Before the House Hunt Begins, Fix Your Credit. When buying a home and applying for a mortgage, a good credit score is critical. A home can be purchased with less than stellar credit, but often at interest rates and terms that aren’t to your advantage. Improving a damaged credit score is something that takes time, patience and must be addressed long before making the move to apply for a mortgage.
Compare interest rates, terms and fees among mortgage lenders. Shopping lenders gives you perspective on what’s available to you. If you have credit history problems, you will pay higher interest rates, but federal law caps the maximum rate above the prime lending rate at 6.5% for first mortgages on a home. Also, by law, once you fill out a mortgage application, the lender must supply you with a loan estimate (LE) within three business days. That disclosure should have all the terms of the mortgage. If it’s unreasonable, go elsewhere.
Agent Rebates. The real estate commission rebate is a tool that a buyer’s agent may utilize to compete on price by refunding part of their commission back to the buyer client. Typically, the commission rebate is applied to alleviate the closing costs. It is reflected in the closing disclosure as a rebate from the agent to the buyer. Laws regarding this practice differ by state so review this policy with your agent before the closing.
Down Payment Assistance. These programs are designed to help you meet minimum down-payment requirements or make home ownership more affordable by adding to what you have already saved. They are often, but not always, restricted to first-time home buyers. Each state administers its own program with its own requirements. Check with your mortgage lender for local rules on this assistance.
Avoid Private Mortgage Insurance (PMI). To minimize risk, a mortgage company wants the buyer to invest as much as possible. Although some lenders will loan up to 90 percent of a home’s value, most prefer 80 percent. If a buyer puts 20 percent down on the property, the mortgage company is satisfied that the buyer has enough stake in the home to lower the default risk. If the buyer puts less than 20 percent down, the mortgage company will take out an insurance policy known as Private Mortgage Insurance (PMI) protecting it from default, requiring the buyer to pay the monthly premiums.
