First-time buyer or seasoned homeowner, we can all benefit from staying up to date on the basic principles of mortgage lending. From understanding best practices to getting the most competitive rate and terms for your financial situation, keeping up with the latest information is no easy task. We spoke with Jeff Brown, Regional Mortgage Sales Manager, Mid-South for TD Bank, for a refresher course on the home mortgage lending process.
What’s a good starting point for someone looking to buy a home?
Getting in touch with a qualified lender should be the first step in the homebuying journey. Lenders can provide an accurate description of what the borrower can afford, including what closing costs may entail. They can also provide insights on down payment assistance programs, which can reduce the upfront cost of a home purchase.
Lenders can also walk prospective homebuyers through a variety of mortgage options and scenarios to identify which is best suited for their needs, before the homebuying process is set in motion. Ultimately, choosing a mortgage loan type comes down to the unique personal financial situation of the homebuyer.
How can borrowers position themselves to get the best interest rate?
There are a few early steps borrowers should consider to qualify for the most competitive mortgage rate possible -- including reducing debt-to-income (DTI) ratio and improving their credit score. DTI is calculated by taking all monthly payments including credit cards, auto loans, student loans and proposed mortgage payments and dividing the total by the borrower’s monthly income.
Most lenders look for the ratio to be 43 percent or lower, but this requirement can vary based on the particular lender. Exceptions are also sometimes made for first-time homebuyers, if their credit is in good standing.
In order to improve DTI ratio, borrowers should start by reducing debt -- paying off credit cards or other loan balances and closing unused credit lines. They should also look at various mortgage products, such as adjustable-rate mortgages, FHA and different loan terms, including 30-year, 20-year and 15-year loans. Considering various products is an important part of securing the most competitive rate for a borrower’s situation.
Who may be best suited for a 15-year mortgage term?
With a 15-year term, the borrower’s interest rate is likely lower than with a 30-year term, so this is a good option for those who are looking to pay off the loan more quickly and reduce their overall interest expense.
Additionally, if building fast equity quickly is a priority for the borrower, a 15-year mortgage can often be a more efficient way to accomplish this goal. However, extending the length of a loan with a 30-year mortgage can also provide homeowners with financial flexibility due to a lower monthly mortgage payment. There is no one-size-fits-all answer — the best option ultimately depends on the borrower’s unique situation as well as their short- and long-term financial goals.
What’s the most important factor to consider when deciding on the best mortgage term?
The most important factor consumers should consider with any loan is how it fits within their monthly budget and if it ensures they can comfortably afford the payment. Once that budget is determined, consumers should discuss it with a mortgage professional for additional insight to determine which loan option best fits their needs.
As with any home purchase, a borrower should be able to answer the question of how long they plan to reside in the home. This helps determine whether a short- or long-term financing option might best meet their needs.
What if someone is looking to refinance — what are the benefits and how does it work?
Refinancing may be a good option for borrowers looking to lower their interest rate, update their mortgage terms, consolidate debt or tap into equity. Ultimately, refinancing should strengthen a borrower's financial position and meet their unique financial goals. Timing and personal finances are important considerations in making this decision, as refinancing is not the best option for everyone.
For example, if you are planning to move soon, it may not be beneficial to refinance, because you may not be in the home long enough to reap the benefits of cost savings. Or if current interest rates aren't significantly lower than your existing interest rate, refinancing may not make sense. There may be other home lending options that would meet your short- and long-term needs better. It's a lot to unpack, which is why discussing your situation and goals with an experienced mortgage professional is always best.
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Generally, the process of refinancing a mortgage is the same as buying a home and includes completing a mortgage application, providing a credit report, and having the property appraised. It’s important to consider closing costs associated with refinancing, which are generally between one and three percent of the amount of the new mortgage. These costs can be paid out of pocket at closing, or rolled into the new loan amount if the borrower has enough equity in their home. Again, speaking with a qualified lender is the best way to determine what works for each borrower.
Jeff Brown, Regional Mortgage Sales Manager, Mid-South, TD Bank
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