With about 1,000 mortgages under his belt over the past 20 years, Jay Goldberg, a mortgage broker at Union Bank in Los Angeles, has seen firsthand how the market ebbs and flows and what that means for homebuyers and refinancers. “Ten or 12 years ago, in the Great Recession, self-employed and professional clients were having a tough time, as qualifying for a loan wasn’t easy. Today, clients are qualifying, but it’s challenging to find a house to buy,” says Goldberg.
Indeed, the supply of available housing is constrained (the National Association of Realtors notes that the U.S. has under-built housing by at least 5.5 million units), making it tough to find houses, even as mortgage rates remain near historic lows (some 15-year rates are near 2%, and some 30-year rates are near 3%, as you can see here). In other words, it can be a tough housing market to navigate. So we asked Goldberg, and some other pros, what aspiring homebuyers need to know before they get a mortgage now.
1. Consider the type of loan you need before you shop around
“Many clients rush to shop for rates before they consider what type of loan best fits their current financial needs,” says Goldberg. First-time homebuyers might want to look at FHA loans, which can come low rates and a down payment as low as 3.5% of the purchase price, and veterans may want to consider VA loans, which sometimes require no downpayment. Meanwhile, thanks to today’s very low rates — some 15-year rates are near 2%, and some 30-year rates are near 3% — buyers of a primary residence or vacation may want a conventional, fixed-rate mortgage. And adjustable-rate mortgages (ARMs) may make sense for someone who is planning to move relatively soon after buying. Some things to consider when looking at loans: Your career trajectory, income expectations, possible inheritance, short-term versus long-term cash flow, expected family size, likelihood of moving and other variables, he adds.
Once you know what type of loan you need, shop around. Greg McBride, chief financial analyst at Bankrate, recommends getting quotes from 3-5 different lenders, and looking not only at the interest rate they offer, but also the terms and fees.
To make sure you don’t fall victim to mortgage mistakes, we’ve outlined the top nine things to look out for when applying for a mortgage.
2. Address income complexities ahead of time
More and more people are self-employed or working in the gig economy — which is great, but can make it harder to get a mortgage. “In a very competitive market, sellers and listing agents often insist on quick closings. That’s not a problem if a borrower’s income comes from a simple pay stub, but if there is any income complexity, the client and mortgage consultant should work to assemble a complete file before writing offers,” says Goldberg. This will prevent a lot of stress and late nights during the home purchase process. This guide can help those with irregular income navigate the mortgage process.
What’s more, it’s important to know that lenders look beyond just income at your debt-to-income ratio, which is all of your monthly debt payments divided by your gross monthly income. “If your total monthly debt payments are 35% or less of your income, it’s a favorable sign,” says Holden Lewis, mortgage experts at NerdWallet. You’ll also want a high credit score (740 or above is ideal) and to ensure you have plenty of savings.
3. Talk to your financial and tax adviser before buying a home
Goldberg advises that “clients should talk to their financial and tax advisers” before buying a home. Asking whether you can afford to buy a home, if you have enough saved, whether the home fits into your future financial plan, what the tax implications might be, and more are all imperative questions you should run by your advisers. You can get matched with a financial adviser who meets your needs here.