Home Financing 

Thank you for visiting the mortgage section of our site.   Here you will learn how to Obtain The Best Mortgage at the Best Rates and how to put yourself in the Best Home Negotiating Position.

Obtain The Best Mortgage at the Best Rates
Most lenders talk to you about fixed, variable and other program types.  That’s all well and good, but unless you understand the concept of “Risk” to the lender, obtaining the “ Best Mortgage” at the “Best Rate” will be confusing and often unattainable.   Mortgage rates range from about 1% to about 12%.  The question is what mortgage program and rate do you qualify for? To obtain the best rates, please take a few minutes to review the content below.  

Why “Rate Shopping” is a bad idea.
Most consumers try to “shop” loan rates and choose their lender based on what the ad says, thinking this is the rate the lender will offer them.  By the way, when you speak to a lender’s representative on the phone, you are getting information similar to ad hype.  Rate Shopping via ads or lender reps is a bad idea.  Why?  Because there are many factors that go into a lender’s real rate offer.  Without a full application, the lender cannot offer you a rate.  In addition, rates change daily, so what you are quoted today may be very different when the lender is ready to lock your rate. Instead of rate shopping, work with a mortgage broker you trust.   Mortgage Brokers represent many lenders.  At American Dream, we represent over 100 lenders. In essence, we do the rate shopping for you.  If you doubt me on this one, go ahead and rate shop.   Ask the broker or lender if they will guarantee the rate they are quoting you.   Ask for it in writing.   They will not provide it because they can not, without first understanding the lender “risk” items below.

How Is Your Rate Obtained?
There are many factors that go into the rate you will be offered by the lender.   Understand this … rates are all about risk to the lender.   If you are a low risk, you get favorable rates.  If you are a high risk, you pay higher rates.  Simple as that.  There are 4 primary criteria used by lenders in determining your risk level:
1. Your ability repay the loan – Debt To Income Ratio (DTI)
2. Your history of paying on time – Credit score
3. Type of property – primary residence, 2nd home or investment
4. The amount of loan you are requesting compared to the value of the property – Loan To Value (LTV)
5. Loan features such as pre-payment penalties.
Let’s look at these one at a time.

Your Ability To Repay The Loan
Lenders are careful to ensure the borrower has the appropriate income to make the mortgage payments.   The “debt to income ratio (DTI)” is used to determine this.   To calculate your DTI, take your total monthly payments on housing, loans, credit cards etc. (not utilities and food) then divide by your gross monthly income (before taxes).   For example, if your bill payments add up to $5,000 per month and your gross income is $10,000 per month, your DTI is 50%.  You need a DTI under 40% to obtain the best rates, coupled with a good credit score.  If your DTI is higher than 40% you can still get the loan, but since you are a higher risk to the lender, you will pay a higher rate.    Your credit report will be obtained as part of the loan application process, telling the lender what you owe.   Your income will need to verified via W-2s and pay stubs.  Only after reviewing these documents can the lender determine your ability to repay the loan. Before obtaining your loan, do what you can to lower your DTI to under 40%.   It will be well worth it!

Your Payment History - Credit Score
Your credit score is arrived at via a complicated formula based on sometimes inaccurate information (your credit file), yet, it is the number 1 criteria used by lenders to qualify borrowers for mortgage programs.  Check your score and your credit file regularly to ensure the information is accurate.  If you find blemishes or inaccuracies, contact the responsible lender to correct the problem.   If you want a good mortgage rate, you must have a “good” credit score!   I use the term “good” score rather than a number because all loan programs have their own credit score requirements.  In short, the more risky the program is to the lender, the higher the score requirements.  Your credit score is obtained as part of the loan application process.

Type Of Property
Lenders offer the best rates on personal residences, then 2nd homes, and lastly investment property.  This is because lenders believe their risk is higher with investment property since an investment property is easier to walk away from if the borrower gets into financial difficulty.  You will have to indicate the property type on your loan application.

The Loan Amount Your Are Requesting – “Loan to Value” (LTV)
The LTV relates to how much you are putting down on the property.  The loan amount compared to the property value is the LTV.  For example, it you purchase a home for $200,000 and put 20% down ($40,000), the loan amount is $160,000.   $160,000 is 80% of the $200,000 purchase price, making the LTV 80%. The more you put down, the less risk to the lender, because if you don’t make your payments, the lender can foreclose and will likely recoup their investment.   Not so with a high LTV loan.   If your LTV is 100% (zero down) the risk is greater to the lender because if you fail to pay, they will not easily be able to sell the property and recoup their investment.  Higher risk means you pay more.  An 80% LTV is normal.  Hit that with a good credit score and a DTI under 40% and you’ll get a favorable interest rate.

Loan Features Such As Pre-Payment Penalties
Most borrowers say “NO” to pre-payment penalties.   After all, who wants to pay the lender money just for paying off the loan.  Seems to make sense but most borrowers don’t realize they pay more for a no pre-payment penalty loan. Why is this?  Simple.  The lender spends a fair amount of money originating your loan.  There are brokerage commissions, underwriting expense, etc.   The lender may not break even on the loan for period of one to three years, hence the pre-payment penalty.   If you are going to stay in your home for more than 1 or 3 years, you may be wise taking the pre-payment penalty.  Ask your broker the difference in your rate with and without the penalty. Prepayment penalties come in 2 flavors, “ hard” and “soft”. Hard means you pay the penalty regardless of how you get out of the loan. Soft means you pay the penalty only if you refinance, making it ok to sell the property without paying a penalty. Again, ask your broker about the savings over having no prepayment penalty and decide from there.

In summary, the items above impact your ability to qualify for the “Best Interest Rate”.  Go to a broker you trust who will take your application, openly discuss these items with you and will then shop the best loan based on your specific circumstances.  So now you know.   Remember, “Rate Shopping” can be hazardous to your financial health.

Put Yourself In The Best Negotiating Position – Obtain a Pre-approval Letter!

Great … you decided to look for a new home.   Before you do, make sure you obtain a mortgage pre-approval letter.  Your negotiating position will be significantly enhanced if you do.  Why?  Sellers want to be assured that if they enter into a purchase agreement with you, that you will be able to obtain the financing to complete the purchase.   This is because once the seller signs the purchase agreement, the home is effectively off of the market.   If you are unable to secure your financing, the seller risks losing valuable time as well as well qualified buyers.  The pre-approval letter provides the seller assurance you can complete the purchase.   The more comfortable the seller is with your ability to complete the purchase, the more apt they are to negotiate price.  

A pre-approval letter is more than pre-qualification.  You will be required to make a complete application and your credit score will be obtained.   The lender or broker will review your application, credit score, debt to income ratio and approximate loan to value to determine if they can provide you a pre-approval letter.  Please note, the pre-approval letter is NOT a guarantee that you will obtain the loan, but it goes much further than a pre-qualification letter which simply provides information the prospective borrower provides.