One of the first steps of being a first time home buyer is getting pre-approved by a lender. Then once you have a home under agreement you will than secure the mortgage. Shopping for your first mortgage should start before you even look at a home.
Securing your first mortgage can be one of the more complex pieces of buying a home. And, of course you want the best mortgage product you can get into as a first time home buyer.
Often the first thing a home buyer will ask of a mortgage officer is “what is your rate?” While you interest rate is important it is a bit of a loaded question.
An Interest Rate On A Mortgage Can Not Be Quoted Accurately
First and foremost, do not drive yourself crazy by shopping for the best mortgage interest rate online. You will do just that, drive yourself crazy.
The interest rates you find posted online are usually the best interest rate on a mortgage you can get and usually includes putting 20% or more down, with top tier credit and a low debt to income ratio.
Don’t forget your interest rate is affected by your credit score, the property you are buying, your debt to income ratio and your loan to value ratio.
Based on the question “what is your interest rate?…. there is not a mortgage officer in the world that can quote you that with any accuracy. There are other factors that go into factoring an interest rate for a mortgage.
- Amount of the Down Payment or (Loan to Value Ratio)
- Your FICO score (the type of scoring used for a mortgage application)
- Your Debt to Income Ratio
- The Type of Property
- Private Mortgage Insurance rate
- The Loan Program
- and more…..
An application with financial documents must be taken for a mortgage officer to accurately quote you an interest rate.
If asked and answered by a mortgage officer, they will quote you the best interest rate for the day. That doesn’t mean you can get that rate.
Shopping For A Mortgage Is More Than Just Interest Rate
There are additional factors to consider when shopping for your first mortgage.
It boils down to what is the best mortgage program for you based on your circumstances.
There is a balance to be had. In some case a low down payment borrower, with a good credit score can pay a slightly higher interest rate with no Private Mortgage Insurance and have a lower monthly payment than a borrower with lesser interest rate that has to pay PMI.
What Other Factors Should I Pay Attention To?
Closing costs are in most peoples minds closing costs, pre-paids and escrows. It is the money above and beyond your down payment that you will need to close the loan.
Typically your closing costs, pre-paids and escrows will run 1.5 to 4% of the loan amount. Different lenders and different loan programs will have different closing costs.
Private Mortgage Insurance
If you are putting down less than 20% there may be a good chance that you have to pay Private Mortgage Insurance or PMI. Mortgage Insurance protects the lender in the event you default on your mortgage. Private Mortgage Insurance will run between .3 to 1% or more of the loan balance.
A 300,000 purchase can run as much as $250 a month in PMI payments.
Private Mortgage Insurance can vary slightly based on your credit score, the loan program and who the lender is getting the insurance from.
There are also loan programs that roll PMI into the interest rate so you do not have the monthly PMI payment. Typically this is reserved for specific loan programs for borrowers with good credit.
The loan programs that are available to you will dictate closing costs, interest rate and PMI.
There are some great loan programs from FNMA and Freddimac that allow borrowers as little as a 3% down payment. They each have a slightly different twist and one may be better than another depending on your circumstance.
If your credit score, is a little less than desirable than FHA is a great program. The downside is you have to pre-fund some of your PMI up front with a monthly PMI payment as well.
You also have VA loans for veterans to purchase homes with no money down! If you are a veteran this is a program you should think of taking advantage of for your home purchase.
Also their may be state or regional loan programs like MassHousing that may be a good low money down option for you.
Some bank will have overlays on some of these products that can make the loan program more conducive for first time home buyers than another.
Each program has it’s strength and weaknesses and one may be better for your circumstances than another.
Where To Shop For Your First Mortgage
When shopping for your mortgage seek seek out a local mortgage lender rather than your local bank.
Lenders typical have products from multiple banks. A lender funds the loan in their name, but will quickly transfer it into a bank that has a program that lines up with your needs.
A bank will offer just their products, though some banks will function like a lender as well.
In general, a mortgage lender will have a larger pool of programs to choose from.
Contact a few lenders so you make sure you are getting the best mortgage for you.
Be prepared to provide financial information to a lender, that is th only way they can fully help you and talk about real numbers.
Myth- Multiple credit checks will damage your credit. When shopping for mortgages, multiple credit checks in a 45 day period only count as one. The FICO algorithm takes into account you are shopping for a mortgage and does not ding you for every pull in that period.
What Should You Ask Your Mortgage Lender When Shopping For Your First Mortgage
What loan programs do you recommend for me?
Different lenders may have different loan programs that could suit your needs better than another. Also your credit profile itself will dictate what programs are available to you.
Which do you recommend and why?
Find out why they are recommending a particular loan program for you.
Will I have to pay PMI and how much?
PMI payments may very likely be part of your mortgage payment. It could add hundreds of dollars a month. Make sure you factor that into your budget.
What are the closing costs for each program?
Closing costs in some cases can be as much as your down payment. Make sure you factor this into your cash on hand so you don’t get caught short.
What would my interest rate be?
Of course your interest rate on your first mortgage will play a huge role in your monthly payment. But don’t be overly focused on your interest rate with out looking at closing costs and PMI as well.
What do you need for a pre-approval?
To get a good pre-approval you should submit income and asset documents. Be leery of a pre-approval where only credit is pulled. Again real numbers cannot be given unless an application is submitted.
Are There Simple Things To Do To Raise My Credit Score Quickly?
Every 20 points of Fico Score will most likely have an impact. Find out if there are little things that can be done that can improve your situation while you are looking for houses.
What Kind Of Service Can I Expect?
First I said find a local lender. When things go sideways, you can get face to face with your mortgage lender. Also mortgage lenders will often meet you at work, your home, after hours and on weekends. A bank or internet company will not.
Don’t be afraid to submit an application to each bank. Make sure you get a loan estimate shortly after applying. As a matter of fact, they have to provide you a loan estimate worksheet with in three days of submitting an application.
The loan estimate will be the accounting of closing costs, prepaids and escrows as well as a break down of your monthly payment. Your Loan Estimate Worksheet is a vital document. It give you real numbers to work with.
Compare Apples to Apples When Comparing Mortgages
Now that you have a couple of loan estimates from different lenders, compare theme side by side.
The obvious is to compare you monthly payment. Your monthly payment is compromised of several things:
Your Principal and interest. This is all based on the interest rate. This is the payment that will get your mortgage paid off in the next 30 years.
Private Mortgage Insurance. Your PMI payment will be a line item on your mortgage statement unless you have a loan product that rolls PMI into the interest rate. Be careful here, sometimes it may bebefit you to pay a higher interest rate where it is a self insured loan than paying a monthly PMI.
Taxes- You will pay a set amount each month to go into your tax escrow account. Because you have not identified a property taxes will be estimated. Make sure both mortgage companies are estimating the same amount.
Insurance- Your yearly insurance will also be escrowed and broken down in to a monthly charge. Again, until you identified a property insurance is just an estimate.
Condo Fee (if applicable)- If you are buying a condo this will not be on your bank statement, but should be included in your loan estimator because it is calculated into your debt to income ratio. Again another estimated item and should be adjusted wo they are the same across the board.
Not only should you compare your monthly payment you should compare closing costs.
If one lender is significantly higher or has a charge another one does not, question that lender. Find out what that fee is. Some lenders might have a lower interest rate but charge an origination fee or lending fee. That’s how they are paid.
But that at the end of the day the APR may not be all that different for the two loans.
A Word About APR or Annual Percentage Rate
Interest Rate and Annual Percentage Rate are not the same thing, like many people think.
Interest rate is actually the interest rate you are paying on the actual money borrowed to the bank.
APR or Annual Percent Rate is the true cost of a mortgage. It calculates the fees paid as well as the interest paid over the length of the loan giving you an accurate picture of what the loan costs you in the form of a percentage. It calculate the cost of the loan over the life of the loan.
What fees are typically included:
- Discount or Orgination Points
- Pre-paid interest- The interest paid from the date the loan closes to the end of the month.
- Administration fees
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Private mortgage-insurance
- Escrow/Settlement fee
For example a $300,000 loan at a 3.75% interest rate with $5000 in fees will have an APR 3.884%. The same loan amount at a 3.625% and $10,000k would have an APR of 3.8928%…. being the more expensive of the two loans.
The APR is required to be on the loan estimate sheet and is a quick way to compare loans.
Final Thought On Shopping for Your First Mortgage
When shopping for your first mortgage their are more pieces in play than just the interest rate. Often, when you are a low money down borrower, like lots of first time home buyers, the loan program you are in will have a lot to do with the overall cost of your loan.
Don’t be afraid to ask questions and don’t be afraid to shop for the best loan product for your circumstances.
Start the application process before you even look at homes. The only way a lender can give a good pre-approval and talk real numbers with you is to have completed a loan application and provided financial documents.
Don’t be afraid to submit 2 or 3 applications so you know you are getting the best loan program for you.
Look at all aspect of your first mortgage and don’t make your decision soley on the interest rate.
Other Mortgage Resources:
- Saving for a down payment to buy your first home can take years. Luke Skar gives some great advice on how to save for your down payment on your first home.
- The mortgage process can be daunting especially for first time home buyers. Joe Boylan provides information about everything you need to know about mortgages.
- Getting your first mortgage? Glen Shelhamer discusses if a bank or mortgage lender better for a mortgage.
- Going thru the mortgage process will expose you to a lot of new terms you may not be familiar with. Paul Sian give us 20 mortgage terms you should know.
Kevin Vitali of EXIT Group One Real Estate has provided Shopping For Your First Mortgage As a First Time Home Buyer. Kevin services Essex County and Northern Middlesex County in Massachusetts. Do you want the best buyer representation in Massachusetts you can get? Call Kevin at 978-360-0422.