There’s a good chance that your home will be the biggest purchase you make in your lifetime, which is why you’ll likely need a mortgage loan when it comes time to buy. And when it does, you surely want to work with a mortgage lender you can trust with this massive undertaking.
It’s your hard-earned money, after all, and finding the right lender can go a long way toward eliminating financial stress.
However, even the most trustworthy bankers and lenders may know a thing or two about the mortgage process that they aren’t telling you. Here’s what you need to know.
You don't need a perfect credit score
It stands to reason that you will need a pretty decent credit score when it comes time to secure a mortgage at a good rate. It’s only fair, given how much cash your lender is forking over and the risk they’re taking on your behalf.
Still, that doesn’t mean you have to have a credit score of 800, which is aspirational for many people but not easy to attain. Rather, you can score a mortgage with a credit score of 680. And even if your score is as low as 620, there are special loans that can still help you secure the financing you need.
There's no such thing as “no closing costs”
If it sounds too good to be true, it probably is, and that very much applies to so-called no closing cost mortgages. These are offered by bankers and mortgage lenders to get clients in the door, as folks might think they’ll save money this way.
The thing is, there’s a good chance a lender offering this kind of financing is jacking up your interest rates to help them recoup costs. But this might wind up costing you more in the end. You may as well opt for the traditional mortgage with a better interest rate.
You can make extra principal-only payments
Your mortgage lender might not clue you in on this, but you don’t have to strictly stick to the payment plan you set up for your loan. Before you get too excited, you can’t just miss a payment without consequences, so never do that.
You can, however, make extra payments over the course of your mortgage that you designate to pay principal only. You may even wind up paying your mortgage off faster just by adding one full principal-only payment per year. That could one of the smartest money moves to make before the next recession.
A 30-year loan isn't your only option
When borrowing an amount of money that’s enough to cover the purchase of a house, stretching it out over a long term is what makes homeownership possible for so many. Most of us don’t have $300,000 in the bank, but over 30 years we can make it work.
But what your mortgage lender might not be telling you is that 15-year loans are an option as well. Lenders will likely get less out of you in the way of interest, but that’s in your favor.
You can shop for mortgage lenders
Just because you’ve been with the same bank for many years doesn’t mean they’re going to have the optimal mortgage loan for your specific needs. To that end, it’s definitely worth shopping around for a great loan.
You might even find that a bank you’re less familiar with has unbeatable rates, which means you pay less for your home when all is said and done.
Don’t be afraid to get multiple quotes from the best mortgage lenders. Credit checks from lenders that are done within a certain time frame (FICO scores give you 45 days) are viewed as one single hard inquiry, so shopping for mortgages won’t hurt your credit score.
Mortgage forbearance is possible
You may have heard of student loan forbearance, especially if you’ve benefited from it during the COVID-19 pandemic. But did you also know that mortgage forbearance is a way to get help when you need it most?
If you find yourself in dire financial straits due to an emergency, get in touch with your lender and ask about this option. They might miss getting payments for a while, but it’s a better option for everyone if you can avoid foreclosure and keep the home you worked so hard to buy.
You might not need private mortgage insurance
If you have a huge chunk of change for your down payment, you likely won’t be asked to buy private mortgage insurance (PMI) to protect the lender in case you default. But if your down payment is around 19% or less of the total cost of your home, there’s a good chance you'll have to purchase this protection with your mortgage.
The cost of PMI can really add up, especially if you’re buying a pricey home, too. So don’t buy it if you don’t need it, and get out of it as soon as you can to save money.
Some closing dates are better than others
Another thing your mortgage lender or bank might not tell you is that if you close on your home at the beginning of the month, you will have to pony up prepaid interest to cover the rest of the month.
To that end, closing at the end of the month could be one of the best ways to keep more money in your bank account. That’s because you’ll only have to cover a few days of interest instead of a few weeks. This won’t wind up being a huge amount, but being able to save anything while buying a home is invaluable.
Your property assessment isn't set in stone
There’s a lot that goes on when you secure a mortgage and prepare to close on a home, including inspections, credit checks, and appraisals. Given how much you have to juggle, your mortgage lender may not tell you that your property assessment isn’t set in stone.
This assessment determines your property taxes as well as the value of your home. After you have your mortgage, you can ask your local government to make a second assessment if you think the value of your property has decreased. It’s a good way to save money, making lemonade out of lemons.
Recasting your mortgage may benefit you
Last but not least, your bank might not have informed you that you can recast your mortgage in order to lower monthly costs. This is something to consider if you’re able to make a large principal payment after a financial windfall, such as getting a big bonus at work or receiving a significant monetary gift.
When you recast your mortgage, the lender recalculates the principal and interest. Throwing a windfall at the principal will decrease the length of the loan, which is similar to making extra principal-only payments every year. Ask about recasting if you’re more interested in lowering your monthly costs.
Your mortgage lender has to make money on your mortgage. Otherwise, they wouldn’t be able to lend to others. It’s a fact of life, but being knowledgeable about the mortgage process may pay off, especially if you're looking for smart ways to reduce your debt.
The same holds true for refinancing down the road if interest rates decrease, which may also save you money. At the end of the day, making smart financial moves is the most important thing.
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