Learn a little, save a lot
A mortgage guide can be a valuable resource for anyone who wants to buy a home. A comprehensive guide should explain how to shop for a mortgage, how to qualify for a mortgage, how to choose a mortgage and how to refinance a mortgage.
Shop for a Mortgage
A mortgage is a major long-term commitment, so it's important to shop carefully -- you don't want to overpay for your house every month for the next 30 years. One Stanford University study found that getting at least four quotes for a home loan saved participants over $2,300 in closing costs.
When shopping for a mortgage, you'll need to get offers from several competing lenders -- either in person, on the phone or online. LendingTree's online marketplace make it very easy to do this by completing one form. Ask mortgage lenders for a Good Faith Estimate -- they're required by law to provide it when you apply for a home loan, but many lenders will issue one if you just ask. The GFE is a government-mandated form that discloses the interest rate, loan terms and most of the costs associated with a home loan. Since the GFE is standardized, it can be used to compare the costs of similar types of loans.
Customer service matters, too. Work with a lender who gives you clear, easy-to-understand information, answers their questions and is responsive to their needs and concerns.
Qualify for a Mortgage
Qualifying for a mortgage can be intimidating, especially if you've never applied for one before -- but that's what a mortgage guide is for -- to demystify the process. Applying for a home loan is not as difficult as some nervous borrowers expect it to be. In fact, qualifying for a mortgage is mostly a matter of paperwork, filling out forms and submitting documents to the lender.
The process starts with a quick credit check and some basic information about your income, assets and monthly debt obligations. Examples of income include wages, salaries, bonuses, commissions, interest and dividends. Examples of assets include checking accounts, savings accounts, retirement accounts and investments. Debts may include car loans, credit cards and some student loans.
The qualifying process continues with a complete package that includes a loan application and copies of documents that support your financial data. Examples of documents include W-2s, paycheck stubs, tax returns, bank account statements and gift letters.
Once all the paperwork is in, the lender can approve the loan and issue you a mortgage pre-approval letter. Having a pre-approved mortgage makes your offers much stronger when you shop for your home.
Choose a Mortgage
Your choice of mortgage will be dictated by your goals and your resources. It's important to compare different types of home loans. Your choices -- government or private, fixed or adjustable, 15- or 30-year term -- depend on your goals and the strengths and weaknesses of your application. A mortgage guide can help clarify these choices.
Home buyers who don't have a lot of cash should first look for a government-backed mortgage that allows a small down payment, or a community mortgage from Fannie Mae or Freddie Mac. Examples include the FHA loan, insured by the Federal Housing Administration, VA loan, guaranteed by the U.S. Department of Veterans Affairs, and USDA loan, backed by the U.S. Department of Agriculture, My Community Mortgage, from Fannie Mae, and Home Possible from Freddie Mac.
The FHA loan allows a down payment as low as 3.5 percent of the home's purchase price. The VA loan and USDA loan can be used to buy a home with no down payment at all. Community home loans require three percent down and have lower mortgage insurance premiums, but they are restricted to people whose income falls in the low-to-moderate range.
Buyers who have a bit more cash should consider a conforming loan from Fannie Mae or Freddie Mac. Fannie and Freddie are corporations that have been controlled by the federal government since falling into financial trouble a few years ago. They purchase loans that conform to their guidelines (hence the term "conforming loans") from lenders. These loans are available with a down payment as small as five percent (three percent for community mortgages) of the home's purchase price.
There are size limits to the above-mentioned loans, and other government-created guidelines that borrowers must meet. Those who want to purchase more expensive properties or choose loans with non-standard features can select jumbo or non-conforming loans. These are sold by private lenders that create their own guidelines.
Refinance a Mortgage
Homeowners' needs can change over time, so it's a good idea to review your mortgage periodically and consider whether it might make sense to refinance into a new loan, perhaps with a lower rate or different term. Three common reasons to refinance are to lower the interest rate, switch from an adjustable-rate mortgage to a fixed-rate loan, and remove mortgage insurance, which is required with most low down payment mortgages.
Refinancing involves some costs, but can also be a money saver for homeowners. In most cases, borrowers are not required to pay these costs out of pocket.
A good mortgage guide can help home buyers get started, and a conversation with a lender can take it from there.