What advice do you have for a first-time mortgage shopper?
March 28, 2011 9:31 AM   Subscribe

First time home buyer, made an offer that was accepted, now we're shopping for a mortgage. The home price and condition should allow us to qualify for a FHA loan or a USDA Rural housing loan. Our available down payment probably is not enough to get us into a conventional mortgage. I would almost certainly like to get a 30 year fixed rate loan. What are some perils and pitfalls of looking for financing? What specific things do you wish that you knew when you took out your mortgage?

I know about getting a loan that doesn't have a prepayment penalty. I don't really know anything about shopping for rates or things like that. The sellers agent asked us to at least talk to someone at a local bank that she has worked with in the past. Our agent said that he had worked with that bank and said that we should at least run the numbers with that bank. I guess I should probably at least do some web searches to shop for rates, our agent seems to prefer working with local banks. He said it was much easier to work out any problems that might arise in the process. We seem to be financially well-qualified to buy the house, but I would like to get the best deal that I can.
posted by jefeweiss to Work & Money (17 answers total) 15 users marked this as a favorite
Best answer: Definitely work with local banks. Or, if it must be a national or regional bank, make sure from the very beginning that you'll be working with a live person whom you can meet with in person throughout the application process. The national banks might offer slightly better interest rates, but they'll make up for it in fees. Also, it's no good if you're offered a great rate but then lose the house because the bank couldn't meet the closing date.

And whatever you do, don't get a mortgage with Bank of America. My experience was one of mind-boggling incompetence (e.g., they sent me several other people's complete credit reports and missed the closing date by two days) and indifference-bordering-on-contempt at all levels.
posted by jedicus at 9:47 AM on March 28, 2011

Best answer: I am currently buying a house with my husband, and we went to the bank expecting to get a FHA or USDA loan, but we actually qualified for a 30 year fixed with only 5% down due to our good credit and low debt to income ratio - so it's certainly possible. Of course, a higher down payment means a better interest rate. The loan officer will be able to plug in all your information, tell you what you qualify for, and show you how the payments will work out for the different programs. When we went in, the rates for FHA and conventional were the same, but conventional had the benefit of not requiring mortgage insurance after three years or reaching 80% equity, plus the FHA program has stricter requirements for the condition of the house you buy. We went to a local bank, we chose the one we went with because my office works with them closely (they are a client and also our firm's bank), but the perception is that local banks are much easier to work with in general, and that has been my experience (I also bank with a credit union). The pre-qualification part was pretty easy, all we had to bring was bank statements and our W-2s, but since you already made an offer you might skip that part and go straight to the full application step. You can certainly go through the pre-qualification part with multiple banks to see if they give you different rates or better options (for instance, we qualified for a single mortage insurance premium payment at closing, which significantly lowered our monthly payments - but this only works if you have that money to pay at closing). Pre-qualifying doesn't obligate you to go through that bank for your loan, and doesn't take too long. I believe some banks let you plug in your information on their website before talking to the loan officer, which will make it even faster. Googling should tell you what the current rates are.
posted by Safiya at 9:53 AM on March 28, 2011

Best answer: Having a real live person to help us find a loan was really helpful for us. Our agent recommended a loan broker that they frequently used and since they worked together all the time, the agent and the loan broker were able to be a seamless team in figuring out a lot of the more complicated bits of our transaction. As I understand it, FHA financing can take a lot more time and be quite a bit more bureaucratic and it's really important to go with someone that really understands and has a lot of experience with FHA.

In terms of going with a loan broker as opposed to working with a bank directly, I really think we made a good choice. I can't say if we got the very best deal possible but I did feel like our broker was working for US, rather than for a financial institution and was our advocate rather than just protecting the bank's financial interests. If it meant that the commission the loan broker got out of the deal increased our final price slightly, it was well worth it.
posted by otherwordlyglow at 9:56 AM on March 28, 2011 [2 favorites]

Best answer: When we refinanced we got a MUCH better deal from a credit union than any big national bank could give us. I would strongly suggest talking to your local credit union.

You can also get a sense of the market from a mortgage broker, who can give you quotes from several different lenders. This can be helpful if you want to get a sense of the market.

If you don't know your credit score, try to find out what it is soon. This will be quite important in determining what kind of loan you can get.

There are a lot of different options with mortgages, like whether or not to pay points to get a lower interest rate. The advice we got is that it's not worth it to pay points unless you are sure that you will have your mortgage for a while, the break-even time is around 7 years or so. Most people either sell or refinance before that time.
posted by medusa at 9:57 AM on March 28, 2011 [1 favorite]

Best answer: Local banks in areas with FHA/USDA-eligible properties tend to have staff with experience in how to handle the applications. Definitely shop around, and don't feel compelled to go with the recommendations of the agents, but our experience was that those personal relationships were really useful in dealing with the final bits of red tape.

If you do go with FHA/USDA, the mortgage itself might not stay with that bank for long, with the servicing sold on to another (bigger) bank from the moment your first payment is due.
posted by holgate at 10:01 AM on March 28, 2011

Best answer: Nthing local banks, and also looking for first-time homebuyer programs - my state had special mortgage help for a second mortgage so that you didn't have to have as much down (and it was a great deal).
posted by ldthomps at 10:12 AM on March 28, 2011

Best answer: Ask, if not demand; to see the rate sheets your broker is working from. Have them explain how the whole point system works and how it relates to your credit score.

A mortgage broker will usually get you a rate at least 0.5% less than a bank; and has a half a dozen or more lenders to choose from. Your initial lender rarely matters; most mortgages get bought and sold (fannie mae, freddie mac) several times.

You can not read too much about what you are asking about.
posted by buzzman at 11:00 AM on March 28, 2011

As someone who just sold a house to first-time homeowner with an FHA loan, I wouldn't do it again. FHA/USDA/HUD etc can be a big pain in the rear for the seller. We were completely frustrated by the process. And, it cost us money. I will hold out for a conventional loan next time.
posted by I'm Doing the Dishes at 11:08 AM on March 28, 2011 [1 favorite]

Best answer: I have been very happy with the mortgage broker that I used (three times so far and one abortive attempt at a re-fi). They generally have access to the same information, so there isn't much value in shopping around brokers for the best deal, but there is a great value in shopping around brokers for ones who will answer your stupid questions (and you'll have lots of them) and not make you feel like an idiot and is transparent about where they make their money.

One of the issues that can be very confusing is paying points to reduce your interest rate. Generally, each 1% of the loan amount you pay up front that this will reduce your interest rate by 0.25%. This works the other way - you can increase your interest rate by 0.25% and get 1% of the loan amount back. This may or may not be a good deal. If you don't have enough money for closing costs then getting a rebate can be very handy. If you have lots of money for closing costs and a down payment it might be worth paying money up front to reduce your interest rate. Is it a good idea for you? Beats me. Ask your friendly neighborhood mortgage broker.
posted by It's Never Lurgi at 11:14 AM on March 28, 2011

Double ++ for the no FHA/USDA/HUD process. Quadruples the paperwork and adds a 1/2% to the interest rate on the loan.

Conventional is priced better because it more favors the prepared.
posted by buzzman at 11:15 AM on March 28, 2011

Best answer: If you can, finance through a local institution that won't sell your morgage. Credit unions are usually pretty good, but just ask how many/what percentage of their loans are sold Check with several different places, to ensure you are getting the best deal.

Find out about payment options. Do you get a discount if you set up your payments as an automatic transfer? If you pay off the loan early, what are the penalties? If you pay an amount higher than the minimum loan payment, does that extra money go toward the principal or interest? What kind of leeway do you have in paying, to avoid late charges?

Check with your insurance company, to find out how much your insurance will be. That is usually rolled into the mortgage, and paid by the lender, as well as your property taxes. Find out an approximation of what your property taxes will be. You can total them up, and figure approximately how much extra will be added to your mortgage payments.

Lenders will not only look at your credit rating and debt to loan ratios, but at how much money you will be able to charge on your credit cards. I suspect they do this because one of the first things new home buyers do is go purchase furniture and other stuff for the house.

That's all i have, as it has been several years since we dealt with any of this stuff, and there have been a lot of changes in the market the last few years.
posted by annsunny at 11:35 AM on March 28, 2011

I never did points because it seems like a weird shell game. And some points expire after a # of years; and and lots of small print, tiered points, miss a payment and lose points, and... Nah, points are for the horses and I don't go to that track. All that being said; do the slow math and if it adds up; do it. Points remain a confusing concept, difficult to explain easily due to the multi-paregraphed pages of explanation behind the initial "pay to reduce your interest rate" teaser .

FWIW, it takes a whopping 40 hours of classtime (as in 8-5 M-F for one week; at least in Colorado) to be eligible to test and become a mortgage broker. It is *not* a rocket scientist certification/licensing. Please; respect your broker but essentially they are no different that a larger dollar amount of somebody in a mallbooth trying to get you to apply for a new credit card.
posted by buzzman at 11:40 AM on March 28, 2011

Juste a note: local banks are best, but once you sign you have no guarantee that your mortgage will STAY with the local bank. Once you're signed, they can sell it to whomever they so desire.

We signed with a local bank for all the above reasons...mere weeks after closing, we'd just moved into the house and we got letter stating Local Bank had sold our mortgage to Bank of America. We hadn't even made our first payment yet! All our efforts to stay local were pointless. :D
posted by ninjakins at 11:52 AM on March 28, 2011 [1 favorite]

Best answer: It is true that you can't guarantee a local bank that originates your loan won't just turn around and sell the paper to a national bank. Just try to have a frank conversation with the loan officer and see what their practice is. Regardless, working with a local bank in the origination process is much easier for everyone involved.

Hang on to copies of all the documents, particularly the appraisal and inspection report; these will come in handy if/when you decide to resell your house.

If by some stroke of evil luck your loan should be sold and begin to be serviced by Bank of America, then buckle up. You should then independently confirm that your taxes and insurance premiums are timely paid. You should document each and every single payment. Keep every letter you get from them in your file. Never withhold a monthly payment based upon confusion about what it is they're telling you. Read up on RESPA (the Real Estate Settlement Procedures Act) and learn the power of the Qualified Written Request letter, which forces them to clarify what they're talking about and puts them on the hook for damages if they ignore the letter. Expect the worst.
posted by chicxulub at 12:38 PM on March 28, 2011

If I were buying a house right now I wouldn't do it with less than 10-20% to put down (in addition to a 6 month emergency fund in savings). I just had one home foreclosed on me in Michigan (I haven't lived there for over 7 years, property manager went out of business) and now I am upside down on my home in Texas. I also wouldn't buy a house unless I was planning to be there for 10 years. And the tax benefits aren't as great as you hope they will be, in all likelihood.

The Michigan home was USDA. Apparently they can come after me for the deficiency.

The USDA/RD loan process was a joke. The porch was falling apart on the house, the roof needed work, but all the inspection turned up was that we had to paint the cinder blocks that the house sat on.
posted by getawaysticks at 2:40 PM on March 28, 2011

Best answer: First, to state the obvious, you should have found the loan before you found the house. I know when we made our offer, the fact we had loan approvals made our offer more solid — and we were able to get a good deal, below list price, with $5,000 back and acceptance without a counter. BUT that being said, you shouldn't have as hard a time finding a loan as some of the news stories have you believe. I'm not a banker, but this has been my experience:

I'm in the process of buying a home. We're not completely through the hurdles/contingencies yet (home inspection was pretty clean, but waiting to hear on appraisal etc.), but we're scheduled to close in three weeks. The loan was the first thing we nailed down so we knew what price range to look in. On the advice of our relatives in the banking biz, we opted out of the national banks and only applied at two regional credit unions (one where he banks and one that holds my auto loan). We asked both to approve us for a number that was well below what all the calculators said we'd qualify for. Because of a hitch — five-year old medical bills I didn't know about! exhibit a on why you should check your credit report first — my credit score wasn't as great as I thought it was. (His was excellent, but unfortunately, they base approval on the lowest score.) One of the credit unions approved us for an FHA loan and one approved us for conventional loan, both for the full amount we asked for on a 30-year-fixed-rate mortgage. In neither case did the score (it's not abysmal just more average than great) outright affect the interest rate. It does, however, cost us an upfront origination charge fee of a few thousand dollars at closing, which is annoying but not as annoying as adding a few percentage points to our monthly mortgage for three decades. We expect to be in this home for the long haul and to pay it down/off early.

The interest rates/APRs on both loans were relatively similar, with no pre-payment penalties or crazy fees, but we went for the conventional one. It offered better terms, including the fact the CU said they don't intend to sell our mortgage. We'd initially planned to pay one point to lower the interest rate, but after discussing the difference in monthly payment versus the payment at closing, we opted not to do that. Fortunately, the credit union we chose to go with offered a one-time rate float down after you locked in the rate. Rates went down last week, and we have now locked in the rate we would have gotten with that point!

Long story short: My suggestion based on our experience is
a) know what's in your credit report and what your score is;
b) don't throw everything at the down payment; you'll need several thousand at closing (and don't trust the bank estimate until you get the official good faith estimate) and other expenses might crop up (like having to replace a heat pump, as is our case, but we factored that into our offer);
c) be proactive about providing documentation to the lenders — they will want your W2s for two years, recent bank and credit card statements, retirement and savings account statements, and pretty much any documentation of any assets and on-going expenses you have. The quicker you do this, the quicker your loan will sail through the process
d) don't use or apply for any credit other than mortgage until you close on your house; even charging something to your credit card could increase your utilization, which lowers your score.

Good luck! (Sorry for the crazy long post!)
posted by ilikemethisway at 7:15 PM on March 28, 2011

My one piece of advice is that as well as using logic and comparing rates and getting a good deal, you need to think about what makes you more comfortable.

I recently got a mortgage - hands down best rates ever. We will save a lot over the life of the loan. But there is a monthly service fee. Even with the fee, this loan is the best deal, but it is going to annoy me every single time I look at my bank statement. I HATE fees. I would rather have a slightly higher interest rate and no fees. And I wish I had figured that out in advance.

Similarly, this bank gets a lot of bad press because they only deal with people online. There are no branches you can walk into. They prefer email over phone. For me, that is ideal. That is always the way I deal with my bank and I hate ringing or going into a branch. For some people, it would be a deal breaker.

My father has a mortgage with a stupidly high interest rate. But he loves the local bank he gets it from and spends (wastes) lots of their time just chatting with the "nice lady behind the counter". That makes him happier than the saved money would from a lower rate. I think he's insane.

But yeah, work out what suits YOU.
posted by lollusc at 9:09 PM on March 28, 2011

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