Unless you have dreadful credit, itâ€™s tough to get a bad loan these days. In fact, even if you have bad credit, there are lenders who will still do the loan â€“ theyâ€™ll just charge you credit card prices.
The evolution of the credit industry over the past five years means lenders always say â€œyes,â€ and then figure out the price. But to get the best loan at the best rate and on the best terms, you have to ask â€œhow muchâ€ first, and then pay attention to the details.
The most important thing to remember is that the best loan for you may not be the cheapest loan youâ€™re offered.
Your loan should work for your personal financial situation. That may mean paying a bit more up front for a lower long-term interest rate, or paying nothing up front in exchange for a loan with a higher interest rate. Either way, lenders today can customize loan programs to suit a buyer or homeownerâ€™s every need.
Here is a list of things to think about before you say â€œyesâ€ to your lenderâ€™s loan offer:
Know what kind of loan you want. The mortgage market is extremely competitive for both conventional loans (which in 2005 meant loans under $359,650) and jumbo loans (starting at $359,651 on up). But lenders offer a variety of customized loan programs that can make it tricky to compare loans on an apples-to-apples basis.
Decide ahead of time if youâ€™re going to go for a 15 or 30-year fixed rate mortgage or if you want an adjustable rate mortgage (ARM) of some kind. Are you enamored by interest-only loans? Be sure you know how they work and decide how youâ€™re going to manage the increased payment at the end of the interest-only period.
Stay on top of interest rates. Interest rates can change frequently during the course of a day, depending on whatâ€™s happening with the bond market. If you decide to float your loan (wait until closer to closing to lock in the interest rate), be sure to watch the bond market closely. If rates seem to be dropping, react quickly and call in your lock. Be sure to get a confirmation of the interest rate in writing.
Watch the points and fees. Again, loans can be customized to suit your needs. A legitimate loan officer, on a loan of about $150,000, will charge at most 1 percent of the loan amount in fees. If there are points to be paid, either the interest rate should be a below market interest rate or there are special circumstances in your case that would cause a lender to charge you points. But if you donâ€™t want to pay anything upfront, then you will have to accept an interest rate that is fractionally higher than if you agreed to pay a point or the fees upfront.
If youâ€™re only going to keep the property (or the loan) for 3 to 5 years, it might make sense not to pay anything upfront, but to accept a higher interest rate. Do the math.
Shop around to compare rates, fees, points, and loan programs. Credit unions often have inexpensive home loan programs, but they may not offer the variety that a mortgage broker will. If youâ€™re self-employed, you may need to work with a lender who offers no-doc loans (loans for which employment documentation and other documentation is not required).
Mortgage brokers usually work with a dozen or more investors, and can do some of the legwork for you, but each mortgage brokerage firm might work with different investors, so youâ€™ll want to be sure to shop around.
Donâ€™t be afraid to negotiate for lower fees. If the loan officer is charging you in excess of 1 percent to do the loan, ask for a reduction in fees without raising the interest rate. Many lenders agree that 1 percent is a fair price on an average sized loan. If your lender is significantly higher, you have to wonder about the deal you are getting.
Consult with your real estate attorney before you apply for a loan. Some first-time buyers think a real estate attorney should only be called only if a problem arises. Others call the attorney after the deal has been negotiated. But your attorney is a good source of information about the deal and probably can offer you the names of good loan officers who provide a good service at a fair price.
July 21, 2005.