Achieving the Dream: Getting a Mortgage

NEW YORK (MainStreet) — Becoming a homeowner used to be the centerpiece of the American Dream, but now, as a new MainStreet study has found, only 17% of Americans cited owning a home as their primary financial goal.

The roadblocks and speed bumps to getting a home loan could be a possible deterent, as many Americans take the easy route when they do go about getting a mortgage. A recent survey from Lending Tree found that nearly 40% of homeowners only obtain one mortgage quote before settling on a loan, despite the fact that nine out of 10 borrowers (91%) are aware that interest rates vary from lender to lender. Mona Marimow, senior vice president of Lending Tree, attributes consumers’ reluctance to shop around for a mortgage to their discomfort and lack of familiarity with the process.

“Mortgage rates are a commodity and you can negotiate them,” Marimow says. “Never just take the first offer.”

To help homebuyers lock in a mortgage that’s right for them, MainStreet lists out the steps to take when shopping for these loans.

Gather paperwork.

According to Erin Lantz, director of Zillow Mortgage Marketplace, homebuyers also don’t comparison shop for mortgages because they’re bogged down by time constraints. Often, they find a home before researching their options, and then they need to finance it quickly. But in reality, Lantz says, most of the financing legwork should be done well before your search.

“From the time you apply for a mortgage to when it is funded typically takes about 30 to 60 days,” she says. “But the process starts much earlier than that.”

First, Lantz says, homebuyers need to gather the documents a lender will need to see when you’re filling out applications. This includes proof of income, tax statements and any documentation on assets. Homebuyers will also need to check their credit report since this plays a huge role in determining the terms of your loan.

“People with a score over 700 will pay one to one and a half percentage points less than someone who is the mid-credit score range,” Paul D. Golden, a spokesperson for the National Endowment of Financial Education, says. “Any way that you can improve your credit score can help you out tremendously.”

<< Learn some surefire ways to boost your credit score on MainStreet. >>

Know your budget.

Financial housekeeping won’t only make homebuyers more attractive to lenders, it will also help them learn exactly what type of mortgage they can afford.

Golden points out that the credit report and application lenders examine to determine a borrower’s worthiness include debts on file with a credit bureau, such as auto loans, monthly credit card bills or court judgments. But keep in mind, these documents don’t always take into account a family’s actual monthly expenses, such as fuel costs, childcare expenses or grocery bills, so Golden suggests prospective homebuyers draft a budget addressing all their expenses, then use an online mortgage calculator to figure what type of mortgage they can safely add to their bills.

He also reminds consumers that monthly payments are just the tip of the iceberg when it comes to the cost of a mortgage. Homebuyers also need to factor in the down payment they want to put down, property taxes and mortgage insurance.

Additionally, he says, “know your future goals. If you know you’ll be adding to your family three years from now, you need to factor in those costs.” 

Choose a loan.

While there are a wide variety of mortgage programs out there with varying conditions and terms, consumers generally have to decide whether they want a fixed-rate or adjustable-rate mortgage.

Fixed-rate mortgages carry interest rates that stay the same for the life of the loan.  Adjustable-rate mortgages, conversely, start with a lower interest rate that remains fixed for a period of time before beginning a cycle of annual resets, guided by an “index” that will reflect prevailing rates in the future.

Lantz says the decision to choose either mortgage should be influenced by personal factors, such as career stability, and how long the buyer plans to stay in the home.
“If you’re going to stay in your home for less than five years, an adjustable-rate mortgage might make sense for you,” she says, explaining that the most popular ARMs are fixed for the first five years before the interest rate fluctuates. However, she says, consumers also need to consider “their appetite” for risk.

“Circumstances can change. Property values may dip,” Lantz says. “You may think that you are going to move in five years, but then find yourself unable to.”

Consider down payments.

Consumers also need to consider how much of a down payment they are willing to pay, though this will vary from shopper to shopper.  

“Ideally, you want to put 20% [of the home’s price] down, but you should put down at least 5%,” Golden says. “The more of a down payment you are willing to pay, the better rate you’re going to get.”

Additionally, homeowners can also elect whether to pay off any points imposed by the lender. Points, also called Loan Origination Fees or Loan Discounts points, are percentage fees charged to get a mortgage. One point on a $100,000 mortgage is $1,000, for example.

Generally, lenders let borrowers pay off points upfront (usually during closing) in exchange for a lower interest rate for the life of loan. Again, how many points, if any, you pay depends on what you can afford and what you’re willing to pay.

Comparison shop.

Deciding on a loan can be daunting, but it’s important to know what type of mortgage you are looking for, especially if you plan to comparison shop.

“You have to compare apples to apples,” Eric Tyson, author of Mortgage for Dummies says, adding that comparing one lender’s 30-year fixed-rate mortgage to another 5-year ARM won’t tell you which one is offering the better overall deal.

Once you have decided what type of mortgage is right for you, consumers should to do some research online to determine that loan type’s current interest rate. This will give them some bargaining power when they actually start to put in applications with lenders.

Of course, just how a flexible a lender is going to be will be influenced by your creditworthiness.

“If your financial situation is less than ideal, you’ll have fewer loan options available to you,” Lantz admits, but she adds that doesn’t mean you won’t be to find take advantage of a competitive marketplace. If a lender doesn’t want to come down on their interest rates, for instance, she says they may be willing to lower some of their fees. “You have to ask.” 

However, experts agree, consumers need to remember that choosing a lender shouldn’t be based solely on rates and fees.

“Getting a better rate is good, but you also need to make sure that the process is completed properly and with your best interests in mind,” says Deborah McNaughton, author of The Essential Credit Repair Handbook and a co-founder of credit counseling website FinancialVictory.com.
McNaughton explains consumers should refrain from working with a lender that they find too pushy or aggressive or otherwise don’t mesh with personally. But consumers don’t have wait until their face-to-face meeting to get an idea of whether or not lenders are reputable or provide good customer service.

Both Zillow and Lending Tree have directories where previous mortgage shoppers rate and review banks, credit unions and independent lenders. 

“Brand is one indicator of trust, but so is trust,” Lantz says. “These reviews provide a record or performance.”

Consumers can read reviews to find out whether or not a lender closed on time, returned a borrower’s phone calls or helped to guide customers through the entire process. They can also gauge whether a lender is known for delivering on the rates quoted prior to filling out a loan application or in their Good Faith Estimate.

Naughton also suggests that customers considering a mortgage with an independent lender check with the Better Business Bureau or their state’s realtor association to see whether they have ever had a complaint filed against them.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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