How to Obtain the Right Mortgage

Written by: Steve Cook   Tue, October 13, 2009 Market Analysis

Most homebuyers dread the process of finding a mortgage.  Going into debt for fifteen or thirty years can be a scary process-which is exactly why you should make every effort to learn about mortgages, put your finance in shape so that you qualify for the best possible terms, determine what you can afford and then shop hard for the right mortgage for you. 

There are literally thousands of mortgage products available today.  Some are highly risky and many buyers have gotten themselves into serious financial trouble because they did not take the time to understand their obligations.  Find the one that fits your particular financial situation.

Prepare your documentation and credit.

To prepare a mortgage application you will need detailed information about yourself, your employment record, and the house you want to purchase. You will need to document your personal finances-your earnings, your monthly expenses, and your debts.

Check your credit record on all of the three major credit rating bureaus: Experian, Equifax and Transunion.  Take steps to make sure each is accurate by carefully reviewing them.  You have a right to know what information is contained in your credit report and to have someone from the credit bureau help you understand what the report says.  Lenders will examine your credit record to learn if you pay your bills on time and decide how much of a credit risk you pose. You may not qualify for certain loans, pay a higher rate of interest or have your application for a mortgage rejected altogether if the report shows that you have a poor credit history.

Determine how much house you can afford.

Assess your financial ability to handle a mortgage by preparing an estimate of your monthly income and loan payments.  Total your before-tax income including salary, commissions, investment income and interest.  Then calculate your monthly loan payments including all outstanding obligations, credit cards, student loan, alimony, etc that won’t be paid off within ten months.  The balance is the absolute maximum you will have available for a monthly homeownership costs: insurance, property taxes, and mortgage payment.

Apply for pre-approval.

It’s far better to be preapproved for a loan than to be prequalified. If you have good credit you can become pre-approved for a loan before you start looking for a house. 

Shop around for a lender before you shop for a home.  Shopping takes time and energy, but not shopping around can cost you thousands of dollars. You can get a mortgage loan from mortgage lenders or mortgage brokers. Brokers arrange mortgage loans with a lender rather than lend money directly; in other words, brokers sell you a loan from a lender. Neither lenders nor brokers have to find the best loan for you-to find the best loan, you have to do the shopping.

Many consumers accept the first loan offered and don’t realize that they may be able to get a better loan. On any given day, lenders and brokers may offer different interest rates and fees to different consumers for the same loan, even when those consumers have the same loan qualifications. Keep in mind that lenders and brokers also consider the profit they receive if you agree to the terms of a loan with higher fees, higher points, or a higher interest rate. Shopping around is your best way to avoid more expensive loans.

Ask your lender to pre-approve you based on what your finances indicate you can afford and the down payment you intend to make. Armed with a preapproval letter, you can focus on homes you can actually afford to buy.  Sellers will be more likely to immediately accept your offer, even if that offer is for less than list price, because you are giving the seller peace of mind that their home is sold.

When reviewing your projected mortgage payment and existing debt, some lenders might use ratios such as “28 and 36″ to determine whether you qualify for the loan. These are commonly used ratios.

In the case of “28 and 36,” the 28 refers to the percentage of your gross income (before taxes) that may be spent on housing expenses, including principal and interest on the mortgage, real estate taxes, and insurance. The 36 refers to the income that may be spent for payments on all your debts (including the mortgage): the monthly payments on your outstanding debts, when added to the monthly housing expenses, may not exceed 36 percent of your gross income. When you talk to a lender, find out what ratios will be used to evaluate your application.

Be prepared to document your income (W2 forms) for past years and year-to-date (pay stubs), current debts (account number, outstanding balance, and creditor’s address for each), and the purchase contract for the home you want to buy. When you file your application, ask the lender how long the approval process will take. The time may vary depending on the complexity of your mortgage, current market conditions, and whether you have to provide additional information. It’s common for a decision to be made within 30 days after the lender receives all the necessary information. Applications for FHA or VA loans may take longer.

Apply for a mortgage. 

When you have negotiated a contract on a property, the lender will hire a real estate appraiser to give an opinion about its value based on the condition of the property and the recent selling prices of comparable properties nearby. Lenders usually will lend the borrower up to a certain percentage of the appraised value of the property, such as 80 or 90 percent, and will expect a down payment making up the difference. If the appraisal comes in less than the asking price of the home, the down payment you planned to make and the amount the lender is willing to lend you may not be enough to cover the purchase price. In that case, the lender may suggest a larger down payment to make up the difference between the price of the house and its appraised value.

If your application is turned down, Federal law requires the lender to tell you, in writing, the specific reasons for the denial. Make sure you understand the reasons given-you may be able to find answers or alternatives that will satisfy the institution’s lending standards. Even if that doesn’t happen, understanding fully why the loan was denied may improve your chances with the next lender you visit. Factors that may affect the loan decision include:

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