With the spring housing market in full swing, prospective buyers are battling rising prices and tight inventory. Still, it’s not all bad news for today’s buyers.
While lending standards are far stricter than they were during the height of the housing boom, it is nevertheless possible for most qualified borrowers to get a loan these days.
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“Most mortgages still go through [government-sponsored entities] Fannie Mae and Freddie Mac or the Federal Housing Administration, which all have strict guidelines, but a lot of banks also had additional [credit restrictions] on top of those,” says Sam Mischner, senior vice president of lender operations at Lending Tree. “We are seeing those start to loosen, and some lenders are saying that they’ll go further down on the credit spectrum.”
Here’s what you need to know to score a mortgage in today’s market:
1. Start the process early. If you’re serious about buying a house this year, you need to meet with a mortgage lender now. That will give you a better idea of how much you can realistically borrow to purchase a house. You’ll also be able to get a pre-approval letter, required by most sellers these days before they’ll consider your offer. “If you’re unable to be an all-cash buyer, the next best thing is to have all your financing ducks in a row when you’re making an offer,” says Daren Blomquist, senior vice president at ATTOM Data Solutions. “Getting pre-approval is a huge part of that.”
You can make the process easier by having your financial documents -- including tax returns, bank statements and pay stubs -- in order and ready to share with your lender. More than half of borrowers recently surveyed by FreeandClear.com said that the paperwork was the most challenging part of the mortgage process.
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Pull your credit report, too, to make sure that there aren’t any errors or surprises that could haunt you.
2. Shop around. Get quotes from at least three lenders, including a national bank, a local bank or credit union and an online lender. Buyers who received quotes before they began house hunting and those who shopped around for their mortgage reported high satisfaction with the process than borrowers who didn’t take those steps, according to J.D. Power.
Online lenders often offer the lowest rate, but many first-time buyers might pay more for the personalized attention they can get from a local lender. No matter which option you choose, having multiple offers may help you negotiate with the lender you ultimately end up using for your mortgage.
3. Understand private mortgage insurance. While putting down 20 percent will typically get you the lowest monthly payment, a growing number of lenders now also offer low down payment loan programs in which you can put down as little as 0 percent on the loan. Even though the price of homes went up in the first quarter, down payments fell, both in dollar terms and as a percentage of home value, according to ATTOM Data Solutions.
Any time you have a down payment of less than 20 percent, you’ll need to pay mortgage insurance on the loan, which will push up your monthly bill. On private loans, the mortgage insurance will drop off once you’ve built up 20 percent equity in the home, but if you use an FHA loan — popular among first-time buyers — the mortgage interest will remain for the life of the loan.
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4. Ask about all your loan options. In addition to figuring out how much you’ll put into a down payment, make sure you’re considering all available loan options, including fixed and adjustable-rate mortgages, and shorter-term loans like 15-year mortgages.
Adjustable-rate mortgages got a bad rap during the housing crisis, and for most Americans, a 30-year fixed rate mortgage remains the right choice when buying a home. However, the rates on an adjustable rate loans are significantly lower than those on fixed mortgages. That could make them an attractive option for folks who know they won’t be in the home for more than a few years, or for sophisticated investors who plan to save or invest the money that they’re saving. Before opting for an adjustable-rate loan, run the numbers to see what your payment would be in a worst-case scenario and whether you’re comfortable with the risk.
5. Consider locking in your rate. While mortgage rates dipped this week, most economists agree that they appear to be on an upward trajectory as the Fed raises rates amid an improving economy and strong job market.
On a median-priced home, an increase in mortgage rates from 4 percent to 5 percent would add $100 to the monthly bill, according to Zillow. Rates are currently at 3.95 percent, and it’s unlikely that rates would jump too quickly, but in more expensive markets, even smaller movements in rates could have an impact on affordability. The Mortgage Bankers Association is projecting that rates could hit 4.6 percent by the end of the year.
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If you’re offered a good rate on your mortgage, lock it in to prevent any surprises come closing time. Although they’ve ticked up from their record lows, mortgage rates remain extremely low by historic standards. “Buyers get hung up on the last 12 months or on a quarter percentage point,” says Kevin Torres, a Mortgage Product Specialist at Navy Federal Credit Union. “But it’s important to put today’s rates into perspective.”
6. Remember you don’t need to borrow the max. If you’re in a competitive market where bidding wars are common, it can be tempting to find a home or make an offer for the maximum amount for which your lender has approved you. Before you do, consider the short and long-term impact of those mortgage payments on your budget and lifestyle. If, for example, you’re planning to have a child or go back to school, you may end up with additional expenses for which you lender hasn’t accounted.
