The bill for closing costs is the final hurdle between home buyers and their new homes, and it can represent a surprising chunk of money. Closing fees run between 3% and 6% of the mortgage; that’s around $9,000 to $18,000 on a $300,000 home.
The impulse to just pay up and move in is understandable, but you wouldn’t buy a car or a TV without researching prices on other, similar products. Same goes here. Serious homebuyers do their homework well before house shopping or making an offer.
Loan officers aren’t all-knowing. Therefore, shrewd borrowers do their homework to truly understand the pros and cons of the different mortgage products available in the marketplace. Borrowers can get an assist in this department by paying fees to mortgage brokers, who can source suitable lenders and help facilitate the transactions. But such brokers also take fees from lenders, in exchange for sending business their way, so it’s important for borrowers to look at recommendations with a critical eye, rather than blindly taking a broker’s advice.
Your closing costs are technically first itemized in the three-page “Loan Estimate” form that your lender must produce within three business days after you apply for a mortgage. It’s a little-known fact, but some lenders will give you a Loan Estimate form even before you apply for a loan, although it’s not required. Note: You’ll receive a final “bill,” called a “Closing Disclosure” form, three days before closing.
The Loan Estimate lets you comparison shop between companies’ total costs and also dig into specific fees once you’ve chosen a lender.
You need the legally binding Loan Estimate to compare costs, not the “closing costs worksheet” or a “fee itemization” that some lenders offer.
Credit scores help lenders determine who qualifies for loans, and the interest rates they’ll pay. Generally speaking, the higher the credit score, the better the terms. For this reason, borrowers should take the initiative to scrutinize their credit reports at least six months prior to applying for a mortgage, to give them enough time to correct any visible errors.
The process of applying for a mortgage loan does ding your credit score slightly, but when a lender checks your credit, that opens a two-week window during which subsequent credit checks have no adverse effects on your score. So spend that two weeks comparing as many lenders as possible. Negotiate for the best possible terms; don’t be afraid to tell one lender what another is offering to see if he’s willing to beat the deal.
Borrowers that are happy with the proposed terms should request written lock-ins or “rate locks” on the LE, that includes the agreed upon rate, the time period of the loan, and the number of points (if any) to be paid. Most lenders charge a nonrefundable fee for locking in these terms, but given the speed bumps that can occur on the road to approval, it’s often well worth it.
After settling on a particular lender, a borrower then obtains a pre-approval letter, which is a legally binding agreement to lend money, that lenders grant borrowers, after all, income verification, credit checks, and funding are secured.
Borrowers can cultivate an idea of what lenders are generally offering by conducting digital searches and using mortgage rate calculators. However, it’s important to note that interest rates fluctuate and that different lenders may offer promotions for certain loan products.
When choosing a lender, customer service is key. After all, applying for a loan requires substantial paperwork and information collection. Having a reliable point of contact to answer questions goes a long way toward easing this onerous experience. This will also ensure approval schedules stay on track, and that all final documentation is signed and executed by all relevant parties in a timely and efficient manner.
Shopping for the best mortgage rate requires discipline and focus. Borrowers must thoroughly understand the terminology, choose the kind of mortgage that best suits them, and factor all costs and fees into their decisions. A mortgage is something borrowers will live with for years to come, therefore it’s crucial to choose wisely.