In Focus – SCCCU Blog

When you begin searching for a new home, you may think you know the steps to take: Read the listings, visit some open houses, sign on with a Realtor, and make an offer. In fact, there’s a biggie missing from that list — a step as important financially as the house you decide to buy itself: get a mortgage.

It’s widely understood that most houses and apartments are purchased using mortgage loans, which the Consumer Financial Protection Bureau defines as “an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest.” Sounds serious — and it is. Mortgages come with a wide variety of lengths (called the term), repayment provisions, and interest rates. Locking in the one that’s best for you means getting something of an education - especially if you’re a first-time homebuyer.

Mortgage 101

Before you begin to look for a mortgage, it's good to understand how they work. The most common type of mortgage is what’s called a 30-year fixed-rate loan. As it sounds, you have three decades to pay the loan back with the rate of interest that you lock in initially (fixed) for the entire time. You’ll also see 15-year and sometimes 10-year fixed-rate loans. These require you to pay off the home in a shorter period of time, but because the financial institution is lending the money for a shorter term, the risk that you won’t repay the money is lower. That’s why interest rates on shorter-term loans are usually lower than those on longer-term ones.

Another type of home loan is an adjustable-rate mortgage or ARM. Here, the initial monthly payment is lower than prevailing interest rates (which allow buyers to qualify to borrow more money), but over time, the rate adjusts in sync with current interest rates or another financial index. If rates rise, your monthly payment will rise (there’s typically a cap that limits how far up it’s allowed to go). If rates fall, your monthly payment may fall as well. Hybrid ARMS, which you may see represented as 5-1 or 7-1 ARMs, are fixed for the first 5 or 7 years of the loan, then begin adjusting. If you believe you will only live in a home for 5 or 7 years before moving, for example, this can be a way to lower your monthly payments without taking on too much risk.

Qualify for the Best Rate on a Mortgage

Getting the best rate on a mortgage involves two things: know your credit score and shop around.  Before you begin shopping for a house, do your own homework to determine your creditworthiness and prepare for a conversation with a lender, says Bob Collins, a mortgage broker at Signal Hill Mortgage in California.

First, gather tax returns, pay stubs, and other paperwork that documents your income for the past two years. You’ll also need documentation of liquid assets, cash on hand, as well as credit history and your current income. That may include credit union, bank, and investment account statements. If you’re unfamiliar with your credit rating, request a free copy of your credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) to learn your credit score - visit www.annualcreditreport.com to get started. If you find an error on your credit report, file an error report with the bureau in question on the bureau’s website. They typically take a month or two to correct it.

What Lenders Look for in Borrowers

As you gather information, keep in mind what lenders are looking for. Harrine Freeman, a credit expert and owner of H.E. Freeman Enterprises, says these things will help you get the loan you’re looking for.

• A credit score of at least 660 (some lenders accept scores as low as 620).
• An explanation of any late payments in the past two years.
• Credit card balances at or less than 30% of the credit limit.
• A solid work history and income.
• A history with financial institutions such as credit unions, and collateral such as checking and savings accounts, investment accounts, retirement accounts, life insurance policies and automobiles.
• A total debt-to-income ratio of 36%or less.
•  A down payment of at least 5% is available.

Better yet, sit down with a loan representative at your credit union and discuss your situation. It's a terrific first step in getting an education. Plus, credit unions are often very competitive when it comes to interest rates.

Get Pre-qualified (then Pre-approved) for a Home Loan

When you’ve found a lender with whom you feel comfortable, it’s a good idea to get prequalified before you start shopping. Pre-qualification involves discussing the various loan program requirements and determining whether you will have the minimum down payment, employment and income history, credit history, and payment reserves.

A lender shouldn’t have to check your credit to pre-qualify you for a loan. In most cases, an underwriter (the loan professional determining whether you qualify for a certain loan) will review the file and issue a conditional loan approval. The formal pre-approval process is the next step, where your loan application and credit report are submitted for review, along with income and asset documentation.

Understand the Real Costs

Once you’ve made an offer for a home and it’s been accepted, you can move on to scheduling a closing date. Just keep in mind there are costs there as well. By law, all lenders must provide a good faith estimate of closing costs, but that list doesn’t include all the charges you’ll face. For instance, the title company, which researches the title or deed to the home to ensure that no one else has rights to it, will determine its own fees (for “title insurance”) as will the home inspector, and a homeowners’ association if applicable.

Don’t Make Big Changes Before Closing

If you’ve gone through a loan pre-approval process, don’t make any big changes – like switching jobs – until after your loan is closed. If you do, all the employment and salary data that your loan was based on is no longer accurate, and you may no longer be approved.

And finally, if you don’t qualify for a home loan right away, don’t panic. There are things you can do to move the needle on your credit score. It won’t happen overnight, but with hard work and diligence in paying your bills on time, every time, it can happen. If this sounds like something you’d like a little help with, call the Credit Union at 831-425-7708, to set up an appointment with one of our Certified Financial Counselors.