100 Tips for 2011 » 10 mortgage loan tips for 2011
Mortgage lenders tightened their standards after the subprime mortgage mess and that won't change in the coming year. But there are mortgage loans to be had.
Follow these tips in 2011 to secure a mortgage loan at an interest rate and under terms that are right for you.
Have the right credit score
The best combination of interest rate and points requires a higher credit score
than in the past. Before the crisis, the best mortgage loans came with credit score of 720. Then the industry went back to basics. Now the best deals often need a 740 credit score.
Protect and preserve your credit
Multiple credit inquiries will cause your credit score to fall. For that reason, some would-be borrowers are wary of shopping around for a mortgage loan. They worry that if two or more lenders pull credit reports, their scores will go down. But the effect of rate-shopping is more complicated than that.
When mortgage lenders make multiple credit inquiries within a few weeks of one another, those multiple inquiries are treated as one. Yes, it will cause the score to drop. But the hit is likely to be minor because multiple inquiries are treated as one.
One credit-scoring method treats all mortgage credit inquiries made within 45 days as one inquiry; an older, less-generous method lumps together all mortgage credit inquiries made within just 14 days.
The interest rate is important, but there are other costs to consider, such as discount points and even the type of mortgage loan. When shopping for best rates, compare combinations of discount points and loan types.
For example, if your best guess is that you'll live in the house for eight years before moving, compare the total fees and monthly payments that you would make under three or four different loan deals. 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?
You might quickly rule out some options, but at least you considered them. Bankrate.com's mortgage calculators will help you compare.
Know your borrowing limit
Whether or not you get an FHA-insured mortgage loan, let the Federal Housing Administration be your guide to how much debt to take on.
For most borrowers, the FHA caps house payments at 31 percent of gross (pretax) monthly income. If you earn the median household income of about $4,200 per month before taxes, then your house payment -- principal, interest, taxes, insurance and association dues -- should be no more than 31 percent of that, or $1,302.
Some housing counselors say 28 percent to 30 percent is a safer number. The FHA limits total debt payments to 43 percent of monthly income. Total debt payments include first and second mortgages, auto loans, credit cards and child support. Some non-FHA loans let you borrow more, but you don't have to do it.
Bankrate.com has a calculator to determine how much you can afford to borrow.