7 Essential Tips for Getting a Mortgage that Saves you Money in 2014
With new mortgage rules set to take effect and rates ready to climb, you may feel like your chances of getting an affordable mortgage are over. The good news is it is possible to get a mortgage that saves you money this year, as long as you keep your finances in order, work hard to get the best rate possible and be ready to grab a deal when you see it.
1. Make sure your finances are documented
In 2014, lenders will undergo extra precautions during underwriting, thanks to new mortgage regulations requiring that lenders verify and document that borrowers have the ability to repay their home loans.
Borrowers who are self-employed or do not receive regular income through W-2s should expect more difficulty, and may have trouble. Don’t get left behind while lenders search for better applicants; the eight factors below will be carefully reviewed by your lender. Prepare to explain any unusual deposits in your accounts, and keep good records of your finances leading up to the application.
Factors to watch:
- Income: Have documentation to show a trail of income, and be ready to explain income or assets that don’t fall into a regular category, like a gift.
- Employment: Your lender will check that you have a stable job and review your employment history.
- Credit history: Check your credit reports and fix any red flags before you start your search for a mortgage.
- Monthly payment: This is a new and important factor, as lenders will look at how affordable the proposed monthly payments will be to you.
- Debt-to-income ratio: Your debt-to-income ratio must be less than 43% under new mortgage rules. While there is some flexibility, lenders will not be willing to move past this much.
- Mortgage terms: Qualifying loans cannot exceed 30 years.
- Points and fees: New Qualified Mortgages cannot include fees or points exceeding 3% of the loan amount.
- Risky features: You will have a great deal of trouble getting approved for mortgages with risky features, such as interest-only periods.
2. Check current mortgage rates and lock in as soon as possible
Keep an eye on the market, as mortgage rates are expected to climb in 2014 as the Federal Reserve reduces its bond-buying program. Stay aware of current mortgage rates and lock in as soon as you’re comfortable.
3. Your bargaining power will increase
As mortgage rates continue their climb, lenders will lose an even greater share of their refinance business. That means they’ll turn attention instead to home buyers and compete for their business. Use this increased bargaining power to your advantage and shop around for the best deal. Make sure you look at more than the interest rate before choosing a mortgage.
4. Put effort into improving your credit
You’ll find it next to impossible to get a mortgage without good credit. This doesn’t mean you should focus only on qualifying, though. Increasing your credit score just a few points could push you past a threshold into a better interest rate, saving you thousands on interest over the course of your loan, or hundreds up-front in closing costs.
5. Lower your debt-to-income ratio
Lenders won’t want to give you a loan if you will have very little cash left over each month after paying your mortgage and debt obligations like student loans or credit card debt. If your debt-to-income ratio is too high, lenders may refuse you outright, or you may not qualify for a loan with the best rates. Keep your monthly debt obligations to a minimum: aim for less than 40% of your gross income.
6. Consider alternative mortgage options
If you really want to save money on your mortgage, you may want to take advantage of options like adjustable rate mortgages, or ARMs. This option isn’t for everyone. If you plan to stay in the house for 7-10 years, you may get a lower rate by opting for a 7- or 10-year ARM rather than a 30-year traditional fixed rate mortgage. Rates on ARMs are up to 1% lower than fixed rate mortgages now. If you don’t know how long you plan to keep the house, a fixed-rate loan is the safer choice.
7. An FHA loan may be more expensive
FHA loans have long been popular with first-time homebuyers, and they’ve been viewed as the first choice for many years. While these loans have lower down payment requirements and less strict underwriting standards, this comes at a price. Mortgage insurance premiums on FHA mortgages are expected to rise this year, and borrowers are now required to pay mortgage insurance for life unless they refinance into a different mortgage later.
Don’t assume an FHA loan is the mortgage option that will save you the most money. Try qualifying for a convention loan first and compare your options.
Above all else, don’t panic and assume a mortgage is out of your reach or that you need to rush your decision. Yes, rates will climb this year. Don’t assume you have to buy now. If you’re shopping for a home, do your best to move quickly but keep in mind this is a major decision. Only get a mortgage when you’re ready, and take these steps to save yourself money in the process.