When you start the home financing process, it is easy to get overwhelmed. Making one of the biggest financial decisions of your life deserves more than a trial and error education. In school, you learned your numbers, then algebra, and eventually probability and statistics, but personal finance was probably not on the list. It simply isn’t taught.
If you’re just starting the process of shopping for your mortgage (yes, shopping for it) here are a few basics to get you started:
Get up to speed on your lingo and your letters…
There is a unique language in the mortgage industry and you need to translate it fast. LTV, ARM, HELOC, APR … if you feel like you’re swimming in acronym soup —we understand.
Here are a few of the most important (and often used) terms you can learn right now:
- ARM: Adjustable Rate Mortgages are those in which the interest rate paid on the balance changes according to certain benchmarks.
- LTV: This is the loan-to-value ratio. It is a risk-assessment ratio used by lenders that compares the amount you’re borrowing to the value of the property.
- APR: The Annual Percentage Rate gives you the cost of the money you’re borrowing. It reflects the amount you’re borrowing plus things like points, fees and other charges.
Get up to speed by brushing up on mortgage lingo with these helpful articles: Don’t Swim in Acronym Soup: 12 Mortgage Terms Translated and Decoding Mortgage Acronyms.
How important is your credit…
Remember that time you maxed out your credit card on that last minute getaway with your friends or partner? Bet you weren’t thinking about applying for your first mortgage then. Your credit score is the lender’s compass for how financially responsible you are —and whether or not you can handle more debt.
Here are a few credit score facts to keep in mind:
- 580 is the minimum for an FHA low down payment loan
- 620 is the minimum for most conventional programs
- 740 is the magic number most experts will suggest to get a good rate
- 780+ puts you in the absolute best position to get the lowest rates available
The Fair Credit Reporting Act (FCRA) requires each of the 3 nationwide credit reporting companies – Equifax, Experian, and TransUnion – to provide a free copy of your credit report once a year. You just have to ask. To order, visit annualcreditreport.com or call 1-877-322-8228.
If your credit score could use some help, check out our tips to fix mistakes on your credit report.
How to know what loan is best for you
There are so many different loan types and programs available to today’s homebuyers. From VA and FHA loans to Adjustable Rate Mortgage (ARM) and fixed rate, what’s right for you? Selecting the mortgage that’s best for you is a crucial part of the homebuying process.
A few key things to think about:
Do you see yourself living in the home long term or short term? Are you planning on expanding your family size and will need more space? Will you be relocating or downsizing?
If the answer is long term, a 30 year fixed will likely be a good fit. For many first time homebuyers who plan to start small and upsize later, a shorter term ARM will give them more buying power to get in the market.
If you are a veteran, VA loans allow you to do 100% financing with no down payment. If you’re not a vet but still need lower down payment solutions, there are a number of options including conventional loans with as little as 3% down and FHA loans with a low 3.5% down payment. If you have less than 20% for a down payment, mortgage insurance may be required. With conventional loans it can be canceled when the loan balance reaches 80% loan-to-value (LTV), with FHA loans, the upfront mortgage insurance and monthly mortgage insurance that cannot be canceled). When you’re ready to select a loan program, Sindeo will walk you through all of the different options and what total costs will be over the life of the loan.
What kind of property will you buy? Typically condos with a 20% down payment with higher interest rates than single-family residence; investment properties typically require more down payment and higher interest rates than primary residence
When to lock in your rate …
You might not pay a lot of attention to interest rates, but when it comes to your mortgage they’re crucial. Even the smallest fluctuation can mean you pay thousands more over the course of your mortgage’s life.
Typically, when you lock your rate, you are protected from rising rates, but you are also locked out of improved rates. Typical locked periods are 15 days, 20 days, 30 days, etc. The shorter the period, the better the rate/pricing, but if you don’t close on time, rate extension costs are very expensive. Make sure the lender is comfortable closing within the locked period prior to locking.
How to know when to lock in your rate?
If you’re buying a home, the earliest you can lock your rate is when you have a ratified purchase contract.
- If you’re buying a new construction home, the earliest you should lock is at least 30-45 days prior to project completion.
- In volatile market conditions or in a rising rate environment like today, it’s safer to lock as soon as you can.
- In a low rate environment, you can float your rate and watch the mortgage market, and lock in a shorter period when you get closer to closing.
- Check with your lender on how long it will take to close prior to locking. A longer rate lock is more expensive.
What’s involved with closing costs
It might sound small with the amount you are already spending, but all the costs add up and you deserve to know what’s included. How do you know if they’re calculated right? Have you saved enough? Can the seller contribute?
Closing costs vary from lender to lender, but range from about 2-5% of the purchase price of the home. Always ask for the Loan Estimate and use the Annual Percentage Rate (APR) to compare rates and true closing costs between lenders. The APR takes into account both the interest rate and the loan costs like origination fee, discount points, credit report, appraisal, etc. The Loan Estimate gives you a breakdown of the loan costs and other costs.
Can you really shop around for a mortgage?
Did you search Amazon before you bought your coffee maker? Browse Yelp for the best Pad Thai in town? Now, you can shop for your mortgage and save thousands over the course of your loan.
With SindeoOne, you run your credit only once, and you can shop over 1,000 loan programs with 45 lenders with a single application that often takes less than 5 minutes to complete. Remember, multiple hard credit inquiries after 30 days can hurt your credit score.