How and Where Should You Shop for a Mortgage Loan?

You might start by looking for a mortgage at the bank where you have your checking or savings account. But don't limit yourself. A wide variety of institutions make home mortgage loans, including savings and loan associations, commercial banks, mutual savings banks and mortgage companies. The mortgages these institutions offer will have varying features. One way to find the creditor with the most attractively priced loan is to look in your local newspaper; check to see if it publishes a shoppers guide to mortgage credit. These shoppers guides are available in many localities and can be used to identify the lenders with low rates. But, basically, the way to find the loan with the most attractive terms is to shop around.

You should have in mind some of the things to look for in a mortgage loan. For example, what types of loans are available from a given institution? Does the lender make privately or federally insured or guaranteed loans? Some lenders offer mortgage loans backed by a federal agency such as the Federal Housing Administration (FHA loans) or the Department of Veterans Affairs (VA loans). Loans that are not government-insured or guaranteed are called conventional mortgages. Insured mortgages may be more attractive than conventional mortgages in some ways - such as lower downpayment requirements. But, they may be more restrictive in other ways; for example, they may be available only for certain kinds of homes, or for properties whose value is below a specified price.

Other factors important to your mortgage decision are the length of the loan and the downpayment required by the lender. The longer the term and the larger the downpayment, the smaller your monthly payments will be. The interest rate is important too, and in some cases the amount of the downpayment will influence the interest rate that you pay (the larger the downpayment, the lower the interest rate). In addition, mortgage loans may have interest rates that will stay fixed for the life of the loan (fixed-rate mortgages), that may change (adjustable-rate mortgages). The initial rate of an ARM is generally lower than the rate available on a fixed-rate mortgage; but remember, the rate may change during the lifetime of the loan. Don't hesitate to ask the lender how one loan differs from another, how the different features of the loan will affect the mortgage, or whether your chances to qualify would improve if you made a higher downpayment.

When you're shopping around, you will find that some home mortgage lenders have special programs to assist veterans, low-income or first time home buyers. Ask the lender if such programs are available.

How Do You Apply For a Mortgage Loan
and How do You Determine How Much You Can Afford to Spend?

The mortgage application process requires considerable paperwork. First there is the application form, which asks for detailed information about you, your employment record, the house you want to purchase, etc. The lender will need documentation pertaining to your personal finances - your earnings, your monthly expenses, and your debts - to help gauge your willingness and ability to repay the mortgage.

Lenders also will examine your credit record to learn if you pay your bills on time. A lender may reject your application if the report shows that you have a poor credit history. Thus, you may want to make sure your credit record is accurate before you apply for your mortgage. You have a right to know what information is contained in your credit report and to have someone from the credit bureau help you understand what the report says. The names of credit bureaus can be found in the phone book.

You can prepare for questions about your financial condition by using the following worksheets. Worksheet 1 helps determine how much money you might have available for a monthly payment - just list all items of income and payments required on debts that won't be paid off within ten months. There's also a place for the estimated mortgage payment quoted by the lender.

To figure the mortgage payment, the lender will begin by asking how much you want to borrow. The maximum loan amount will be determined by the value of the property and your personal financial condition. To estimate the value of the property, the lender will ask a real estate appraiser to give an opinion about its value. The appraiser's opinion can be an important factor in determining whether you qualify for the size mortgage you want. Lenders usually will lend the borrower up to a certain percentage of the appraised value of the property, such as 80 to 90 percent, and will expect a downpayment making up the difference. If the appraisal is below the asking price of the home, the downpayment you planned to make and the amount the lender is willing to lend you may not total enough to cover the purchase price. In that case, the lender may suggest a larger downpayment to make up the difference between the market value (asking price) of the house and the property's appraised value.

When looking at your projected mortgage payment and existing debt, some lenders might use ratios such as "28 and 36" to determine whether you qualify for the loan. These are commonly used rations. In this formula, the 28 refers to the percentage of your gross income (before taxes) that may be spent on housing expenses, including principal and interest on the mortgage, real estate taxes, and insurance. The 36 refers to the income that may be spent for payments on all your debts (including the mortgage): The monthly payments on your outstanding debts, when added to the monthly housing expenses, may not exceed 36 percent of your gross income. When you talk to a lender, find out what ratios will be used to evaluate your application. Then use the Worksheet to calculate whether you are within the lender's guidelines.

Be prepared to provide certain documentation about your income (W2s for prior years and year-to-date pay stubs), current debts (account number, outstanding balance, and creditors address for each), and the purchase contract for the home you want to buy.

When you file your application, ask the lender how long the approval process will take.

The time may vary depending on the complexity of your mortgage, current market conditions, and whether you have to provide additional information. It's common for a decision to be made within 30 days after the lender receives all the necessary information.

Applications for FHA or VA loans may take longer.