What Should You Look for When Securing a Mortgage?

When I was married, I co-owned three condos: one we lived in, one we rented out, and one we flipped. Now that I’m single again, I’m preparing to purchase my own.

Working in the financial services industry for 12+ years helped me understand how home loans worked. Knowing what to look for when securing a mortgage helps make the process easier. The following information can help.

Mortgage Basics

A mortgage is a loan that helps you purchase a home. The contract is between you, the borrower, and a lender, such as a bank, credit union, or mortgage company. You repay the loan based on the signed agreement. If you do not make your scheduled payments on time the lender can take the property.

How Mortgage Brokers Work

You can secure a home loan directly with a financial institution or have a broker help you find a lender and negotiate the loan details. The advantages of working with a broker include:

• A mortgage broker can access several lenders and offer diverse loan products and terms.

• Having a broker manage the loan approval process saves time.

• Comparing the terms and conditions of loan offers helps determine the best deal.

Consider contacting multiple brokers before deciding which one to work with:

• Check the National Multistate Licensing System to determine whether a broker you are considering has any disciplinary actions against them.

• Understand that a mortgage broker’s payment is in addition to the lender’s fees.

• A broker can be paid in points either at closing, as an add-on to your interest rate, or both.

• Ask each broker how they get paid so you can compare offers and negotiate with them.

Tips to Secure a Mortgage

These tips can help you secure a mortgage:

• Determine the down payment that fits your budget. The higher the amount, the more favorable your mortgage terms and monthly payment.

• Access your free annual credit reports. Visit AnnualCreditReport.com to review your Equifax, TransUnion, and Experian credit reports. Dispute any errors with the relevant credit bureau. Let lenders know if the dispute is not resolved before you apply for a mortgage.

• Request quotes from multiple lenders or brokers to compare rates and fees. Pay attention to the interest rate, monthly payment, and complete loan cost.

• Focus on the annual percentage rate (APR). The total you pay for credit each year includes the interest rate, points, mortgage insurance, and other expenses. Understanding these costs helps you compare mortgage offers.

• Compare loan expenses. The Federal Trade Commission’s Mortgage Shopping Worksheet can help you track and compare loan quote costs.

Looking Beyond the Interest Rate

Dig deeper if you find a lender offering a low or fixed interest rate to determine the terms of the deal. Focus on possible issues in the following areas:

• Potential interest rate increase: A mortgage’s interest rate might be low or fixed for a short introductory period. Then, the rate could dramatically increase.

• Balloon payment: A very low monthly payment could mean paying only the interest, not the principal. If your payments do not include the interest and principal, you could receive a balloon payment significantly higher than usual. An inability to pay the balloon payment can lead to foreclosure, or losing your home to the lender.

• Negative amortization: Paying a portion of the interest owed monthly means the unpaid interest is added to the principal. Increasing your loan balance over time means you end up borrowing more money. The risk of owing more than you could receive from selling your home substantially grows.

• Annual percentage rate: Check the fine print to determine the APR so you understand the total yearly cost of the loan.

Deciding Which Mortgage Offer Is Best

Understand how much interest you would owe monthly and your total monthly payment. The calculation typically includes:

• Principal, or the money borrowed

• Interest, or what you pay to borrow the money

• Taxes

• Homeowner’s insurance

Private mortgage insurance (PMI) could be included in your mortgage if you have less than a 20% down payment. This policy protects the lender if you do not make your scheduled payments and default on your loan.

Strategies to Negotiate Mortgage Terms

Ask lenders or mortgage brokers whether they can offer better terms than the ones they or another lender quoted. They might waive or lower one or more fees or agree to a lower interest rate or fewer points. Ensure the lender or broker does not lower one fee while raising another or lower the interest rate while adding points, which will impact your total loan cost.

What to Know After Applying for a Mortgage

Federal law requires lenders and mortgage brokers to provide you with the following:

• A home loan toolkit booklet from the Consumer Financial Protection Bureau (CFPB) within 3 days of your mortgage application to protect against unfair practices during the home-buying process

• A loan estimate within 3 business days of the lender receiving your application, explaining the estimated interest rate, monthly payment, total closing costs, estimated costs of taxes and insurance, any prepayment penalties, and how the future interest rate and monthly payment might change.

• The CFPB’s Loan Estimate Explainer to guide your expectations.

• A Closing Disclosure at least 3 business days before closing with the terms, expected monthly payments, fees, and other costs. Check the Closing Disclosure against the Loan Estimate and share any discrepancies or questions about costs or terms with your lender.  

• The CFPB’s Closing Disclosure Explainer to provide an idea of what to expect.

What to Watch for After Closing

The closing involves you and the lender signing the paperwork to finalize the loan agreement. You receive the mortgage proceeds and are legally responsible for paying back the loan. Reviewing the CFPB’s Mortgage Closing Checklist helps you understand what to expect.

Note: This post is for educational purposes only.