Mortgage 101

Rates for mortgage loans are near historic lows and show no signs of rising appreciably in the coming year. Home prices are also depressed, making mortgages attractive to many consumers. Add the satisfaction of home ownership and federal income tax deductions into the mix, and it is easy to see the benefits of getting a mortgage for a primary residence. For investors, who often use cash to buy investment properties, taking out a mortgage loan provides the advantage of freeing up cash for other investments.
Lending standards remain tight, but you can improve your chances of securing a mortgage loan at a favorable interest rate with the following eight tips.

1. Research your borrowing limit.

Do not rely on your lender to decide how much you can afford. Experts recommend that you spend no more than 28 to 30 percent of your gross monthly income on your house payment, which consists of principal, interest, insurance and taxes. Establish your budget, and make sure you leave plenty of room for unexpected expenses. Online financial calculators can help you decide how much mortgage you can afford.

2. Prepare your financial documents.

Lenders often require a two-year employment history. Gather your last two pay statements, income tax returns, W-2s and bank statements. Self-employed applicants should provide two years’ worth of business tax returns. The lender may also require bankruptcy or divorce decree papers. Ensure the accuracy of all documents to avoid problems down the road.

3. Shop around.

In addition to interest rates, consider loan types and discount points. Calculate how long you plan to live in the house, and figure monthly payments and total fees under several different loan deals. Compare a scenario where you pay zero discount points and a higher interest rate with one where you pay discount points in return for lower rates. Find the combination that works best for your situation.

4. If you have only a small down payment, turn to the federal government.

Many lenders require a minimum 10-percent down payment. Even with depressed housing prices, many borrowers cannot come up with that much cash. Fortunately, the Federal Housing Administration, or FHA, backs mortgages with down payments as low as 3.5 percent. With the disappearance of many low-down payment options following the housing bust, increasing numbers of borrowers are turning to the FHA.

5. Protect your credit rating.

Lenders demand evidence of good credit in this tough lending environment. Get copies of your credit reports from the three primary credit reporting bureaus, and study them for errors. Report any issues to the bureaus before applying for a mortgage. Keep in mind that high credit scores pay off in lower mortgage interest rates.

6. Do not be deterred by a low appraisal.

If the appraisal turned in to your lender is too low to back the loan and you think the appraiser is wrong, dispute the appraisal or turn to another lender. Occasionally, opinion of a home’s value differs from one appraiser to another. An appraisal by a new lender’s appraiser may return a more favorable result.

7. Pay attention to the clock.

Once the lender has your mortgage application, promptly submit all requested documents. Delays can kill the deal and result in the loss of your deposit. Familiarize yourself with the expected closing date, and check in with the lender from time to time until the loan has closed.

8. Avoid applying for new credit until closing.

Once your lender has run a credit check and approved your mortgage, work to maintain your credit rating. Do not apply for credit cards or seek financing for a new car. Your lender does not want to see you assume more debt at this time and may well run another credit check before closing.