This guest post is from Shizane over at www.savingadvice.com. I think that anyone getting started in buying a home should read this. Even if you have bought a home before, this post is a great refresher on the ins and outs of getting a mortgage. I knew about floating a rate, shopping title companies (never allowed in the states we're in), but I hadn't ever considered a soft prepayment option. Anyway I think this is one of the better posts about how to shop for a mortgage.
Tips for Getting the Best Possible Mortgage
1. Choose a mortgage broker first and let him choose your real estate agent. A mortgage broker’s bread and butter usually come from realtor referrals. Allowing your mortgage broker to choose your realtor, contingent upon your approval, is a dream come true for your broker!
This will more than likely yield you a better deal with the mortgage broker. He won’t be as concerned with making a large profit from you as he now expects to get several referrals sent to him from the real estate agent he referred you to. It’s an I’ll scratch your back if you scratch mine business.
Understanding this concept can buy you leverage. Just make sure you convey to your broker that you understand how the business works and you expect better loan terms because of your generosity.
NOTE: Get a copy of your appraisal and credit report from your broker. Should you have to switch to another broker, this will save you money and speed up the process. Credit reports are good for 90 days and appraisals are good for 180 days. Also, never give your broker original copies of any of your documentation. Again, this makes it more difficult and delays the process of switching brokers.
2. On the day and time you are ready to lock your loan, get a good faith estimate from another lender. On the day your mortgage broker is ready for you to lock your rate, you and he may have already discussed what lender he will use to obtain your loan. That particular lender may have had the best rates when your broker looked them up yesterday or the week before, but things may have changed today.
In fact, due to market fluctuations that can occur multiple times a day, it is imperative you have your broker get rate quotes from at least one other lender he had compared in the past. This comparison will need to be timed as closely together as possible, which will help to ensure an apples-to-apples comparison and feel confident you are getting the best possible deal.
3. It may be wise to shop around for a title company and appraiser. Mortgage Brokers often refer their clients to the same title companies or appraisers. In some cases it may be advantageous of you to use the recommended appraiser or title company due to a good working relationship between the parties; however, this does not mean you can’t have a smooth transaction with other third parties just because your broker doesn’t normally work with them.
I would suggest calling around to get price quotes. Chances are you will find a cheaper appraiser and/or title company.
4. If you have excellent credit, advise the broker of it during your initial interview process. Besides informing your mortgage broker that he can choose your realtor, letting him know your credit is superb may also help to persuade him into giving you favorable terms that he may not offer to anyone else.
Often, a person with excellent credit will not have as many roadblocks in regards to getting a lender’s underwriter to accept the loan applicant. This makes your broker’s job easier. On this flip side, if your credit isn’t so hot and you would like to use a service to improve your credit score, let him know he can pick out the credit improvement company contingent upon your approval.
Your broker does not (should not) receive a kickback from the credit improvement company because kickbacks are illegal. Again, this is an I’ll scratch your back if you scratch mine business. Your broker now may receive a referral in return from the credit improvement company. Understand this and use it to your maximum advantage!
5. You may want to consider accepting a soft prepayment penalty. It may sound counter-intuitive to request a prepayment penalty to be in your contract, but in some cases, this may save you money. By having a soft prepayment penalty clause in your contract, you are agreeing the loan will not be paid off in full or extra payments you make will not reduce your loan by more than 20 percent during a 12-month period. This is typical, but always check what the rules are.
Soft prepayment clauses usually last only 36 to 60 months. This option is great when interest rates are historically low and you are unlikely to refinance during the agreed time period. The soft prepayment penalty, however, should allow you to sell your home at anytime without incurring a penalty. Should the situation arise where you have to pay your prepayment penalty due to a breach of contract, expect to pay around 6 months worth of mortgage interest.
6. So how does a soft prepayment penalty save you money? It is not unusual to reduce your interest rate by up to .25 percent on a 30 year fixed mortgage! The lender offers this because they are increasing their chances you will keep your loan with them longer, thus increasing their profits in the long run.
This can make a sizeable difference on your payment and increase YOUR savings in the long run. But don’t expect you broker to tell you about this option! In fact, many unscrupulous brokers will add this soft prepayment penalty in your contract without telling you about it and keep the money you would have saved on your loan.
NOTE: There is something called a hard prepayment penalty. Avoid this at all costs. It is not advantageous in any way to accept one of these. The only reason you should ever accept this is in cases where your credit is poor and this is the only way a lender will do business with you.