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STEP 4

OVERVIEW

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.

Address Your Credit Problems

Credit reporting is a system 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 payments 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.

If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don’t assume that the only way to get credit is to pay a high price. Ask 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 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 several types of lenders—thrift institutions, commercial banks, mortgagecompanies, 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 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 have contracted with you 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 do not 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 so that you can compare the information. The following information is important to get from each lender and broker:

1. INTEREST RATES

Ask 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 adjustablerate loans go up, your monthly payment will probably rise, as well.

Ask how your ARM rate and loan payment will vary, including whether your loan payment will be reduced when rates go down. And ask about the loan’s annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate.

2. 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 actually know how much you will have to pay.

Borrowers or sometimes offered the chance to lower their mortgage 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 the seller stays below the six percent maximum contribution ceiling mandated by FHA. Don’t be afraid to negotiate with your seller and ask them to pay for your discount points.

3. FEES

A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees 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 borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. “No cost” loansare sometimes available, but they usually involve higher rates.

Be sure to ask what each fee includes. Several items may be lumped into a single line item. Also ask for an explanation of any fee you do not understand. Some common fees associated with a home loan closing are listed on worksheets you’ll use to properly plan for your mortgage.

4. 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 FHA loan rules require a minimum down payment of 3.5% for new purchase loans. There are additional factors that affect the amount of the down payment, and this may be the source of confusion. Credit issues or other factors may affect the lender's perception of your credit worthiness. That can affect the terms, rates and down payment you're qualified for from that particular lender.

FHA rules for down payments don't vary from state to state, but the amount of your down payment could vary depending on individual circumstances. 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 couldvary from loan to loan for a variety of reasons.

5. PRIVATE MORTGAGE INSURANCE

Private mortgage insurance (PMI) protects the lender if you stop making payments on your loan. Lenders may require you to purchase PMI if your down payment is less than 20 percent of the sales price or the appraised value of the home. PMI premiums are added to your monthly mortgage payment. You may be able to cancel private mortgage insurance after a few years based on certain criteria, suchas paying down your loan balance to a certain amount.

The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. This date should be given to you in writing on a PMI disclosure form when you receive your mortgage. 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.