Six essentials to successful mortgage financing

Prior to purchasing a home, one critical step that Spokane REALTORS® advise their clients is to speak to a local lender about financing options for their new home. According to professional lender advice, there are six critical things prospective buyers need to do to prepare for successful financing of a newly purchased home.

With an excess of housing inventory coming on the market this spring, now is a good time for buyers to get into the market. Lower prices mean lower monthly payments, but before prospective buyers jump in, there are some key things you need to know about getting a mortgage.

These six essentials include:

1. Use a down payment. Home buyers will see better loan terms if you can put at least 5 percent down. Each 5 percent increment will help, so put as much down as you can and speak to 2-3 lending professionals for specifics on various scenarios. Zero down payment programs have all but disappeared, although FHA and conforming 3 percent down programs still exist. Even with a small amount down, buying compares favorably to renting.

2. Shop the right way for interest rates. Fees are critical, as they affect your overall cost, so don’t go by interest rates alone. An interest rate that sounds higher may include no fees, while another is lower but includes fees that may make the actual financing cost higher, so be sure to have it spelled out for you. Lenders are required to provide a Good Faith Estimate of all costs, and buyers are advised to check it carefully against the HUD-1 Settlement Statement to make sure there are no “surprise” charges or other fees.

3. Be wary of advertising. The airwaves are full of advertisements trying to entice borrowers into a mortgage because the Federal Reserve has cut interest rates claiming “rates will never be lower.” In actuality, long-term fixed interest rates for mortgages are tied to bonds called mortgage backed securities (MBS) and the prices investors are willing to pay for them. The Fed does not control long-term fixed interest rates for mortgages. There may be some impact on adjustable rates, but seldom to the extent that advertisers would have you believe. All borrowers should research mortgage rates with their trusted local lender and be fully informed about the market prior to purchasing.

4. Think about paying more for your house. It might sound crazy, but by paying more for your home you might actually wind up paying less for the transaction. Here’s how: Instead of negotiating the sales price down by a certain dollar amount, ask the seller to pay for the costs to “buy down” the interest rate on the loan or help pay some of the closing costs. The monthly payment can be reduced substantially, saving cash flow in the short run while increasing your principal balance in the long term. Seller funds can also be used to buy out PMI. Your mortgage professional can help you calculate the actual savings.

5. Know your PMI options. PMI, or private mortgage insurance, protects the lender from losses incurred after default when foreclosing on a property. If a borrower has less than 20 percent down on a conventional conforming mortgage, they must pay PMI, with rates that can vary based on credit score. Borrowers typically pay PMI monthly, but there are other options, including lender-paid mortgage insurance, in which premium is added into the interest rate of the loan. There are other options that allow a smaller fee at closing without raising the rate, and sellers can also pay the fee at closing, which sometimes can be a condition of the sale. For more detail on these sometimes confusing alternatives, ask for additional advice from your trusted lending professional.

6. Improve credit scores. Credit scores have always been important, but never more than today, especially for borrowers with less than 20 percent as a down payment. Small differences in score can mean big differences in interest rates or fees, so consumers should do everything they can to show their credit in its best light.

•Do not close out credit card accounts, but instead distribute the balances as evenly as possible and use old cards every few months to keep them active.

•Check your credit report for errors and get them corrected, and get rid of liens and charge offs, if you have any, and resolve any late payments. All these will have a quick and positive effect on your credit score. Even people with great credit scores as high as 720 may pay a penalty based upon recently changed guidelines. Credit repair is not just for people who have credit problems. Most people don’t realize they can optimize their score using a few simple techniques.

•Getting the right mortgage is much more than just getting a loan, because it has an impact on wealth-building, retirement and other strategies in personal finance. Mortgage professionals advise borrowers in making the right choice with their loan because it helps them better understand how to use their mortgage in becoming financially more secure.

With the seasoned professional expertise of a Spokane REALTOR® and trusted lender on your team, finding and funding a new home purchase can run more smoothly. Readers are invited to contact any member of the Spokane Association of REALTORS® today.

Source: RisMedia.com, Bruce Brown