I first suggest that you go to http://www.annualcreditreport.com/. You are allowed to view your credit report once a year for free, and you definitely should. While this will not tell you your credit score (unless you are willing to pay $8 or so), it gives you a chance to verify your credit history and correct any inaccuracies before banks and lenders start looking at your credit report for themselves. Once you know the report is accurate, your credit score is what it is. Just so you know, anything above a 720 is usually considered a pretty good credit rating.
The second thing I would do is figure up how much of a down payment you can cook up. 20% is the magic number. Although most lenders do not require a 20% down payment, not being able to put 20% down usually leads to the lender requiring the buyer to purchase PMI (private mortgage insurance). This will be an additional expense that must be factored into your purchase analysis. Without destroying your quality of life and financial security, I would generally advise you to put down as much as you can, but it really is a lot easier to get a favorable loan if you can hit at least 20%.
Third, you need to determine what time frame works best for you. The shorter the loan period, the less interest you will pay, but that means higher monthly payments. If you have concerns, I would advise you to get a longer term loan with no prepayment penalty so you can enjoy the lower required monthly payments. This way you still have the option to contribute additional funds to pay off the loan sooner without having to worry about any extra fees.
Now it’s time for the “fun” part: letting lenders compete for your business. Try to tell yourself throughout this process that they need you more than you need them because someone out there is going to be willing to give you a loan! I would start with your home bank, I would ask for your realtor’s recommendation, and I would ask your soon-to-be neighbors who they used. You’re trying to find out who was pleasant to work with, not the numbers at this point. If you are feeling lonely or want to feel important, go ahead and enter in your information like I did on a website like Lending Tree or Quicken Loans. The response was overwhelming, but quite informative as my phone rang off the hook for 2 days with people wanting to give me a loan!
Once you narrow your lenders down to 3 or 4 based on likability, think R-P-F; rates, points, fees. Determine who has the lowest rate and pitch it to the others to drive them down or mark them off your list. Will they let you lock in that rate for free? Find out how much points are, decide if that is something you want to do, and then pitch it to the others. Get the lenders to provide you with an estimate of fees and pitch the lowest fee amount to the others to drive them down or mark them off your list. Suddenly you will be left with a couple of lenders that you have squeezed as much as you can, and they will be offering you the best home loan you could possibly hope for. At that point, go with whoever is nicer!
Great info, Tom. I wish we had known this when we were "1980's home buyers"! Keep up the good work!ReplyDelete
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