For some folks getting a mortgage can be a daunting task. Especially for first time home buyers. This short tutorial and guide will make it easy for first time home buyers and those new to mortgages to understand what is a mortgage and how to obtain one at the best cost and rate.
A mortgage is simply a loan that the bank provides you with that you have to pay back over a certain amount of years agreed on by both parties.
There are many types of mortgages available, however with this tutorial we will be going over the 30 year fixed rate mortgage.
List of to-do’s before you contact your bank or mortgage company.
1. Understanding how much you can afford.
Most bank uses a rough formula to figure out how much you can afford, they call this DTI or debt to income ratio.
For your case your total mortgage expense including taxes and insurance should not be more than 40% of your total gross income.
Most banks and brokers, will now require a full documentation of income before they will lend you any money. It simply means your last 2 years of W2s if you’re employed or last 2 years of tax returns and current Profits and loss statement if you’re self employed. Depending on your credit some creditors will also ask for your bank statements. As a safeguard simply provide your loan officer 12 months of your bank statement. The easier you are to work with, the chances are your loan officer will give you a better deal.
3. How to negotiate
There are many ways to negotiate a mortgage. I will provide you a simple clear cut method that I go by. Like you, the person who is doing the loan for you has to make money so asking for a free loan like most “experts” claim will only result in a higher interest rate on your end. So the trick here is to find the balance. As a general rule of thumb I always recommend buyers to pay no more than 1 Point. Other wise known as 1 percent of the total loan balance, borrowed. So for example, if you are taking out a $300,000 mortgage you don’t want to pay more than $3,000 for everything and that includes your title and escrow charges.
So now that you know how much in dollars you want to pay, you can let your loan officer know, and they will give you a rate, now you can compare rates between banks.
When comparing rates make sure you are comparing the same products, some loan officers will show you a different type of mortgage usually an adjustable to show you a more favorable rate or cost.
There you go folks that’s how you get the best mortgage at the lowest cost. You can use this strategy and tailor it to what you feel comfortable with. If you don’t want to pay a single penny for your loan simply tell them, you don’t want to pay anything for the loan, it will result in a higher interest rate. So you be the judge of it.
Have a great one!