Thinking to buy a home? You would probably need to qualify for a mortgage first. Sellers and real estate agent with MLS often prefer those with a preapproval letter in hand while scrutinizing several offers to purchase.
From a buyer’s point of view, the selection of a right mortgage lender is of paramount importance as they have to bear the consequences for a pretty long time. Mortgage shopping and comparing between offers from different lenders have become usual steps of a homebuying process.
Draft a Blueprint of Future Mortgage Obligations
A financial analysis is necessary to confirm you can really afford a home. It is the first milestone towards the idea of successful homeownership. You may want to use different mortgage tools, such as an affordability calculator and a payment calculator, to achieve this milestone.
Besides, you must know the upper price limit under which you should look for a home. This is usually the maximum amount that a lender is willing to lend after verifying your credentials. A pre-approval letter is what you need to begin home shopping, knowing all the way how much you can afford.
It is also important to ensure you are comfortable with the monthly payment associated with a particular loan amount. Consider paying down as much as to keep your payment lower. Those who have not much to pay upfront should explore alternatives, seeking assistance from a qualified loan officer or mortgage broker.
Shop Around to Find the Lenders with Best Offers
Begin mortgage shopping by roping in several potential lenders – talking to their loan offers, asking as many questions as you need to clarify your doubts, looking in detail at their offers, and comparing interest rates, closing costs and other fees. Contact at least three or four loan originators who can be anyone from online lead generators, mortgage brokers, big and small banks, credit unions and non-banking financial institutions.
The following are some of the things you should consider while choosing your lender.
- Interest rates and APRs
- Types of loan options available
- Customer service support
- Closing costs
- Other fees (pay special attention to hidden fees and charges)
You can visit websites of major banks and prequalify online, filling out simple questionnaires. Repeating this step with several lenders can give you an idea about your preparedness and the lenders’ willingness to work with you.
However, you must note that prequalification is non-binding in nature and the lender is not obliged to present you with a formal commitment. It can indeed help you shortlist lenders who are willing to work with you. Contacting a mortgage broker directly, on the other hand, can help you bypass this step.
Apply and Get Pre-Approved
Select a few lenders based on your prequalification results and contact their loan officers. Discuss your typical needs and decide on two or three lenders that you can apply at and get pre-approved. You should avoid applying at too many lenders in quick succession as this act might result into a damaged credit standing.
Keep talking with the loan officers and come close to clearing all your doubts and choosing a relevant loan product. Among many things, you may want to seek specific answers to the following questions.
- What loan programs are suitable for your need?
- Can you qualify for FHA loans or a conventional loan is what you need?
- Which suits you the best – a fixed-rate mortgage or an adjustable-rate option?
- Should you purchase points to lower down your mortgage rates?
Once you have all your doubts cleared, chosen a loan type and decided on whether to purchase points or not, you can proceed with the application process. If you are working with a mortgage broker, you just need to supply relevant information for multiple applications at different lenders.
Your loan officer will help filling out Uniform Residential Loan Application – a standard loan format used by Fannie Mae backed institutions. Gather all necessary documents and submit the same at the lender. Sign all necessary documents and you are done with mortgage application.
Within three days of application, your lender will send you the Good Faith Estimate (as required by RESPA) and Truth-in-Lending Disclosure Statement (as required by TILA). Receiving the same will confirm that you have not been denied by the lender.
You will be pre-approved soon, depending on the outcome of your credit verification, and will subsequently receive a pre-approval letter, signifying your lender’s willingness to offer a formal commitment to lend. A pre-approval letter, among the many things, contains the answer to the much-asked question – how much you can afford to buy.
Compare and Pick your Lender
The most important documents you receive from a lender after you have applied are Good Faith Estimate and Truth-in-Lending Disclosure Statement. If you have received the same from two or more lenders, you can easily compare and pick out the lender with best offers.
The Good Faith Estimate contains three pages. The first page presents a summary of your loan and escrow account information. The second page is dedicated to a detailed summary of settlement charges, also known as closing costs. The third page of the document contains a table that allows you to compare similar rates and settlement charges from other lenders.
The Truth-in-Lending Disclosure Statement reveals the total cost of the mortgage loan you have applied. It gives you an insight into the amount being financed, the annual percentage rate (APR), the finance charge, and the payment schedule.
Now is the time to single out one lender that you really want to work with. Respond within 10 days of receiving the Good Faith Estimate as the lender is not legally bound by it after that period. You may want to lock-in an interest rate at this time, but remember it must not expire before the closing and you may also have to pay a fee for that.
