BUYERS: HOW TO FIND THE BEST MORTGAGE & GET PREQUALIFIED
Now that you’ve determined how much house you can afford (link to “Figuring Out How Much House You Can Afford”), it’s time to shop for a mortgage loan and get prequalified. Prequalification is a nonbinding promise from a lender about how much money you may borrow. Prequalification can lead to preapproval, which is a binding contract between you and a lender.
However, before you begin, it is essential you familiarize yourself with the marketplace and its terminology.
“What always astounds us,” says Hugh Frater, CEO of Fannie Mae, “is that more than 90% of homebuyer education is accessed AFTER the buyer has an accepted offer. There is inadequate consumer education around what it means to buy a home, and what it means to get a mortgage.”
“Many homebuyers get intimidated by the mortgage process and just go with whatever is easiest—usually what their local bank is offering,” says Greg McBride, chief financial analyst for Bankrate.com. “Smart buyers shop around to uncover the lowest offers.”
Julie and her team will help you shop wisely, arming you with the knowledge to negotiate the best deal possible.
Basic Mortgage Loans
- Conventional/Fixed Rate
Known as a plain-vanilla mortgage, a conventional fixed rate loan offers an unchanging monthly payment, with 15 and 30 years being the most common terms. With a locked-in rate, you’ll always know what your payment will be. This is the best route for those who prefer constancy and predictability. If you’re planning to stay in your home for at least a decade, a 30-year fixed-rate loan is your best bet. If you can afford higher payments, consider a 15-year fixed-rate loan which features a lower interest rate and could save you thousands over the life of the loan.
- Adjustable Rate Mortgage (ARM)
ARMs begin with a fixed interest rate for a specified period of time, then the rate is adjusted periodically—usually once a year—based on the cost of borrowing money. A common ARM is the 5/1 loan in which the interest is fixed for the first 5 years and adjusted thereafter. Because ARM interest rates start lower than fixed-rate loans, they are most often chosen by first-time homebuyers to boost their buying power.
Interest-only mortgages allow the borrower to pay only the interest portion of the loan during the first 5 or 10 years. The monthly loan payments are subsequently increased to pay both interest and principal.
- Federal Housing Administration (FHA) Loans
Designed for low-to-moderate income borrowers, FHA loans require lower down payments (3.5% and 10%) and lower credit scores than conventional loans. Currently, a credit score of at least 580 will allow you borrow up to 96.5% of the value of a home. A credit score between 500 and 579 will require a 10% down payment.
Finding The Best Mortgage
Once you’ve run your numbers and decided on the type of loan that best suits your needs, it’s time to shop around.
When doing this, leave no stone unturned.
1. Start by comparing current mortgage rates and best deals at Bankrate.com.
3. Call or visit your local credit unions and community banks. Smaller lenders typically have better rates for ARMs and offer better terms and rates to people with variable income streams, like the self-employed.
4. Once you’ve found the best deal, it’s time to gather your information and complete the necessary paperwork. While information requirements vary by lender, refer to this basic checklist.
5. After you’re prequalified, your next step is to get pre-approved. Getting pre-approved is almost like applying for a real loan, but it happens before you select a home. This is an in-depth process, and you’ll need to submit paperwork about your income, assets, employment history, and residency status. Refer to Zillow’s checklist of what’s usually required.
Julie and her team of experts are ready to help you achieve your homebuying goals. We will prepare you with all the necessary info, and even recommend tried-and-true financial professionals with competitive rates.
We look forward to helping you with any real estate financing questions you may have. Please contact Julie at 650.799.8888 or Julie@JulieTsaiLaw.com to schedule a free consultation.