7 steps to get a mortgage

By Kathleen Lynn The Record (Hackensack N.J.)

Mortgage rates have plunged to record lows, below 4 percent. That’s great, but only if you can actually qualify for a loan, and that’s not easy.

Lenders have tightened their underwriting standards, leaving many would-be home buyers out of luck.

But there are steps homebuyers can take to find the right mortgage, and qualify for it. Here are seven:

1. Improve your credit score: A credit score below 620, as measured by the Minneapolis company FICO, will knock most potential buyers out of the running.

And even if you can qualify for a loan, lenders reserve their best interest rates for borrowers with the highest credit scores, typically 740 and above.

If a bad credit score pushes up your interest rate by even one percentage point, you could end up paying $85,000 more over the life of a $400,000 loan, said Tracy Becker of North Shore Advisory, a credit repair company in New York state.

Start by checking your credit report, which is available free at annualcreditreport.com, at least six months before you’re ready to shop for a home.

You can get a free report once every 12 months from each of the three credit reporting companies: Experian, Trans Union and Equifax.

Make sure there are no mistakes on the report. If you see incorrect reports, dispute them with the reporting company.

These reports are the basis for the credit score created by FICO. The score, which ranges from 300 to 850, is used by lenders to determine whether you’re eligible for a loan, and at what interest rate. You can get a copy of the score for $15.95 at MyFico.com.

There are ways to beautify your report:

Pay your bills on time. Pay down your debt. Don’t close unused credit cards. Don’t open new cards.

2. Decide what type of loan is best for you: Fixed mortgages offer the security of knowing your rate will never rise; since rates are near or at record lows, there’s a pretty good argument to lock in now.

An adjustable-rate mortgage offers lower rates and might work if you expect to move within a few years.

A 30-year loan will keep monthly payments lower, but a 15-year will have a lower interest rate and will save you tens of thousands of dollars over the life of the mortgage.

If you have less than 20 percent down, you have the choice of a Federal Housing Administration mortgage or a conventional mortgage with private mortgage insurance.

FHA loans allow down payments as low as 3.5 percent but carry an upfront fee of 1.5 percent of the mortgage amount, plus an annual fee of 1.15 percent, according to Keith Gumbinger of HSH.com, a Pompton Plains, N.J., company that tracks the mortgage market.

Private mortgage insurance is cheaper, typically costing less than 1 percent a year and varies according to the borrower’s credit score and down payment.

PMI is canceled once the homeowner has 20 percent equity in the property. But to get a conventional loan with PMI, you’ll probably need to have 10 percent down and a better credit score than the FHA requires, lenders say.

3. Shop around: Check with several lenders. Compare interest rates and closing costs like fees for the application and appraisals. These costs generally run about 2 percent of the loan amount, Gumbinger said.

4. Get preapproval: Lenders will give prequalification letters, informal estimates of how much house you can afford. Better yet, get a preapproval letter, which is a tentative commitment.

Sellers sometimes accept lower offers from qualified buyers who are able to show they can actually close on the deal.

5. Be prepared to show lots of paperwork: Fannie Mae and Freddie Mac, the government entities that guarantee loans, are forcing lenders to demand much more documentation these days, including pay stubs and tax returns.

And they will ask for fresh documents, like pay stubs, just before the closing, to make sure nothing has changed.

Start saving pay stubs, bank statements, canceled rent checks and other paperwork several months before you even start shopping.

6. Consider locking it in: Many lenders will offer borrowers the chance to lock in their mortgage rate free for up to 45 days, and some will lock in for up to 60 days, either free or for a small fee.

Gumbinger advises buyers to consider locking in, since there’s not much room now for rates to fall.

He recommends a 60-day lock-in, which should be long enough for most closings.

7. Don’t mess it up at the last minute: Once you have your loan approval and make an offer on a home, don’t throw the whole deal into doubt by making moves that will change your credit profile.

Don’t quit your job or take out a big car loan, for example. Don’t apply for a new credit card, even if a merchant offers you 10 percent off if you do.

The lender will recheck your employment status and credit profile just before the closing.