Things to Know Up Front When Shopping for a Mortgage
There are many things that are helpful to know at the beginning of the process of shopping for a mortgage. Knowing this information will help to streamline the process, save time, and potentially put an individual in a better negotiating position. In fact, much of this information is critical to know prior to embarking on shopping for a home. It will make the entire home shopping and mortgage shopping experience easier because an individual will have the answers to basic questions.
Obtain Your Credit Report
When starting the process, it is important for individuals to understand their credit history. Because of the Fair Credit Reporting Act (FCRA), consumers can now order a free copy of their credit report from each of the three consumer credit reporting companies (Equifax, Experian, and TransUnion) each year. To order their credit report individuals may visit annualcreditreport.com or call 1-877-322-8228. This will allow individuals to check for errors or inaccuracies and have the problems fixed prior to shopping for a loan.
Understand What You Can Afford
When determining how much an individual can afford, it is important to look at three things:
Armed with this information, an individual should know how much they will be putting down on a home, how much they will have for closing costs, how much they can afford to pay on a mortgage on a monthly basis, how large a mortgage they can afford, and ultimately how much they can afford to spend on a home (down payment + mortgage amount).
Understand Your Own Income Potential
Individuals should also assess heir own income potential. Do they expect their income to remain fairly constant or do they expect it to increase significantly over time? Knowing this may give them some guidance in picking a type of mortgage. Individuals who expect their income to remain fairly constant should probably avoid mortgages whose payments will increase over time such as adjustable rate mortgages, graduated payment mortgages, or growing equity mortgages. Conversely, individuals who expect moderate to large increases in income may want to consider these other mortgage types rather than a fixed rate mortgage.
Other Things to Consider
Some other things for potential borrowers to consider include:
Decide on the Type of Mortgage
A potential borrower should now be ready to select the type of mortgage that best fits their needs. They should now know:
It is now time for the borrower to start shopping for the best loan deal that they can find. When shopping for a loan, a borrower needs to obtain a few pieces of information to be able to compare loan options. The information that they should obtain to be able to compare options includes:
Things to Watch Out For
Potential borrowers need to understand if a loan has any prepayment, or early payment, penalties. They should ask the lender as well as check their Truth in Lending (TIL) form. On that form there is a line that states "If you pay off your loan early, you [ ] may [ ] will not have to pay a penalty." A check mark in "may" means that there is a prepayment penalty. Prepayment penalties should be avoided if possible. If they cannot be avoided then the borrower needs to understand what the penalty is and for how much of the life of the loan is it in place.
Another thing for a borrower to watch out for are loans that can have negative amortization. Negative amortization means the the principal amount of the loan can actually increase (what the borrower owes goes up). This can happen in certain types of adjustable mortgages that have payment caps. If a capped payment is not enough to cover all of the interest payment, then the unpaid interest is added onto the principal amount of the loan. Negative amortization is also something that should be avoided if possible.
Where to Shop for a Mortgage
While there are thousands of lenders who may want an individual's mortgage business, there are really only a few places that a borrower needs to look to find a mortgage:
A borrower should expect to investigate at least a couple of these avenues when looking for a mortgage. This will enable them to better understand prevailing rates, terms, and conditions, and make a more educated decision on their ultimate mortgage.