What You Need to Know About Mortgages Before You Buy

What You Should Know About Mortgages Before You Shop for a Home

By Howard J. Willis *

We occasionally find home-buyers with many questions regarding mortgages and the best loan solution for their situation. We also observe buyers who could strengthen their negotiating position not only with mortgage lenders but also with home-sellers by following a few basic rules. Obtaining a mortgage can be an often frustrating and intimidating experience.  A mortgage is a product – a financial product like life or auto insurance and requires that you obtain a professional advisor well before you begin the home-buying process. Hopefully the following information will help you in your home purchase and more importantly save you money. 

1. Shop for a Professional Mortgage Banker First – Not the Best Interest Rate         

Why? “A common mistake many buyers make is to make multiple phone calls and to contact several internet companies asking for the best rate” says Joy Reisner, mortgage banker with EWM Mortgage in Weston. “Customers really don’t always know the right questions to ask and may not know that the lowest rate actually may not be in their best interest. They would be best served by first finding a mortgage professional they feel comfortable working with and who can be their long-term advisor for years to come.”  Joy went on to emphasize that a professional mortgage banker will first listen to what the customer’s situation is, will ask questions, and then suggest several product options for the buyer to select from.

2. Review and Repair Your Credit

Do you know your current credit score? This is a common over-sight many of us make – at least three and preferably six months before you plan to seek a mortgage commitment you should verify your current credit score. By the time you begin looking for a home and then thinking about a mortgage you may find yourself at a disadvantage in getting the best deal. “We had one customer whose bank had reported the same $19,000 credit card account three times to the credit reporting agencies amounting to $38,000 more in debt than our customer actually had” says Beth Brandt, Vice-President of mortgage lending at Mackinac Savings Bank in Plantation. Beth reports that inaccurate information on the credit report is one of her biggest issues she deals with in helping customers gain loan approval.  “Getting all the required documentation on time is another area that can delay the process and even the home purchase closing” adds Beth.

Before you even think about applying for a mortgage, obtain copies of your credit report and your FICO credit score. Your FICO score is the three-digit number that’s used in 75% of mortgage-lending decisions. You can order your FICO score on the Web for a fee of $12.95, which includes a copy of your credit report. Doing this at least six months in advance should give you plenty of time to challenge any errors on your report and ensure that they’re removed by the time you’re ready to apply for a loan. You can also see the factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt.

3. Get Pre-Approved for a Loan
We find many borrowers confuse being “pre-qualified” with being “pre-approved.” Pre-qualification is a pretty casual process, where a lender tells you how much money you probably can borrow based on how much money you make, how much debt you already have and how much cash you have for the down payment.  Getting pre-approval, by contrast, is a more complete process where the buyer actually applies for a loan. You typically submit tax returns, pay stubs and other information. Your mortgage banker will verify the information and check your credit. If all goes well, the lender agrees in writing to make the loan.

4. Establish Yourself as the Most Appealing Buyer

In a hot real estate market like Weston and West Broward, the house hunter who is only pre-qualified is likely to be last in line. Home sellers and their agents give much more weight to offers being made by buyers who already have a loan lined up. The more cash you put down on a home-purchase and already having a “pre-approval” will help you achieve priority over other potential buyers competing for the same home.  You also place your real estate professional in the best possible position to negotiate a potentially lower price. 

5. Borrowing too much money
Few first-time buyers have any clear idea of the costs involved in homeownership. Many people take out the biggest loan they possibly can, thinking that their incomes will some-day increase enough to make the payments more palatable. Not only will you pay potentially more for mortgage payments than you probably did for rent, but be sure you ask your banker what your “PITI” will be: mortgage principal, interest, taxes and insurance. You will also want to obtain or budget for utilities, maintenance and repairs that you may not have faced as a renter. Instead of going to the edge of what you can afford, consider limiting your housing costs - mortgage payments, property taxes and homeowners insurance -- to 25% or so of your gross income. That’s a much more sustainable level for most people, many financial planners say, than the 33% lenders are typically willing to give you.

6. Planning for Closing Costs        
When you close on your loan (the day your loan is funded and you take title is called “Closing”) you will be expected to bring a cashier’s check for a number of expenses, which typically include attorney’s fees, taxes, title insurance, prepaid homeowners insurance, points and other lenders’ fees. Together, these are known as closing costs, and the total can amount to between 2% and 3% of the selling price of the house assuming you have no unusual costs. Plan for closing costs by getting a good-faith estimate from your lender before you apply. Make sure you have the cash in your checking account and that it doesn’t “disappear” before the closing date. Use your mortgage banker and ask all the questions you need answers for or items you simply don’t understand. Remember this is a product you are buying – you wouldn’t buy a car without knowing all the details so ask your banker about the interest rate, the “points” charged to get that rate (each point is 1% of the total loan amount) and any other fees the lender charges. Compare terms from two or three lenders if you are not convinced. Your real estate agent can help you with a preliminary estimate of your closing costs.  But before you make a final buying decision you should ask your mortgage professional for that good-faith estimate which should include all fees being charged. Ask about each fee and try to negotiate down the ones that seem excessive.

What Does All This Mean?

The smart home-buyer will try to establish his or her FICO credit score to at least 660, will link up with a reliable mortgage banker, and obtain a pre-approval letter before seeing the first home with your real estate professional.  There are more mortgage products available than ever. Be sure your income and expenses are realistic and that your PITI won’t become a strain on enjoying life. By following these simple steps you will put yourself in the strongest position possible when you are ready to submit an offer on your next dream home and you will have saved potentially thousands of dollars in mortgage interest and your purchase price.

*Howard Willis is a realtor with Esslinger-Wooten-Maxwell Realtors and a principal of the Allegra & Howard Willis Real Estate Group.  Howard has a law degree and specializes in providing real estate sales and services to premium home and condominium owners. Call with your questions and comments to (954) 949-0444 or to howard@thewillisgroup.com. Learn more about Allegra and Howard at www.thewillisgroup.com