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The Home Buyer’s Guide to Landing the Best Loan

Updated: May 14

Getting optimal financing terms when seeking a mortgage, refinancing, or tapping home equity can save you thousands. Use these tips to get lenders competing for your business and lock-in the best rates and terms.

Tip #1 - Get Your Documents in Order

Having all your financial paperwork ready makes getting loan pre-approvals and applications easier. Collect pay stubs, tax returns, bank statements, IDs, and proof of assets. Doing this over and over again manually takes time and leaves you with little control over your privacy. With YourOwn, you can effortlessly consolidate your ID, financial documents and data in a secure digital wallet. Your linked data is kept up to date and is ready to be shared with potential lenders at a moment's notice. This not only streamlines the application process but also showcases you as a well-prepared and serious homebuyer.

Tip #2 - Shop Around

When it comes to selecting a lender for your mortgage, it's essential not to settle for the first option you come across. Instead, take the time to thoroughly evaluate your choices. Start by collecting quotes from a variety of sources, such as traditional banks, credit unions, mortgage brokers, and online lenders. Aim to gather quotes from at least five different institutions. Once you have multiple offers in hand, you'll be in a strong position to negotiate for the most favorable interest rate and loan terms. The competition between lenders works to your advantage, as you can leverage their competing offers to secure the best possible deal on your mortgage. This approach can potentially save you thousands of dollars over the life of your loan and ensure that you're getting the most cost-effective financing for your home.

Tip #3 - Improve Your Credit Score

Good credit means better rates. Check your reports for errors beforehand and pay down debts to boost your score. Focus on three key actions: First, consistently make on-time payments for your debts, such as credit cards, loans, and bills, as payment history significantly influences your score. Second, manage your credit utilization by keeping credit card balances low compared to your credit limits. Aim to use less than 30% of your available credit. Lastly, avoid closing old credit accounts, as a longer credit history can positively impact your score.

Tip #4 - Leverage Investments for Lower Rates

Many lenders offer discounts on mortgage rates and fees based on the total assets you have invested with them or their partners. The more you have in eligible brokerage and investment accounts, the lower your interest rate. Even a 0.125% decrease can translate to thousands in savings over the life of the loan. Be sure to ask lenders about any preferential pricing tied to your investment portfolio holdings.

Tip #5 - Make a Strong Down Payment

A substantial down payment can significantly enhance your prospects when applying for a mortgage. It reduces the amount you need to borrow, effectively lowering the principal and the total interest paid over the life of the loan. This usually results in more favorable interest rates, reducing long-term borrowing costs. Furthermore, a substantial down payment signifies financial responsibility and commitment to lenders, often leading to better terms and conditions. In essence, saving aggressively for a strong down payment not only makes financial sense but also garners favorable attention from lenders, offering both short-term and long-term benefits.

Estimating your ideal home down payment boils down to the 20-20-20 guideline. Plan to put down 20% of the home's price to secure favorable loan terms and avoid private mortgage insurance (PMI). Ensure this down payment is around 20% of your annual income, allowing you to preserve your financial flexibility for other goals. Additionally, allocate 20% of the home's purchase price for closing costs, moving expenses, and potential home repairs to be well-prepared for homeownership. While this guideline offers a practical framework, consult with financial experts and mortgage specialists to tailor your down payment to your specific financial situation, regional market conditions, and goals.

Tip #6 - Lock-In Low Rates ASAP

Interest rates for mortgages can fluctuate rapidly, sometimes even within the span of a day. This means that securing a favorable rate is a matter of utmost importance. As soon as you receive a competitive interest rate offer that aligns with your financial goals and expectations, it's advisable to lock it in. Locking in the rate essentially means that the lender guarantees you that specific interest rate for a certain period, typically between 30 to 60 days. This safeguards you from any potential rate increases during that time frame, ensuring you secure the rate you want. However, it's essential to be prepared for this step and have all your documents and financial information ready because once the rate is locked, you need to move forward with the loan application process promptly. Delaying this step could result in losing the locked rate, which might not be as favorable when you revisit it.

Tip #7 - Highlight Unique Situations

If you’re a first-time buyer, veteran, buying in certain locations, etc. - make sure lenders know. You may qualify for special programs and discounts. For instance, first-time buyers might qualify for down payment assistance or reduced interest rates. Veterans frequently have access to VA loans with favorable terms. Certain areas offer special incentives to encourage home buying, such as reduced down payment requirements or tax incentives. However, these programs and discounts are often underutilized because homebuyers are unaware of their eligibility.

Tip #8 - Buy Down Your Rate with Points

Paying points, also known as discount points, to lower your mortgage rate can make financial sense over the long-term if you plan to stay in the home. Each point typically costs 1% of the total loan amount but can reduce your interest rate by 0.25% or more. On a $300,000 loan, 1 point at $3,000 upfront could save over $30,000 in interest paid over 30 years at a 0.25% lower rate. Run the numbers with a mortgage calculator to determine if the interest savings outweigh the upfront costs based on how long you will hold the loan. If you can recoup the initial payment within a few years and afford the lump sum, points can effectively allow you to "buy down" your rate and lifetime loan costs.

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