Navigating the Mortgage Maze: 4 Loan Tips

As banks continue to tighten their credit standards, many borrowers are getting frustrated at what it takes to get a mortgage with a favorable interest rate and terms. offers some of the following tips for mortgage shopping in the new year.

1. Make sure you have the right credit score. Lenders require higher credit scores nowadays. Prior to the subprime fallout, a 720 credit score would suffice; now the best deals often require a 740.

2. Shop around. Interest rate is one key thing to zoom in on, but it’s not the only thing buyers want to consider. They should also heavily weigh discount points and the type of mortgage loan in finding the best rate.

For example, if the buyer plans to live in the house for eight years, they’ll want to compare the total fees and monthly payments that would be required under three or four different loan types. “Ask yourself how much it would cost to pay zero discount points and get a higher interest rate compared to paying discount points in exchange for lower rates? What about a 5/1 or 7/1 adjustable-rate mortgage?” the article notes.

3. Know your borrowing limit. Use the Federal Housing Administration as a guide to how much debt to take on, even if you’re not getting an FHA-insured mortgage loan, says. The FHA caps house payments at 31 percent of gross monthly income for most borrowers. The FHA limits total debt payments–which includes first and second mortgages, car loans, credit cards, etc.–to 43 percent of monthly income.

4. See if your buyers qualify for any federal programs for downpayment assistance. Most lenders require borrowers to have down payments of at least 10 percent of the home’s price. There are exceptions, however. FHA requires a down payment of 3.5 percent if you have good credit, whereas the Department of Agriculture’s rural development program, which is limited to rural areas, offers mortgage loans with zero down payment. The Department of Veterans Affairs also offers zero-down mortgages for eligible veterans.

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