If you are thinking about buying your first home or have experienced credit problems, you may want to get a mortgage quote before wasting time looking for a home you may not be able to afford.
The Mortgage Quote Advantage
A lender will look at your debt-to-income ratio and determine if you current income is sufficient to cover your living costs, payments on outstanding debts, and the cost of a monthly mortgage payment. In general, they will be estimating that you should be able to budget about 28 percent of your monthly income toward housing, and your mortgage payment plus your other debts, like credit cards and car payments, should not exceed 36 percent of your gross income. The balance of your money is budgeted to cover taxes, utilities, food, day care, etc.
The lender will also look at such things as:
- Length of employment
- Credit History
- Stable employment history
- Amount of cash available for a down payment
- Type of dwelling you wish to purchase
- Term of the loan (10-year, 15-year, 30-year)
- Type of loan (FHA, ARM, fixed)
He will also ask for a general idea of how good your credit rating is or get your permission to pull a credit report. The better your credit rating, the lower the interest rate you are apt to pay.
Once the lender has this information, he will quote you an interest rate and tell you what your monthly mortgage payments would be based on the information you have provided him. A lender can also tell you, based on the same information, how much you can afford to spend on a home, which can help you narrow down your search for a home to only those homes within your price range.
While a mortgage quote can provide you with the comfort of knowing that, in general, you qualify for a loan, it is important to note that the interest rate quoted, and therefore the monthly payment quoted, comes with an expiration date. Interest rates fluctuate constantly, and the lender will only guarantee the rate quoted for a specific amount of time.
Mortgage quotes also come with strings attached, and these strings often come in the form of closing costs, property taxes, home insurance, and private mortgage insurance (PMI). These additional costs are not usually added into the mortgage quote and can add up to significant dollars. For this reason, do not feel pressured into buying the most house you can afford, especially if you feel your budget will already be stretched by the payment of just the monthly principal and interest.
It is also important to note that not only do interest rates fluctuate between lenders, so do fees. One lender may charge a fee a low as a few hundred dollars to process your loan while others may tack on several thousand. For this reason, it is important to shop around for the best mortgage quote.
Another caution is that a quote is not set in stone. Many factors can influence the final interest rate you will pay; in fact, you may end up finding a home to purchase only to discover your lender will not finance it. Some things that may affect your financing would include:
- Credit report does not agree to your assessment of your credit worthiness.
- The home does not appraise for as much as the contracted price.
- You are unable to come up with the full down payment used in the calculation of the quote.
- You find a home after the expiration date of the original mortgage quote.
- The home is located in a high crime or run down neighborhood.
- You have underestimated your outstanding debts.
- You failed to mention a foreclosure or bankruptcy.
- The lender is unable to verify your income.
Mortgage quotes are a terrific tool for estimating how much you can afford to spend on a home, but it is wise to keep in mind that the quoted monthly payment and/or interest rate may be less than what you actually end up paying.