Looking to buy your first home? Have you found the perfect place, but are worried about how to get the best deal on your home loan? Fear not! In this guide, we’ll walk you through all the steps of getting the best deal on a home loan that will allow you to buy that dream house without breaking the bank.
1. Know your credit score
When you’re ready to buy, make sure you’ve checked your credit score and know where it stands. Borrowers with great credit may be able to save hundreds of dollars per month in interest payments over those with poor credit scores. Some lenders may even refuse loans to people with low scores, so aim for high numbers across all three major reporting agencies: Equifax, Experian and TransUnion. These sites can provide free credit reports and scores that are updated every 30 days. It’s important to know these numbers because they play a role in setting the terms of a mortgage (your creditworthiness), as well as determining whether or not you are approved at all (risk).
2. Know how much you can afford
Before you start searching for your dream home, you should know how much you can afford. Your mortgage lender will assess your credit and determine how much of a loan you can qualify for. To find out what kind of payment is realistic for your budget, start by calculating your monthly housing costs—including rent or mortgage payments, insurance, property taxes and maintenance fees—and then subtract other essentials such as transportation costs and food. Ideally, your cost-of-living expenses will equal no more than 30 percent of your monthly income. After paying your essential bills, allocate enough money to save for retirement, emergency funds and future purchases such as furniture and appliances. Then use any extra cash to pay down debt until it’s completely gone. Once you have your personal finances in order, don’t forget to consider all financial aspects of homeownership; if you want to make home improvements down the road, factor that into your calculations too.
3. Get pre-approved
When you’re house hunting, it’s important to get pre-approved for a home loan—and stick with that lender. This gives you power during your house hunt, letting sellers know you’re serious about buying their property. And since lenders tend to compete for customers (especially if you already have one in mind), get multiple quotes from different lenders; choose one of them as your go-to lender and make sure they know they can expect your business again in six months or so. Before shopping around too much, ask current clients of that lender what they thought of working with them: You might be able to skip getting quotes altogether if most people think highly of them. MortgageBite was built to make this process easy and free. Sign up for a free account!
4. Choose your home loan type
There are three main types of home loans: Fixed-rate, adjustable rate and interest-only. Fixed-rate loans have an interest rate that remains constant over time. Adjustable-rate loans have an initial fixed period followed by a variable period where your interest rate could change annually or monthly, depending on your lender’s terms. Interest-only loans allow you to make only interest payments during an initial fixed period, after which you will pay principal as well as interest.
5. Consider your options
when deciding on a mortgage, it’s crucial to evaluate your options before choosing a lender. Even though two lenders might offer similar terms, you should look into each lender’s reputation, referral, and mortgage rankings and reviews. This way, you can determine whether or not to work with them at all. Always review your credit report carefully: also make sure that you are familiar with your own credit score. Some people have mistaken assumptions about their credit report; if yours is clean, you may be able to qualify for better interest rates than you imagined. Shop around for quotes: even if you plan on working with one lender in particular, shopping around can pay off in better rates or less expensive fees. Asking several different banks (or other lenders) will help ensure that you have an array of quotes to choose from.
6. Compare Rates & Terms
Before you decide on a lender, find out what rates and terms are available. You can do this by applying to multiple lenders, asking friends or family members who have recently bought homes for their recommendations, or browsing online reviews. A few minutes of research up front can save you thousands of dollars in extra interest down the road. As long as your credit score is decent and your finances are relatively stable, you should have little trouble finding a number of lenders willing to work with you. Take careful note: just because it’s easy to apply doesn’t mean it’s easy to qualify! Many factors will determine whether or not you get approved for a mortgage—the time period when you last held a mortgage, how much debt you currently carry relative to your income, your job security (for example, if you’re self-employed), and so on. Expect that many lenders will turn down your application if one of these factors looks suspect; it may be worthwhile to look at opportunities specifically targeted toward borrowers like yourself. Sign up for a free account to get home loan offers in minutes!
It may be cliché, but one of the most surefire ways to save money is to negotiate. If you can’t get your lender to adjust your interest rate, you can try and negotiate fees or terms that make sense for you. For example, could you lower your origination fee by paying closing costs upfront? Or, perhaps it would make sense to pay slightly more over time in order to reduce your closing costs. Always ask. You never know what kind of deals might be out there! Learn more about saving money at every stage of buying a home with our Guide to Buying a Home.