Posted: 2019-11-20 | Author: Scott Roberts
Buying a home is one of the largest investments most people will ever make, and for the vast majority of homebuyers, taking out a mortgage will be a necessity. When you are working on a budget, it is important to keep your mortgage costs as low as possible. But to do this, you need to know how the system works and what you need to do to negotiate a better mortgage.
The word "negotiate" is a bit of a misnomer when it comes to mortgages. These days, borrowers do not negotiate mortgage rates the same way you would negotiate with a car salesman over the purchase price of a vehicle.
Some years back, the government started fining lenders for “disparate treatment” of customers. Disparate treatment with mortgages means essentially giving different mortgage rates to borrowers with similar traits and characteristics. So, you cannot expect a mortgage lender to negotiate rates if it would result in unfair treatment from one borrower to another.
All that being said, there is still some room for negotiation with closing costs and various fees, and there are many other ways borrowers can put themselves in the best possible position when securing a mortgage. This all starts with a thorough understanding of the important factors within your control that affect your mortgage rate, so you can take steps to address these factors before you start looking for a home.
• Your Credit Score: Your FICO score is a major factor in determining whether or not you can qualify for a mortgage, and the rate you will qualify for. In some cases, it may be worthwhile to delay buying a home for a while so you can raise your credit score and qualify for a better rate.
• Your Debt-to-Income (DTI) Ratio: Lenders will look closely at your current income and debt obligations to make sure you can afford the loan they will give you with room to spare. If your debt to income ratio is 50% or higher, you will have a hard time getting a mortgage. Ideally, your DTI ratio should be no higher than about 43%.
• Your Down Payment: A larger down payment gives you access to more loan programs. And if your down payment is at least 20%, you will not have to take out private mortgage insurance (PMI), which will save you potentially thousands of dollars on the cost of your loan.
A borrower who has a favorable credit score (say 760 or higher), low debt to income ratio (35% or lower), and a high down payment (20% or higher) will be optimally positioned to secure a better mortgage. Sometimes, lenders will work with borrowers like these by lowering various fees in order to earn their business. They know that this type of borrower can qualify for just about any type of loan, and this gives them more leverage to secure savings in areas where there is room to negotiate.
Shopping for a Better Mortgage
Whether you have all the factors working in your favor or there are some areas where you are less than perfect, it always pays to shop around for the best mortgage. This may seem like an obvious point, but studies show that not very many consumers actually do it.
Most borrowers (77%) apply with only one lender, and they take whatever rates, terms and conditions they are offered. This can be a very costly mistake, because although the going interest rate tends to remain fairly consistent between lenders, each lender has their own fee structures, programs they provide access to, etc. By settling with the first lender you apply with, your options are severely limited, and it will be much more difficult to get the best mortgage you can qualify for.
It is understandable that most consumers would not want to shop around and get quotes from multiple lenders. Talking to five or six lenders and applying for mortgages with all of them is very time-consuming, and the general assumption among consumers is that, at the end of the day, there won’t be much difference from one lender to the next.
A better way to shop for your mortgage is to work with a local lending expert. A local lending specialist has access to a wide range of lenders and can also provide access to all the loan programs that are available in your area. For example, even borrowers with a lower credit score, low down payment, and higher debt to income ratio may be able to get better terms and conditions through an FHA or VA loan. There are also down payment assistance programs and other specialized programs for those who qualify.
Not all banks and lending institutions have access to these programs, however, and if you talk to just one, you might miss out on a much better deal. By working with a local lending professional, you will know what all of your options are and be optimally positioned to negotiate the best mortgage for your situation.