Home Buying: The Financing

Unless you have a bundle of cash, you’ll probably need financing to buy your house.  You can look at all the homes you’d like, but you’ll need a pre-approval if you are going to make an offer.  I would recommend setting a budget for your home rather than taking whatever the lender will approve you for.

Pre-qualification or Pre-approval

If you are curious whether a lender would give you a loan you can get pre-qualified.  Usually this is just a soft pull of your credit and they will tell you how much you could afford.  A pre-approval generally requires a hard pull of your credit and may require some documentation.  A pre-approval is stronger than a pre-qualification, but I’d wait until you are ready to make an offer to get the pre-approval.  Getting either of these does not commit you to using that lender nor commit them to providing you a loan.

Choosing a lender

You will want to choose a lender that has a good reputation, because it would be terrible to lose a home.  However, all situations are different, so you may see bad reviews from people that didn’t get approved.  Lenders are regulated by the government, so make sure they have a license number and are able to lend in your state.

You will want to get loan estimates from multiple lenders so you get the best prices.  When comparing the loan estimates you will want to do an apples to apples comparison.  Don’t compare a 4% rate with a 4.5% rate, nor a 15-year with a 30-year, make sure the terms are the same.  You could do the math, but they can give you multiple loan estimates for much easier comparisons.  If you look at the two pictures you will want to add up A. Origination Charges and B. Services You Cannot Shop For.  On the left we have a quote which would have fees of $564 whereas the other has fees of $929 ($275 + $654).

Recommendations

I recommend comparing lenders in a short period since the credit pulls will be combined.  In the 12 months prior to applying for a mortgage try to do as little with your credit as possible and improve your score.  I made a spreadsheet to compare the offers from nine lenders, but I think that was too many to juggle.  I’d recommend comparing four.

Better

I would start with Better since they allow you to control the terms and show you the price for each one.  They make it easy to choose your terms.  Furthermore, they have many incentives, such as a $500 gift card from WayFair if you fund your loan through them and a $25 Amazon gift card if you schedule a phone call.  I wouldn’t choose a loan based on that, but what they offer is the Better Price Guarantee which is that they will beat the loan of a competitor by at least $1000 or give you $1000.  This guarantee makes it one of the lenders you should definitely check out.

The service for Better was pretty good.  They have a tab showing my support team and an option to schedule a call.  There was really limited availability on it so I thought it wasn’t very helpful.  However, you can call and email your team anytime and they are there to answer your questions.  Since they use technology rather than sending you loan estimate after loan estimate they keep their prices pretty competitive.

Costco

Costco has a network of lenders who I assume are pretty good to be recommended by a company with great customer service.  In the end I went with one of these since they had the almost the best price and were very responsive to questions.  They work with nonmembers as well.

Others

Our builder had a preferred lender so we also checked that out.  Before they discounted the price on the home they offered to cover the title fees if you went with one of their preferred lenders.  In our case that lender couldn’t offer a rate as low as the one we found elsewhere.

Fixed or adjustable

You have to pay interest on the money you borrow.  A fixed-rate means your rate will remain the same throughout the term of the loan.  A 4% loan will still be 4% for your last month’s payment.  There is also an adjustable-rate which is locked for a period and then will fluctuate based on interest rates.  Given the same terms and same rate you should choose the fixed rate because it is safer if rates go up.  If rates go down you can always refinance.  However, usually an adjustable rate will have the lower rate.  You have to look at your situation and determine if you plan on living in the house long and are willing to take the risk of a huge change in the interest rate.

Term of the loan

If you go with a fixed-rate there is 30, 20, and 15-year terms.  I would recommend going shorter if possible because you’ll pay a lot less in interest.  You can pay around 55% more and be done paying in half the time.  For adjustable-rate loans there are 5/1, 7/1, and 10/1.  The first number is how many years your rate will be fixed before it fluctuates.  The second number is the frequency, in years, they will adjust the rate.

Paying points

You have the choice to pay points to decrease your rate.  For example, a lender may offer a 0.25% discount on the rate for half a point.  A point is a percent of the loan value.  So if your loan is $400,000 a point would cost $4,000.  In this case lets say paying $2,000 reduced your monthly payment by $40.  Your breakeven would be after 50 months, so if you think you’ll hang onto the loan for at least that long then it is worth paying the points.

Escrow account

Your lender will likely show your loan estimate with an escrow account.  This is an escrow account which holds money for your property taxes, property insurance, and maybe other things.  These are generally bills that are due once a year, but the escrow account makes you pay them monthly so the lender doesn’t have to worry about you not paying and the government taking a lien on your home.  If you want to waive that account it will likely cost you a quarter point.

Locking your rate

Your rate can fluctuate until you lock your rate.  You generally have to jump through many hoops before you can lock your rate.  There is a 30-day and a 45-day lock.  A shorter lock will likely have a better rate since the company takes less risk in the rate changing over the period.

Documentation

You will need A LOT of documents to get your mortgage.  The one your lender needs may very from the ones mine needs, but you’ll get the idea.

• Months of bank statements
• Identification
• Paystubs
• Signed contract
• Tax returns for two years
• Copy of earnest check

Once you give them all your documents they will begin the inquisition.  They will need you to explain all your recent credit inquiries and addresses.  If you have bigger transactions on your statements they will want to know why and where they came from if they are deposits.  The will untangle the web of your money and they to make sure you aren’t taking out loans that are not recorded on your credit.

Conclusion

I hope you learned something about getting a mortgage.  I would definitely give Better a shot at your business and will update you on whether they follow through on their guarantee.  Definitely shop around so you get a good deal and choose something that works for your needs.