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My wife and I are looking to purchase our first house. What is the best approach for finding a mortgage? We're looking for a conventional 30yr fixed (w/10-20% down).

Thanks!

5

If you have good credit, you already know the rate -- the bank has it posted in the window. If you don't have good credit, tell the loan officer your score. Don't have them run your credit until you know that you're interested in that bank. Running an application or prequal kicks off the sales process, which gets very annoying very quickly if you are dealing with multiple banks.

A few pointers:

  • Shop for TCO, not the best rate. Most folks stay in a home for 5-7 years, so you should increase the weighting of closing costs in your evaluation.
  • Understand the costs associated with the loan in detail. This varies from state to state.
  • Explore first time homebuyer programs offered by your state, county or city. I received $7,500 in grants and forgivable loans from NYS through their SONYMA program when I bought my first home.
  • Don't worry about your credit score and get into a tizzy over the effects of inquiries.
  • Look for local banks and credit unions with lower (not lowest) advertised rates. Go in and talk to them, understand their policies and practices. These institutions usually offer the best value.

You're looking for a plain vanilla 30 year loan, so avoid mortgage brokers -- they are just another middleman who is tacking on a cost. Brokers are great when you need more exotic loans. Always, always stay away from mortgage brokers (or inspectors or especially lawyers) recommended by realtors.

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First of all, think of anyone you know in your circle locally who may have gotten a mortgage recently. Ask him, her, or them for a recommendation on what brokers they found helpful and most of all priced competitively.

Second of all, you may consider asking a real estate agent. Note that this is generally discouraged because agents sometimes (and sometimes justifiably) get a bad reputation for doing anything to get themselves the highest commission possible, and so folks want to keep the lender from knowing the agent. Yet if you have a reputable, trustworthy agent, he or she can point you to a reputable, trustworthy broker who has been quoting your agent's other clients great rates.

Third of all, make sure to check out the rates at places you might not expect - for example, any credit unions you or your spouse might have access to. Credit unions often offer very competitive rates and fees.

After you have 2-3 brokers lined up, visit them all within a short amount of time (edit courtesy of the below comments, which show that 2 weeks has been quoted but that it may be less). The reason to visit them close together is that in the pre-approval process you will be getting your credit hard pulled, which means that your score will be dinged a bit. Visiting them all close together tells the bureaus to count all the hits as one new potential credit line instead of a couple or several, and so your score gets dinged less.

Ask about rates, fees (they are required by law to give you what is called a Good Faith Estimate of their final fees), if pre-payment of the loan is allowed (required to re-finance or for paying off early), alternative schedules (such as bi-weekly or what a 20 year mortgage rate might be), the amortization schedule for your preferred loan, and ask for references from past clients.

Pick a broker not only who has the best rates but also who appears able to be responsive if you need something quickly in order to close on a great deal.

  • My understanding from the Clark Howard radio show is that credit pulls for a mortgage in the same 2 week window will count as one. No harm in doing it all in one weekend, but you could stretch it out if need be. – MrChrister Dec 6 '10 at 14:25
  • @MrChrister - thanks. I'd heard weekend before, but it's good to know that it can be a bit longer. – justkt Dec 6 '10 at 14:26
  • I've heard 2 days, not 2 weeks for the pulls to count as one. – Vitalik Dec 6 '10 at 15:16
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    credit.com/credit_information/credit_help/… each bureau has a different window, but they are all at least 2 weeks in the US. Search for duplication. – MrChrister Dec 6 '10 at 17:05
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Check with you local bank where you have an account. Sometimes they can offer a discount that results in a good rate. I just refinanced a month ago with Bank Of America and their rates were very competitive. What set them aside from the rest was their low closing fees.

Otherwise I would shop around on bankrate.com and it will show you results of both local and online mortgage brokers. It will list the rates and expected fees. The also list an average national rate so you can compare the rate you are considering and see if there could be a better deal elsewhere.

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    I would avoid online rates for a first mortgage, there are just so many variables. I would get a mortgage from a person, but definitely go online to get an idea of what to expect. – MrChrister Dec 6 '10 at 14:27
  • @MrChrister - I agree, for the first time process you want someone who will be there in an office you can visit if there is a problem. Plus with online brokers I've seen a whole gamut of consumer complaints! – justkt Dec 6 '10 at 14:29
  • As a first time person, there are so many combinations and questions I wouldn't have known to ask. – MrChrister Dec 6 '10 at 14:34
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Make sure you shop around and ask a lot of places for a good faith estimate. Last I knew, the good faith document is the same everywhere and long form that makes it easy enough to compare the hard numbers from place to place. I have gotten several estimates for various scenarios and I have had them hand written and printed. (I discounted the hand written ones because that broker seemed pretty disorganized in general)

Learn the terms online, and start comparing. Use the good faiths as a negotiation tool to get lower rates or lower costs from other brokers. See how accurate the person is at listening to you and filling out the paperwork. See how responsive they are to you when you call with questions and want some changes.

Check with at least four places.

  1. Your current bank(s)
  2. Your current credit union. (Get one if you don't have one)
  3. A couple of mortgage brokers.

The more places you shop, the better idea you will have of what fees are high and what interest rates are low. I might pay a higher fee to get a lower interest rate, so there are lots of trade offs to consider.

1

I second the suggestions for your local credit union and asking co-workers who might also be in the process of a home purchase. Additionally, you want to educate yourself as much as possible so that you can ask questions about the calculations responsible for the differences. I got different values starting from the various online automatic quotes all the way through to the GFE and it was not obvious to me. You can also sign-up for free workshops for first time home buyers, though most of the material will be a breeze it helps you get worksheets going and lists going for documentation that you need to gather. You might want to start at the HUD site and explore. Especially the Borrower's Rights. The cost booklet was very helpful for me to interpret the GFE, but honestly I didn't appreciate it the first time it was handed to me. Finally, you might meet qualifications to take advantage of FHA programs; the waitlists discourage everyone including the loan brokers, but you want to at least be aware of programs that can help.

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