From starter homes to vacation escapes, many of my clients have taken advantage of recent market conditions to make the real estate purchase they’ve always dreamed of. The combination of affordable prices and low interest rates has made home buying accessible to many who had deemed it beyond their financial reach.
The one stumbling block for some prospective homebuyers, however, has been today’s dicey lending environment. Even though positive economic and housing market indicators continue to pick up, strict lending criteria and confusing terms and processes stop many would-be homebuyers in their tracks.
But have heart. By knowing how to navigate the lending landscape, a manageable mortgage—and your dream home—are within reach. Talk to your real estate professional about the steps you need to take to secure financing. In the meantime, here are some great tips from the American Homeowners Foundation:
Don’t stretch your loan qualification limits. A home should be a source of satisfaction and an investment, not a financial albatross. Borrowing heavily from family members, selling assets, and living poor just to own a bigger or better home makes for larger mortgage payments and risks difficulties in the future.
Shop for competitive rates, points and fees. Get at least three bids. The most competitive lender one week may not be next week, so get (or reconfirm) quotes the same week you are ready to make the commitment.
Get an immediate written confirmation of your locked-in interest rate and interest rate terms. You might find some discrepancies with the figures used on the final loan documents.
Don’t agree to prepayment penalties. You may want to refinance or partially prepay part of the mortgage. If there is no mention of prepayment penalties, make sure you have an addendum attached to the mortgage specifying that no fees will be imposed.
Understanding all the conditions of your loan. You or a professional that you trust should thoroughly scrutinize each document. Ask questions if you aren’t sure what something means.
Pick the right kind of loan. Rates are higher on 30-year loans than on comparable 15-year loans. That's because there is a greater risk that rates will go up the longer the lender commits to a fixed rate. While there is an advantage to the predictability of fixed rates, if you expect to be transferred in five years, you’ll be paying more than you need for a 30-year, fixed-rate loan. If you want both the security of predictable payments and the lowest monthly payment, consider "hybrid" loans - those with a fixed rate for the first five or seven years of their 30-year duration. If you are going to be there for a shorter period, or have confidence that rates will be dropping further, consider an adjustable rate mortgage. Be sure to discuss your particular circumstances with your real estate professional and/or lender to make the best loan choice.
Save everything. Lenders require and provide numerous documents. Some get misplaced, usually at the most critical time. Keep copies of everything you send the lender and everything the lender sends you.
Take advantage of the deduction. The mortgage interest deduction is one of the few remaining tax deductible interest payments, and it’s also the cheapest form of long-term financing. Consider financing/refinancing as an alternative source of funds for home improvements or other constructive long-term investments like education. Don’t get in over your head, and never use it to finance your summer vacation or other short-term pleasures.
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