Shopping for a Lender
Serious homebuyers do their homework well before house shopping or making an offer. Here are some important tips to get you started:
1) Get pre-qualified or preapproved. Before you go scarfing up all the complimentary crackers and cheese at Sunday open houses, get your pre-qualification letter in hand. Sellers like to see it; it shows you’re serious and really eligible to buy a home. In short:
- Pre-qualification takes a few minutes over the phone. A lender can tell you how big a loan you’d likely qualify for by asking you some financial questions. This puts you in a specific price range to help you narrow down the list of potential homes.
- Preapproval requires an appointment with a lender and documentation of all your financial statements. You’re going to have to do it anyway, so if you have the time, you can get this step out of the way first and show a seller exactly how much loan you qualify for.
- Getting pre-qualified or preapproved does not lock you in with a lender. You don’t owe a lender anything until you’ve signed the closing papers (although don’t pay upfront costs like appraisal fees until you’ve settled on one lender, because they aren’t refundable).
2) Shop around. The process of applying for a mortgage loan does ding your credit score slightly, but when a lender checks your credit, that opens a two-week window during which subsequent credit checks have no adverse effects on your score. So spend that two weeks comparing as many lenders as possible. Negotiate for the best possible terms; don’t be afraid to tell one lender what another is offering to see if he’s willing to beat the deal. Which leads us to the next step:
3) Apply for a no-closing-costs mortgage. Some new mortgage products have hit the market, including loans with no (or few) closing costs and no PMI. What’s the catch? Well, there is none. These loans are offered by entities so large they can afford to eat the cost, hoping that once they have you as a customer, they can sell you other, more lucrative products. One such lender is Bank of America; their No-Fee Mortgage Plus program offers a $250 Best Value Guarantee, meaning that if you’re approved for the program and choose another lender instead, they’ll give you $250. So apply. Either you go with them, or you can use the low closing costs to bargain with other lenders who may be able to deal with you on PMI and interest rates to get you an even better deal.
4) Know your PMI facts. Paying PMI has been out of vogue for a while; borrowers who can’t afford the full 20 percent down payment now usually opt for piggyback mortgages in which the mortgage loan is divided into two chunks at different interest rates. A wrinkle: In 2007, for the first time, private mortgage insurance became a tax-deductible expense. This law is not permanent and has to be renewed each year, however, so your safest bet is to get a no-PMI loan or a piggyback mortgage.
5) Be shrewd about the good faith estimate (GFE). This summary of expected charges from the lender should specify your note rate, annual percentage rate (APR) and monthly payment as plainly as possible. Tips for reading your GFE:
- Some closing costs are universal and you’ll pay them no matter which lender you choose (except those that advertise no closing costs). These include title insurance, a rather hefty fee which protects the lender in case title issues crop up later with your property, and any credit check fees, appraisal fees and pre-paid portions of your property taxes and homeowners insurance. On the other hand, fees that go directly to the lender, such as underwriting fees, application fees, loan origination fees or discount points, should be considered negotiable. Always ask about anything that confuses you --- if you feel you’re getting the runaround, ask a real estate attorney to look over the GFE.
- Some lenders skimp a bit on the projected property taxes for your home to make your overall monthly payment seem lower. Do your research and know what city and county taxes will come to, so you don’t get a rude shock down the road.
- Lenders may also fudge a bit on the amount of escrow you’ll have to prepay at closing; this depends on your closing date, both on the time of the month and the time of the year you’re closing. If you know the closing date, the lender should be able to give you an exact number.
TIP: Loan origination fees are not tax-deductible, but interest points are. If your GFE shows an origination fee of a point, ask if the bank can charge you an interest point instead. The bank gets the same amount of money, but you get the tax advantage.