As a Minnesota consumer, it’s important to enter the mortgage selection process with a firm grasp on which financial arrangement will work best for your household. The following steps are an excerpt from the Consumer Financial Protection Bureau’s Home Loan Toolkit; a clearly written and invaluable guide for home loan shoppers. The complete toolkit, including financial worksheets and valuable tips, is available as a download (in PDF).
Step 1 – Define What Affordable Means To You
“Only you can decide how much you are comfortable paying for your housing each month. In most cases, your lender can consider only if you are able to repay your mortgage, not whether you will be comfortable repaying your loan. Based on your whole financial picture, think about whether you want to take on the mortgage payment plus the other costs of homeownership such as appliances, repairs, and maintenance.”
Use these worksheets (in PDF) to estimate your ideal mortgage payment.
Step 2. Understand Your Credit
“Your credit, your credit scores, and how wisely you shop for a loan that best fits your needs have a significant impact on your mortgage interest rate and the fees you pay. To improve your credit and your chances of getting a better mortgage,get current on your payments and stay current. About 35% of your credit scores are based on whether or not you pay your bills on time. About 30% of your credit scores are based on how much debt you owe. That’s why you may want to consider paying down some of your debts.”
Instructions on how to obtain your credit report and correct errors is available here (in PDF).
Step 3. Pick Your Mortgage Type – Fixed or Adjustable
“With a fixed-rate mortgage, your principal and interest payment stays the same for as long as you have your loan. Consider a fixed-rate mortgage if you want a predictable payment. You may be able to refinance later if interest rates fall or your credit or financial situation improves.
“With an adjustable-rate mortgage (ARM), your payment often starts out lower than with a fixed-rate loan, but your rate and payment could increase quickly. It is important to understand the trade-offs if you decide on an ARM. With an ARM your payment could increase a lot, often by hundreds of dollars a month. It’s important to make sure you are confident you know what your maximum payment could be and that you can afford it.”
Step 4. Choose The Right Down Payment
“A down payment is the amount you pay toward the home yourself. You put a percentage of the home’s value down and borrow the rest through your mortgage loan.”
Learn more about how your down payment will affect your total loan package using this easy to follow chart (in PDF).
Step 5. Understand The Trade-Off Between Points And Interest Rate
“Points are a percentage of a loan amount. For example, when a loan officer talks about one point on a $100,000 loan, the loan officer is talking about one percent of the loan, which equals $1,000. Lenders offer different interest rates on loans with different points.
“There are three main choices you can make about points.
- You can decide you don’t want to pay or receive points at all. This is called a zero point loan.
- You can pay points at closing to receive a lower interest rate.
- Or you can choose to have points paid to you (also called lender credits) and use them to cover some of your closing costs.”
See an example (in PDF) that demonstrates the trade-off between points as part of your closing costs vs. interest rates.
Step 6. Shop With Several Lenders
“You’ve figured out what affordable means for you. You’ve reviewed your credit and the kind of mortgage and down payment that best fits your situation. Now is the time to start shopping seriously for a loan. The work you do here could save you thousands of dollars over the life of your mortgage.
- Make a list of several lenders you will start with. Mortgages are typically offered by community banks, credit unions, mortgage brokers, online lenders, and large banks.
- Get the facts from the lenders on your list. Find out from the lenders what loan options they recommend for you, and the costs and benefits for each. For example, you might find a discount is offered for borrowers who have completed a homebuyer education program.
- Get at least three offers—in writing—so that you can compare them. Ask at least three different lenders to give you a Loan Estimate, which is a standard form showing important facts about the loan.
- Compare Total Loan Costs. Total Loan Costs include what your lender charges to make the loan, as well as costs for services such as appraisal and title.”
Use this chart (in PDF) to easily compare your mortgage offers.
Step 7. Choose Your Mortgage
“Once you have found your best mortgage, the next step is to tell the loan officer you want to proceed with that mortgage application. This is called expressing your intent to proceed. Lenders have to wait until you express your intent to proceed before they require you to pay an application fee, appraisal fee, or most other fees.”
Step 8. Avoid Pitfalls And Handle Problems
“Even the best prepared consumer can run into problems during their loan process. It’s important to be aware of how to smoothly navigate any potential setbacks.”
Learn more about how to deal with mortgage issues like lending discrimination, predatory lending and more with this easy flow chart (in PDF).
The Consumer Financial Protection Bureau is a federal agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. Have a question about a common consumer financial product or problem? You can find answers by visiting consumerfinance.gov/askcfpb.