Buying a home is one of the most significant decisions a consumer will ever make. Given what has occurred in the housing market during the past few years, consumers need to be well-informed when considering and managing a mortgage.
"It's important to thoroughly think through all the aspects of a mortgage, even if you have not yet applied for one," said Jonathan Miller, Deputy Director in the FDIC's Division of Depositor and Consumer Protection.
These tips may help you navigate the process, from preparing to be a homeowner to making your final payment.
Considering a Home Purchase
Think about what you can afford to spend on a mortgage and other living expenses. Based on your savings and your budget, ask yourself how much you can devote to monthly loan payments as well as related costs such as real estate taxes, condo or homeowners association fees, insurance (which may include mortgage insurance if you make a down payment of less than 20 percent) and home maintenance. The answers will help you determine whether to buy a home, how much to pay, and what type of mortgage will meet your needs.
Also make sure that after you make your home payments you will have a cushion of savings and income for other purposes. "It's important to keep in mind other financial goals and obligations you may have, such as saving for retirement or a child's education," said Glenn Gimble, an FDIC Senior Policy Analyst.
Order a free copy of your credit report before you apply for a mortgage. Review the report carefully to verify its accuracy and dispute any errors. Errors in your credit report may affect your credit score, and higher credit scores can mean lower interest rates. To order a free copy of your credit report from each of the three major credit bureaus every 12 months, and to purchase your credit score, visit www.AnnualCreditReport.com or call toll-free 1-877-322-8228.
If you have questions about your readiness for a mortgage, consider speaking with a reputable housing counselor.
"A good housing counselor can help potential borrowers prepare for homeownership," said FDIC Policy Analyst Matt Homer. To locate a counseling agency that is approved by the U.S. Department of Housing and Urban Development (HUD), see For More About Mortgages.
Looking for a Mortgage
Stick to your budget. "Borrow only what you can comfortably afford to pay," said Elizabeth Khalil, an FDIC Senior Policy Analyst. "Even if you are approved for a higher loan amount, consider borrowing less. You’ll save money in interest payments, plus you can avoid overextending yourself."
Make sure your mortgage loan originator is registered with the government. Go to www.nmlsconsumeraccess.org to conduct a free search of licensed and registered lenders.
Shop for a mortgage that meets your needs, and don't be afraid to negotiate.
"Lenders are required by law to provide important information to help you understand mortgage-related offers and compare multiple options," noted Luke Brown, an Associate Director in the FDIC's Division of Depositor and Consumer Protection. "We urge you to review these documents carefully and ask any questions that you have."
It's especially important to remember that nearly all of the terms of a mortgage, such as the interest rate and fees, are negotiable and lenders may not initially offer you the best package.
As you shop around, compare multiple options and scenarios and consider the following:
- Fees can vary widely from lender to lender. In addition, you may be able to purchase "points" to reduce your interest rate. Points have to be paid at the loan closing ("settlement").
- With interest rates currently at low levels, consider a fixed-rate loan even if an adjustable-rate mortgage (ARM) offers a slightly lower rate at first. If you are considering an ARM, ask the lender how high the rate may rise. Lenders also may offer variations that start with low payments and increase to much higher ones, with names such as interest-only loans, hybrid mortgages and balloon payment loans. These loans can carry significant risks for borrowers if they can’t make the new, higher payments.
- The Annual Percentage Rate (APR) represents the overall cost of the loan as a yearly rate and incorporates the interest rate as well as other costs, such as upfront points. "The APR is the fully-loaded price tag that conveys the total cost of a loan," says FDIC Senior Policy Analyst Kathleen Keest. "But keep in mind that if you are considering an adjustable-rate mortgage, the APR may not be as useful since it can change over time."
- Review all loan documents carefully. Within three days of applying for a mortgage, your lender must provide you a "Good Faith Estimate" of costs and additional disclosures of key loan terms. Also, before you go to sign the loan documents at settlement, the lender must provide the actual fees, which you can compare to what you received in the Good Faith Estimate.
- When loan documents are provided at settlement, review them to be sure that the terms accurately reflect the agreement you made with your lender. Only then should you sign.
Managing Your Mortgage
Establish a system for making your payments on time. Good choices may be automatic payments from your bank account or online bill paying.
Build a rainy-day fund. You may be able to rely on that to make mortgage payments if you fall on tough times.
If possible, consider paying off your mortgage faster. Doing so will reduce future interest costs and save you money. Consider adding extra money to each mortgage payment to reduce principal.
Carefully review all correspondence from your lender or servicer. If your loan is sold to a new servicer, for example, your new servicer will notify you where to send your mortgage payment.
Keep up with insurance payments and respond quickly to any notices regarding a lapse of coverage. If you fail to obtain required insurance or your policy expires, lenders may take out "force-placed" insurance on your behalf and pass along the cost, which is generally very high. But you can still obtain your own less-costly insurance policy so that the bank can cancel its force-placed policy.
Watch Out for Scams
Always be on guard against mortgage-related scams. Fraud artists typically make false promises to erase a bad credit history or rescue a home from foreclosure. But these claims often prove too good to be true. Look at these offers with a critical eye, and don't hesitate to seek assistance before committing to anything. Here, too, consider contacting your state or local consumer affairs department.
If you're struggling to make mortgage payments, immediately contact your loan servicer, perhaps with the help of a housing counselor, to discuss your options to stay in your home and avoid foreclosure. For additional guidance, see the FDIC’s foreclosure prevention online toolkit. You can also learn more about the government’s mortgage relief options on HUD's Web site.
Adapted from "Your Mortgage: Tips for Finding, Managing a Home Loan," an FDIC publication