When buying a home for the first time, you’ll have to obtain a mortgage in order to pay for it. But most first-time homebuyers might not know the best way to go about getting a good deal on a mortgage. To find the best mortgage rates, you have to start with the best mortgage lender.
Before you can go about choosing which lender to go with, you should decide what kind of mortgage you’re looking for. There are several different types of mortgages and each one has its own benefits. Decide which one works best for you:
A fixed-rate mortgage (FRM) is the most common type of mortgage. The biggest benefit of an FRM is that your interest rates stay the same for the entirety of the loan, meaning the amount you pay each month does not change. This can be a good thing as your interest rate will never increase, but if rates decline you will not benefit from them unless you refinance your mortgage. FRMs are offered for terms of 10, 15, or 30 years. The longer the term, the more interest you end up paying in the long run.
An adjustable-rate mortgage (ARM) offers a lower initial interest rate that remains constant for a set amount of time before changing based on market factors. The benefit of an ARM is the ability to take advantage of potentially declining interest rates, but it does open you up to the possibility of paying a higher interest rate. With an ARM you can choose a one-year ARM, where the interest rate changes every year; or you can choose a hybrid ARM, where you receive a fixed rate followed by an annually adjustable rate.
A Federal Housing Administration (FHA) Loan is a government-backed mortgage requiring a smaller down payment than an FRM or ARM. It does, however, require you to purchase monthly mortgage insurance. The benefits of an FHA loan are the smaller down payment and the ability to receive one without needing a good credit score.
A VA (Department of Veterans Affairs) loan is a government-backed mortgage that requires either a low down payment or no down payment at all, and does not require mortgage insurance. People with military affiliations can qualify for VA loans.
What To Do Before You Choose A Lender
The first thing you need to do is collect all the necessary documentation. Obtaining a mortgage requires a great deal of paperwork and income verification, so getting all of your financial paperwork in order ahead of time will drastically speed up the process. To obtain a mortgage, you’ll need:
- Recent pay stubs
- Tax returns
- W-2’s from your employer
- Bank statements from savings and checking accounts
- Bank statements from investment or retirement accounts
- Form 4506-T
Once you have all your documents gathered, it’s time to get your finances straightened out. Lenders view your application in relation to your financial stability, so make sure that you have a good credit score. Check your credit score online to see if it needs improvement. To improve your credit score, try taking out a credit card and paying it off on time and consistently.
Making sure your debt-to-income ratio is as low as possible will improve your fitness for a loan, as lenders take into account the amount of debt you’re carrying when deciding whether to loan you more money and therefore increase that debt. They also look at things like job stability, so try and avoid changing your job in the midst of applying for a mortgage. Changing your job may give you a different base salary that doesn’t qualify you for the same loan amount.
Choosing The Right Lender
Take your time and shop around. Review as many lenders as you can and never settle. It can be tempting to pick the first recommendation you receive if you’re a first-time homebuyer, but taking the time to do the research will help you make an informed decision about what the best mortgage is for you. Pricing varies drastically from lender to lender, so obtaining quotes from multiple lenders will give you the context to know what kind of deal you’re getting. While all lenders are subject to the same daily market rate changes, some lenders offer extra incentives like a credit or low closing costs.
Getting preapproved for your mortgage will help you determine your budget in advance of shopping for your dream home, helping you make smart financial decisions. A common mistake first-time homebuyers make is choosing the perfect house only to find out it’s outside their budget when applying for a mortgage, or to end up with a mortgage payment so high that they have no room for other expenses. Getting preapproved has the added benefit of showing sellers that you’re a serious buyer and gives you more leverage when negotiating the price.
Consider getting a mortgage rate lock, where the seller agrees to lock in an interest rate for a mortgage over a period of time. This will give you anywhere from 15-60 days where the seller guarantees you a specific interest rate until you’re ready to sign the sale agreement. This can be beneficial in that it allows you a bit of flexibility to negotiate the sale price with the previous homeowner, but if rates go down after you’ve locked in, you won’t be able to take advantage of that.
There are three different types of lenders: banks, brokers, and credit unions. Mortgage bankers work for major banking institutions like Chase or Wells Fargo. If you have a good history with your bank you may be able to get a lower interest rate.
Mortgage brokers are middlemen between borrowers and lenders. They offer more access to competitive interest rates and flexible repayment terms.
Credit unions are owned by account holders and are a good choice for anyone with low to average credit, usually offering lower rates than bankers or brokers.