With more than 40 million people filing for unemployment this spring and the economy still on life support, making a huge purchase is the last thing on a lot of minds right now. And yet for new parents, or folks who feel sanguine about their job situation, this might be a great time to buy a new home. While prices haven’t dropped as one might expect during a crippling pandemic, mortgage rates are amazingly cheap right now. And over the long haul, that means you could be saving thousands, or even tens of thousands of dollars, on your loan. While we should all take those advertised rates with a grain of salt, there’s certainly a case to be made to shop around. In order to snag the best deal on a mortgage, you have to be smart about how you shop and present yourself as a darn-near-perfect prospect for lenders. Here’s how to do it.
1. Polish Up Your Credit Score.
Extending a giant loan to a consumer doesn’t come without risk — especially during a recession. That’s why banks and other lenders are likely to reserve their best interest rates for individuals and couples with a strong income history and dazzling credit scores. Boosting that number even a little can often make a substantial dent in your financing costs.
Step one: Get a copy of your FICO score, as well as a credit report from each of the three major bureaus at least a couple months before you start house-shopping (you can get a free copy of all three once a year at AnnualCreditReport.com). In addition to challenging any errors that show up your reports, you may also want to pay down existing loan balances that can drag your score down.
For those with multiple sources of debit, first zero in on credit cards, which have the biggest impact on your FICO score, advises Clint Carver, a loan officer with Salt Lake City-based Beam Lending. “If you do have a balance on your cards, keep it under 20 percent of your credit limit,” says Carver.
2. Do Plenty of Comparison Shopping
Life gets busy, even during a partial lock-down. So you may be tempted to simply call up your local bank and ask what rates they can offer for your mortgage. While that tactic might be a time-saver, it can also be costly.
Different lenders can quote vastly different rates and fees for the same customer, making it imperative to shop around. Online mortgage rate comparison tables can be a good starting point, says Keith Gumbinger, vice president of the mortgage information website HSH.com. From there, you should talk to multiple banks, mortgage companies or credit unions to see who wants your business the most.
Also consider engaging mortgage brokers, who get offers from multiple lenders. According to Gumbinger, these loan intermediaries can be particularly helpful for people who are self-employed, generate seasonal income or don’t have traditional income documentation. “If your credit or financials place you outside the plain vanilla lending box, a broker will likely be your best bet to secure a loan,” he says.
3. Be Clear About What You Want. Very Clear.
When contacting lenders, clarity is key. Specify your expected down payment, the type of mortgage you want, the length of the loan, and how much you can allocate toward closing costs.
Some lenders have a way of making their offer look better than it really is, shrouding a low interest rate with higher fees. “By sharpening your parameters, the lender you contact will be able to give you a more precise quote,” says Gumbinger.
You should also tell the loan officer or broker whether you’re interested in paying “points” — that is, pre-paid interest that helps lower your rate (each point is worth one percent of the total loan amount). In some cases, “buying down your rate” may be worth it, especially if you plan to be in your home for an extended period. But if you only intend to at the new address for a few years, you might be better off skipping those upfront costs. Definitely do the math.
One thing to keep in mind is that the relationship between interest rates and points isn’t linear. According to Gumbinger, the first point you pay on a 30-year fixed mortgage may lower the rate by 0.25 percent, but the next point will be somewhat less. Therefore, expect a diminishing return with each additional point you fork over. “You couldn’t, for example, pay 12 points today and get a 0.25-percent interest rate,” he says.
4. Make an Apples-to-Apples Comparison.
By law, lenders should provide you a three-page Loan Estimate, which forecasts your monthly payment and any closing costs you’d have to pay. It also includes prepayment penalties and other special provisions that you’ll want to take into consideration.
By law, the Loan Estimate has to include the APR, or annual percentage rate, which can be an invaluable tool when comparing different offers. While the interest rate is what the lender charges to borrow the loan’s principal amount, the APR factors in the cost of broker fees, discount points and other lender charges. Therefore, it’s a more accurate indicator of the overall cost of taking out the loan.
Carver also suggests paying close attention to prepaid expenses on the Loan Estimate, like taxes and insurance costs. When you close on the loan, you’ll have to pay the same for those things regardless of which lender you choose. But because banks and mortgage companies don’t know how much you’ll have to pay when they formulate the quote, they fill in a “guess.” A lender may only show one or two months of taxes, even if they would end up collecting them for a longer time period than that. “It can involve a bit of smoke and mirrors,” says Carver, who co-wrote The Super Simple Home Buyer’s Handbook.
5. Be Ready to Negotiate.
In addition to homeowners insurance and taxes, expect to pay a litany of one-off fees when you close on your loan, including those that go toward loan origination, underwriting, document preparation, appraisal and title insurance. Some of these are controlled by the lender, while others—like the appraisal and title fees—go to third parties.
Often, there’s a trade-off involved. “A loan with the lowest fees will be unlikely to have the lowest rate, and, conversely, a loan with the lowest rate is unlikely to have the lowest costs,” says Gumbinger.
Still, if you a company comes in with a low interest rate but substantially higher fees than a competitor, it doesn’t hurt to see if they can come down a bit on the latter. One line item you should keep a close eye one, says Carver, is the loan origination charge, which gets split between the loan officer and the lender.
Origination fees are listed as a percentage of the loan amount, so buyers of higher-value homes, in particular, can end up paying a boatload. Carver advises borrowers to ask the loan specialist if they can come down, as long as you’re realistic. As he says, “there’s no such thing as a free lunch.”