Additional Tips to Help You Get the Best Loan Terms
Shop, Compare, Negotiate
Once you have decided on the type of mortgage you want, there are several steps you can take to get the best price for your mortgage.
- Check advertisements in local newspapers and on the Internet to get an idea of the best terms and rates. Be aware, however, that rates change frequently, and you may not be able to get the published rate.
- Contact several lenders on the same day to compare quotes. Do not be afraid to let lenders compete for your business by letting them know you are shopping for the best deal.
- Negotiate for the best price you can get. Ask the lender for better terms than originally quoted. Lenders might offer different prices to different borrowers even with the same qualifications. Ask the lender to waive or reduce one or more of the fees, including origination fees, or agree to a lower rate. Make sure the lender does not lower one fee and raise another in its place. Sometimes a creditor will offer a lower rate if you pay an upfront fee in exchange for lowering the rate, called a discount point, or just “point.” One point is 1% of the loan amount. If you consider paying an upfront fee in exchange for a lower rate, be sure to know how much of a rate reduction does the discount point buy, and how will it affect the overall cost of the loan.
- Be sure to get a Loan Estimate of settlement service charges you will likely have to pay. The Loan Estimate is an itemized list of the costs and fees associated with your loan, given to you in good faith by your lender or broker.
- Use the Loan Estimate to compare and understand all costs, terms, and the risk of “payment shock.” The only charge a creditor can require you to pay before giving you a Loan Estimate is a reasonable fee for a credit report, so you can get Loan Estimates on different kinds of loans, and from different creditors to help you compare. For example, you can get a Loan Estimate for a 4.5% fixed rate loan, and one for a 4% adjustable rate loan, to help you understand and compare the overall costs and risks of each.
Federal law requires the lender or broker to mail or give you a Loan Estimate within three business days of getting your application.
“Application” means that the creditor has certain key pieces of information, such as your name, social security number, and the property address. But the lender cannot require you to provide verifying documents before giving you the Loan Estimate.
You can use the Loan Estimate to help you understand the potential costs and terms of loans you are considering. Here’s some of the key information you can find on the Loan Estimate:
- The interest rate, and, if it is an adjustable rate loan, the maximum interest rate;
- The monthly payments, and the variations in payments, up to the maximum possible payment, and whether they could change during the loan;
- Estimated closing costs charged by the creditor and, if one is involved, the loan broker;
- Estimated third-party closing costs – itemized and in total;
- Whether you can shop for any closing costs;
- An estimate of how much cash you would need to close, if any;
- The Annual Percentage Rate, or “APR” (this is a rate that represents the combination of interest cost and some of the closing costs.)
- That means it’s a good way to compare a loan with a lower interest rate and higher closing costs to a loan with a higher interest rate, but lower closing costs. You’ll find the APR on the third page of the Loan Estimate, in a section labelled “Comparisons.”
- The “Total Interest Percentage” or “TIP” – that’s a new way to compare loans. It is the percentage of the interest compared to the loan amount, and it’s found in the Comparisons section on Page 3 of the Estimate, along with the APR.
- Unlike the APR, the TIP reflects just the interest, not closing costs. That makes it a good way to compare loans with similar closing costs, but different rates. It will help demonstrate the overall impact of the different rates.
You can use the Loan Estimate to shop among mortgage lenders and save.
While some closing costs may increase without limits from the Loan Estimate to the time you close the loan, there are legal limitations on when, and by how much, other closing costs can increase.If the APR increases by a certain margin above what was previously disclosed, the lender must provide a corrected disclosure at least three business days before the loan closing.
Keep your Loan Estimate so you can compare it with the Closing Disclosure, which provides you with more details reflecting your final loan terms.
Qualify for a Loan
Lenders use certain criteria to qualify you for a loan, including your income, debt, and credit history.
Once you find a home, you can request a pre-approval. In some circumstances, it is advisable to get pre-approved before you buy, for example, in areas in which houses stay on the market only a short time before they are purchased.
Pre-approval is a commitment from the lender to lend you money. The pre-approval process lets you know how much of a mortgage you can obtain, and tells sellers you are prepared to buy a home.
To obtain pre-approval you need to assemble financial records and fill out an application. You will usually need:
- Pay stubs for the last two or three months
- W-2 forms for the last two years
- Tax returns for the last two years
- Information about your assets and long-term debts
- Recent bank statements
- Proof of any additional income – you do not need to disclose alimony or child support payments unless you want them considered in repaying the loan