Hopeful to Homeowner Part 3: Getting a Mortgage That Works for You
Editor’s Note: In this three-part series on buying a first home, we’ll explore how to beef up on your financial literacy, review your credit report through the eyes of a lender, and negotiate the best deal on a home mortgage.
Newlyweds Heang and Sallie Ly wanted to move out of the apartment they were sharing and buy a home, their first, and were hoping that they would land somewhere within commuting distance from Washington, DC. They spent their weekdays perusing listings on websites like Trulia, Zillow, and Redfin, and they dedicated their weekends to visiting open houses throughout Arlington, VA. But the homes were either too pricey or too small, and other bidders quickly snapped up the ones the couple thought were “just perfect.”
Frustrated and heartbroken, they turned to the pros. As a veteran of the U.S. Air Force, Heang was eligible for a VA loan, and he eventually pre-qualified for a no-down-payment VA loan with Navy Federal Credit Union. A local real estate agent helped them on their search by keeping them abreast of the latest listings in the Arlington area. The agent’s help would eventually pay off.
“Within weeks, we found a great home and smoothly transitioned from our apartment,” says Heang. Getting professional help, he adds, made all the difference.
Word-of-mouth referrals are a great way to start your “home team,” an informal term used in the real estate industry to describe the trusted advisors that work to help aspiring buyers find the right home for them.
“There’s some misinformation out there, so it’s important to visit reputable websites and find experienced people to help you,” says Eric Broermann, a real estate agent with McWilliams|Ballard in Alexandria, VA. He refers young buyers to lenders and other professionals he knows, so by the time they leave his office “they’re connected,” he says.
First-time buyers can benefit from an experienced team knowledgeable about loan products and down payment assistance programs geared for their needs, says Broermann. “They often think they’ll need to put 10 to 20 percent down, and that’s not always the case,” he says.
VA loans (guaranteed by the U.S. Department of Veterans Affairs) for veterans, servicemembers, and surviving spouses, and USDA loans for low- to middle-income borrowers in qualifying rural areas — both offer zero-down-payment options.
David Hunter, 29, of Haymarket, VA, recently purchased his first home using a USDA loan. “Not having to save for a down payment really helped,” he says.
Loan products from housing finance agencies require as little as 3 to 5 percent down for eligible borrowers, and additional local down payment assistance may be available. In San Francisco, one of the country’s most expensive home markets, first-time buyers can receive up to $200,000 in down payment assistance that doesn’t need to be repaid until the homeowner either sells or refinances the property.
The Loan Terms
When you’re approved for a loan, you’ll receive a Good Faith Estimate, or GFE, outlining the loan terms and fees.
The interest rate is the most important term, since it will determine how much you’ll pay over the term of the loan. Interest rates can be fixed or adjustable and vary daily. “Even an eighth of a point change can mean the difference in getting the house or not being able to qualify,” says Barry Ezerski, a managing broker with Re/Max-Lawton in Lawton, OK.
A fixed rate stays the same so your payments don’t fluctuate year to year. Adjustable rates can “adjust” with prevailing interest rates. If the rates go down, you may pay less. But if they go up, you could find yourself with a higher monthly payment, says Christopher Brooks, vice president of Tampa Bay Community Development Corporation, part of NeighborWorks® America.
You can sometimes lower your interest rate by paying points or prepaid interest (one point equals 1 percent of the value of the loan), which also may be tax deductible. If you plan to stay in the home for 10 years or longer, consider paying points to lower you interest rate, says Brooks (consult with your tax advisor for details and applicability to your situation).
Loans are generally offered in 15-, 20-, or 30-year terms. Longer terms mean lower monthly payments, but you’ll pay less overall with shorter terms. Ask lenders to show you several options, he advises.
A trusted advisor should tell you what to expect and how you may be able to save time, money, and fuss.
For example, Annehanna Merritt, a residential real estate agent with Coldwell Banker in Columbus, GA, suggests having only one lender pull credit to make you a loan offer and using that information to request competitive offers. “You’ll want several options that you can compare so you’re choosing the best loan for your needs,” says Merritt.
In addition, some of the itemized loan fees on the GFE, like inspections, can be negotiated, and in some markets you can ask that the seller pay all closing costs. You’ll also save money if your settlement date is toward the end of the month. This lowers the interest lenders will charge to compensate until they receive the first full payment the following month, she says.
Consider Your Options
Since you are likely financing hundreds of thousands of dollars, it’s crucial that you learn as much as you can about homebuying and mortgages before signing your loan papers, say experts. “This is the largest monetary purchase people may make in their lifetime, so you want to be sure you understand the process and ask questions – the more knowledge you have, the better you’ll do,” says Broermann.
Most of all, say experts, take your time and make the decision best for your situation. “The easy route works for a lot of things, but not with selecting a mortgage,” says Jack M. Guttentag, better known as “The Mortgage Professor,” a nationally syndicated columnist and Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. “This is a decision worth doing the right way.”