Shop for a mortgage before you
shop for a home
You don't play in traffic, you don't jump out
of an airplane without a parachute, and you
don't shop for a home until you've made sure you
have a good loan to pay for it. If you don't
have your loan lined up first, you could face
delays during the home-buying process and
someone else could buy the home you want. You
could also end up with a higher interest rate on
the mortgage you do get -- one that could cost
you thousands of dollars more over the life of
the loan.
So even though shopping for a home is more fun
than shopping for a mortgage, you need to take
care of the mortgage first. Shopping for a
mortgage doesn't start at the lender's office,
however. It normally starts on your computer or
phone, since that's where most of us order
copies of our credit reports. If possible, the
mortgage process should start months before you
plan to go house hunting in case there are
errors on any of your reports that need to be
corrected.
Your credit report will be a major factor in
the equation a lender uses to decide if you get
a mortgage and what the interest rate will be.
The better your credit and your credit score,
the lower the interest rate should be.
You are entitled to one free copy of your credit
report every year from each of the three major
credit-reporting companies --
Equifax,
Experian
and
TransUnion. However, you cannot get a free
report by going directly to the companies. They
will attempt to sell you the reports. The free
reports are available only by going to
www.annualcreditreport.com or calling (877)
322-8228.
If you are married, your spouse is also entitled
to a free copy. Each credit report contains
information on how to report and correct any
mistakes that might appear. It is important to
remember that credit-reporting agencies just
accept raw information from companies and others
that issue credit. They do not check the
information. Mistakes are common. Each company
has its own way of working, and often each has
some different information.
With the growth of identity theft, it makes
sense to check your credit reports on a regular
basis even if you are not planning to get a
mortgage. If someone has used your name and
information to get a credit card, it will show
up on your credit report. It is now possible to
get all three reports from any one of the three
agencies.
Once you have your credit report, your first job
is to look for mistakes that could lower your
credit score and raise your interest rate. If
there are errors, follow the directions to
correct them and formally present your side of
the story. If you are like most of us, there
might be a black mark or two on your credit
report that is valid. Those will remain there
until they are corrected. If you have had any
late payments, missed payments, judgments,
liens, repossessions or a bankruptcy in the last
seven to 10 years, they will appear on your
credit report and have a negative impact on your
credit rating.
You can do two things about legitimate black
marks. First, write a letter explaining the
black marks -- what happened and why it won't
happen again -- and send copies to all three
credit reporting agencies. Many lenders
understand that life events such as divorce and
illness can temporarily affect even the most
well-meaning borrower. Second, start paying your
bills on time, month after month. In most cases,
the better your “current” history is, the better
your credit score will be. These two steps could
give you a lower interest rate. It might not be
a lot lower, but every fraction it drops saves
you money over the life of the mortgage.
Next, take a close look at your finances, both
income and "outgo." How much do you feel
comfortable spending a month on mortgage
payments? Lenders want to lend you as much money
as they can to buy the most expensive house you
can get. The question is: Can you really afford
it?
You can look at “afford” in terms of how much
you can squeeze out of your budget by cutting
back on all other activities and praying that
the car will not need work, that your kids won't
need braces, and that there will be no
unexpected expenses in the next few years. Or,
you can be realistic. Look at how much you can
spend on a monthly mortgage payment while
accepting the inevitability of cars that need
work, kids who need braces and expenses that
come when you least expect -- or can afford --
them.
Once your credit history is as clean as you can
get it and you know how much you are comfortable
spending on a monthly house payment, find a
lender. When you look for a house, you want
something you will be comfortable living in.
Find a lender you are comfortable dealing with.
Ask friends for recommendations, check out
advertisements, and then make sure you talk to
at least three lenders.
Once you have your lender, get pre-approved --
not pre-qualified. Pre-qualified means that you
told a lender how much you make and what your
bills are, and the lender told you that “if”
everything checks out, and there are no
setbacks, you will qualify for a loan of X
amount. When it comes time to get the loan, they
do the actual checking, and that can take weeks,
or longer, since there usually are some glitches
that require extra time.
For pre-approval, a lender checks your credit
history, your income, work history, any
inconsistencies that arise and so on --
everything except the value of the property you
want to buy. The lender then gives you a letter
saying you have been pre-approved for a loan of
up to X dollar amount pending the
appraisal.
Some real estate agents won't even deal with
customers who don't have a pre-approval letter.
The letter lets agents know they are dealing
with serious buyers and how much house they can
afford. That letter also lets everyone else
involved in the process know that once the house
has been chosen, and the price agreed upon,
closing the deal will probably be relatively
quick and easy.
That's when you start looking for a house.
That's when you know that when you do find it,
you already have a mortgage with which to buy
it.
Mortgage Glossary4
