Did You Know?

You'll want to know all the costs involved when you shop for a mortgage. You can then compare different options and choose the one that's best for you.

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Shopping for a Loan

Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage —whether it's a home purchase, a refinancing, or a home equity loan— is a product, just like a car, so the price and terms may be negotiable. You'll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars.

Good Credit Is Important

Credit reporting is a system that lenders use to decide whether or not to give you credit or a loan and how much interest they can charge you for it. Your credit report is based on the bills you have missed or been late paying, loans that you have paid off, plus your current amount of debt. A credit report contains information on where you work and live, how you pay your bills, and whether you've been sued, arrested, or filed for bankruptcy. Consumer Reporting Agencies, such as TransUnion, Equifax, and Experian gather this information and sell it to creditors, employers, insurers, and others.

You may have some strikes against you on your credit report, but don't assume that the only way to get a loan is to pay a high price. If your credit report contains negative information such as missed payments, be sure to explain your situation to the lender or broker. Inquire how your past credit history affects the price of your loan and what you would need to do to get a better price. Take the time to ask questions, shop around, and negotiate the best deal that you can.

Don't assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will limit your loan choices to only high-cost lenders. Whether you have credit problems or not, it's a good idea to review your credit report for accuracy and completeness before you apply for a loan.

Look for the Best Mortgage

Home loans are available from types of lenders—thrift institutions, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you're getting the best price.

You can also get a home loan through a mortgage broker.Brokers arrange mortgage transactions rather than lending money directly; in other words, they find a lender for you. A broker's access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they you are under contract to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions.

Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers, and most brokers' advertisements don’t even use the word “broker.” Therefore, be sure to ask whether a broker is involved. This information is important because brokers are usually paid a fee for their services that may be separate from and in addition to the lender's origination or other fees. A broker's compensation may be in the form of “points” paid at closing or as an add-on to you.

Learn About Costs

Be sure to get information about mortgages from several lenders or brokers. Know how much of a down payment you can afford, and find out all the costs involved in the loan. Knowing just the amount of the monthly payment or the interest rate is not enough. Ask for information about the same loan amount, loan term, and type of loan from multiple lenders so that you can compare the information. The following information is important to get from each lender and broker:

Interest Rates

sk each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week. You'll need to understand the difference between a fixed rate loan and an adjustable rate mortgage (ARM). Keep in mind that when interest rates for adjustable rate loans go up, your monthly payment will probably rise as well.

Ask how your ARM rate and loan payment will change, as well as the loan's annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and other credit charges expressed as a yearly rate.

Points

Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate. Ask for points to be quoted to you as a dollar amount rather than just as the number of points so that you will know how much you will actually have to pay.

Borrowers are sometimes offered the chance to lower their interest rate by purchasing discount points. A point is shorthand for a “discount point” and is equal to one percent of the loan value. If you are borrowing $200,000, a single point would cost $2,000. Sellers are allowed to purchase discount points on behalf of buyers as long as they stay below the 6%maximum contribution mandated by FHA. Don't be afraid to negotiate with your seller and ask them to pay for your discount points.

Fees

A home loan often involves many fees, such as loan origination or underwriting fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of their fees in the Loan Estimate. But remember that many of the fees mentioned are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can finance these fees along with your home loan, but doing so will increase your loan amount and total costs. “No cost” loans are sometimes available, but they usually involve higher rates.

Be sure to ask what each fee includes since several may be lumped into a single line item on your Loan Estimate. Keep in mind that it is within your rights to ask for an explanation of any fee you do not understand.

Down Payments

There's a mistaken impression among some loan applicants that FHA rules for down payments vary from state to state. The truth is that the FHA requires a minimum down payment of 3.5% for new purchase loans. This requirement does not vary by state, but the amount of your down payment could vary depending on individual circumstances.

There are additional factors that affect the amount of the down payment, which tends to be the source of confusion. Credit issues or other factors may affect a lender's perception of your creditworthiness. This consequently affects the terms, rates, and down payment you're qualified for from that particular lender. Borrowers should not expect to be given the same terms or conditions on an FHA loan as a friend or fellow borrower, and the lender's requirements could vary from loan to loan for a variety of reasons.

Mortgage Insurance Premium

Mortgage Insurance Premium (MIP) protects the lender if a borrower stops making payments on their loan. When it comes to FHA loans, lenders require that borrowers pay an Upfront Mortgage Insurance Premium, as well as the Monthly Mortgage Insurance Premium. These funds are used to protect the lenders—in that case that FHA borrowers default on their mortgages—and to fund the agency itself.

The premiums are added to your monthly mortgage payment, and your annual MIP cost is determined according to your loan’s term length, your loan-to-value ratio, as well as when you received your loan. For example, FHA loans with terms of 15 years or less qualify for reduced MIP, as low as 0.45%. Don't confuse PMI with mortgage life insurance, which is designed to pay off a mortgage in the event of a borrower's death or disability.

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