate lock deposit upfront, and others will offer a rate lock in exchange for a slightly higher interest rate than the current prevailing rate, or require the borrower to pay a certain number of points, which could be fixed or floating.
“Fixed points refer to a set number of points; with floating points, the interest rate is locked in, but the number of points that must be paid to guarantee the rate can change over time,” explains Smith.
This is why it’s important to understand your lender’s rules regarding mortgage rate locks.
Also, you must be absolutely sure that your mortgage rate lock will last long enough to cover the entire home-buying process from start to finish (closing). Some closing processes can be drawn out, lasting a month or even longer. If you suspect this will be the case for you, have a chat with your lender about locking down a rate for the full length of that drawn-out process without paying penalty fees. Often, if you talk to the lender ahead of time, you can avoid paying for mortgage rate lock extensions later on.
Please note that if the home doesn’t close before the end of the agreed-upon mortgage rate lock period, then the guaranteed rate that you “locked in” will expire, and further, any deposit that you paid could be forfeited to the lender. If the expiration date passes because of something you failed to do, or something you did that you shouldn’t have, then most likely you’ll be out of luck for that rate you tried to lock in. However, if the date passes because of the lender’s action or inaction, then the original rate you agreed on could still be available.
Don’t make the mistake of assuming that a mortgage rate lock will provide unlimited protection. Yes, a lock will certainly protect you against rising interest rates when the market shifts, but a lock will also prevent you from taking advantage of an even lower interest rate if rates fall when the market shifts in the other direction. Before you enter into a rate lock agreement, ask your lender if they will offer you a “one-time election,” or a mortgage rate lock “float down,” which will allow you to exchange your current rate for a lower rate if prevailing rates have generally fallen.
BE PREPARED FINANCIALLY
Finally, before locking in a mortgage rate, be sure that you are financially prepared for this step. Financial preparation is key to the totality of the home-buying process, and locking in a rate is no exception. If you find and try to lock down a great rate, but in the end, you aren’t financially ready to apply for and qualify for a mortgage, then you’ve not only lost on a great rate, but you’ve wasted time and energy for nothing.
As I’ve said it throughout this write up, some of the pieces of being financially prepared including checking (and possibly fixing) your credit score, saving and having enough for a down payment, keeping on top of building up your regular savings account, determining how much you’ll need for monthly mortgage payments — as well as other standard costs, such as closing costs, homeowner’s insurance, property taxes, and ongoing maintenance — and looking for homes that fall within your budget.
Bankrate.com adds “if you lock in a rate too soon and end up going with a different type of loan, your rate lock might be void.”
You could also lose out on a mortgage rate lock if your situation happens to change, including a significant credit score shift or change in debt-to-income ratio, before closing and ultimate settlement.
THE BOTTOM LINE
In the end, when you’re shopping for a home loan, looking for a great deal, and then locking in that deal, is a good idea and general rule of thumb. The trick is to know when to lock in a rate, and to find out each lender’s rules and policies surrounding mortgage rate locks. Mortgage interest rates, and mortgage rate lock fees, can vary significantly from day to day, and from lender to lender, so it’s best to take your time when researching and shopping.
Further, in addition to shopping around, when you’ve found a lender, a low rate, and you’ve decided to lock it in, it’s imperative that you get that mortgage rate lock in writing. Don’t make any assumptions or take anything for granted. A quote or a promise or somebody’s word isn’t good enough; you need it in writing.
“Rising rates mean rising profits for lenders,” says Lisa Smith of Investopedia, “so they have every incentive to increase the rate whenever possible.”
HOW TO GAIN AN ADVANTAGE:
The most important piece of advice to take away from all this when looking for a loan and getting pre-approved, is to take your time, shop around, and don’t automatically go with the first rate or the first option given to you. There any many banks and mortgage-lending companies, with different rates and options, out there. Do a little research and digging to find the best rate and option that works for you and your needs.
If you don’t know where to start, ask your real estate agent. He or she will have a plethora of knowledge and experience when it comes to lenders, and can give you advice, some dos and don’ts, mention banks or lenders to avoid, as well as make suggestions and put you in contact with an experienced, competent, renowned, and reliable mortgage lender who will work with you to get you the best available rate.
If you do find a great rate, secure it and lock it in, in case the market takes a turn for the worse. You don’t want to end up missing out on a good rate, or leaving it up to chance, hoping the market stays more or less even, when everything changes, and suddenly you’re paying more interest on your mortgage than you can afford.
Now we can move into the negotiation process, which is a major part of the home-buying process. This is when having a great buyer’s agent really comes in handy!