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How to Shop for a Mortgage

Do you know how to shop for a mortgage? You should know about it if you are about to make what is likely the largest purchase of your life – a new home. You don’t want to make any mistakes that will end up costing you thousands of dollars now or in the future. And you have no idea what you are doing. There are things you need to get a mortgage.

In order to prepare you for the strenuous process you are about to engage in, we offer steps on how to shop for a mortgage that fits your needs and budget.

But, First

There is no harm or shame in asking friends or relatives who have already purchased a home with a mortgage to provide you details and warnings about the process. Collect the information and categorize it – what to look for, where to look, what to look out for – and consider the source.

For example, is the person you talking to about their mortgage experience coming from a similar financial place as you? Your needs in your mortgage hunting may be similar to that of others, but it may also be vastly different depending on your financial means.

Like it says, consider the source as you try to find the best mortgage broker available to you.

The Things You Need to Get a Mortgage

Step 1: Look at Yourself

Before you go shopping for a mortgage, you need to determine just what kind of mortgage candidate you are. That means you need to ask yourself: “What size mortgage can I afford?”. Determine your available funds, not only for your down payment but for the size of your monthly mortgage payment as well.

Determine your credit score. A low credit score will signal a lender that you are a risk to default on the loan. Even if you are offered a mortgage, a low credit score will prompt the lender to offer you a higher interest rate, which they do as a protection against a potential default.

A low credit score will put you in a position where you can get turned down, which will cost you both time and money, and affect your motivation and momentum to get a mortgage, and that house you want.

If you have a decent credit score, you next need to determine your mortgage budget. You need to consider all of the debt you currently have, in credit cards or automobile loans, or college loans, as you determine what money you have for your monthly mortgage payment. You can have suggestions for several formulas to best determine what you can afford, but you really need to know how much you owe already before you add a mortgage to the negative side of your personal ledger.

Step 2: Know the Mortgage Rate Climate

Since the Great Recession, mortgage rates have been historically low. The pandemic did nothing to encourage an increase in those rates. But the economy is bouncing back in a big way, and the federal benchmark rate will edge up eventually.

It’s not just the mortgage interest rate that should interest you as you look at current mortgage events. In the summer of 2021, the housing market was as hot as it has been in decades. Demand far exceeds supply. Obtaining a mortgage in this environment is going to be unusually difficult, which is why you must present the best possible financial image to the lenders (See Step One).

Step 3Determine Your Preferred Payment Plan

Now you are ready to shop. You need to decide if you want a 15-year or a 30-year mortgage, which is dependent on how much you can pay on your loan every month. You will save thousands of dollars over time with a 15-year mortgage but you may pinch your spending habits during that time to meet the monthly loan payment.

When shopping for a mortgage, there is no harm in starting at the beginning, which is the internet. Even the best online mortgage brokers publish mortgage rates online daily and update them whenever the market demands. The rate quoted online is just a jumping-off point; your final rate will be determined by your personal credit information, your down payment, and your available assets.

About Federal Agencies

There are decisions to make beyond which lender offers the lowest interest rate. Federal agencies (FHA, VA), and others back some loans and many others do not (most conventional loans). There are also different rules from lenders regarding early payoff of the mortgage or applying for payments beyond the monthly loan amount. Be sure to inquire about those particulars.

You will also need to ask about fees. Mortgages have fees for pulling a credit report, applications fees, and the appraisal of the home you want to buy. Some lenders want payment of those items upfront, while others will roll those costs into the mortgage.

Some lenders will also suggest you pay discount points, which is basically paying a percentage point of your overall interest rate upon receiving the loan rather than carrying the higher percentage over the length of the loan. Whether you do this will be determined by the money you have available to offer upfront. The lender will certainly make it seem like a wise idea, and mathematically, they may be correct, but it is simply more money pulled from your immediately available funds.

I have listed all the things you need to get a mortgage, this will surely help you make a smart mortgage decision.

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"Life Insurance is the only tool that takes pennies and guarantees dollars."

Ben Feldman

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