Shop for Mortgage
It is important to remember that you have another chance to shop around for the best mortgage product for you at this point in the process, regardless of when you were pre-approved and who pre-approved you. You are not obligated to get your mortgage from the lender that pre-approves you, and you should take the opportunity between your home inspection and signing you Purchase & Sale agreement to make sure you are getting the best product for you at the best rate and with the lowest fees from a reliable lender. With that in mind, we do suggest doing your homework in the beginning as it can streamline the process later on if you know that the loan officer you get pre-approved with is someone you’re comfortable with and who can offer you the best mortgage product.
**Keep in mind that when you shop around for a mortgage with different lenders they will want to check your credit. It is important to keep your credit in good standing after your pre-approval because it will be checked at this point and again before you close. Your credit score will not be hurt for getting pulled multiple times, as you have a 14 day window in which all hard inquiries from mortgage lenders will be lumped as one inquiry.**
Every first-time homebuyer in Massachusetts should start their shopping by looking into the two non-profit public agencies that offer first-time homebuyer loans unique to the state. MassHousing and the Massachusetts Housing Partnership (MHP) both offer products that allow to put 3% down and not pay Private Mortgage Insurance (PMI). MassHousing offers a variety of products to fit your needs including a Purchase & Rehab loan, while MHP’s The ONE mortgage is the most affordable loan available to first-time buyers. Both agencies establish eligibility requirements for their loans based on credit, debt ratios, income, and assets. MyMassMortgage.org provides detailed information on both agency’s products. Income limits for The ONE and MassHousing based on county can be found here and here. A list of participating lenders for MassHousing and The ONE can be found on their respective websites.
Please Note: Many first-time homebuyers are drawn to FHA loans because it is a well-known product nationwide. It can be a great option for a buyer with a low down-payment (3.5% for FHA) and credit that doesn’t meet typical eligibility criteria, but it will be much more expensive than MassHousing or The ONE due to PMI. FHA does not have an income limit to qualify, but it does set a maximum loan amount based on county. If you are in this situation, you may want to put off buying a home temporarily while you improve your credit so you can qualify for one of the Massachusetts products.
Outside of the state-funded mortgage programs, certain lenders offer their own first-time homebuyer loans with competitive terms. When talking to loan officers, make sure to ask what first-time homebuyer products they offer.
Conventional and Portfolio Loans
If you can afford a higher down payment (10, 15, or 20%) you may want to look into portfolio or conventional loans. Conventional loans are standard loans approved by Fannie Mae and Freddie Mac to be sold on the secondary market. If you have a 20% down payment you don’t have to pay PMI on a conventional loan and the rates are very competitive. Portfolio loans are lender-specific and are not sold on the secondary market. Therefore, the rates and terms vary from lender to lender. If you get a conventional or portfolio loan and put less than 20% down, you will have to pay PMI until you reach 78% Loan to Value. These type of loans also have eligibility requirements for credit and debt-to-income ratios that are based on the Qualified Mortgage standards.
Fixed Rate vs. Adjustable Rate
A fixed rate mortgage offers stability and some peace of mind. Your interest rate will never change for the life of loan. Typical lengths of fixed rate loans range from 15 to 30 years, with the most popular being 30. The longer the loan is, the lower the monthly payments will be. Adjustable rate mortgages (ARMs) offer a lower interest rate for the initial period, but also a lack of predictability. ARMs come in different terms, but an example of one would be a 5/1 ARM. This means that for the first five years you will have the same interest rate. After that, the rate can change from year to year. These loans come with caps for how much the rate can increase. For example, the cap may be listed as 2/6. This means that the highest the interest can increase in one year is 2% and the most it can increase over the life of the loan is 6%. ARMs may be a good option for buyers who know they will move after a certain period of time, but can be a risky option for long-term owners.
When comparing the rates and terms of different loans, make sure to not just look at the interest rate. The interest rate, while important, does not give you the full story of how expensive the loan is. You must also take into account the closing costs associated with the loan. When deciding between loans, the APR offers a quick way to compare the interest rate plus all other fees of each loan. If two loans have the same interest rate, but one has a higher APR, that tells you that the fees for that loan are higher and therefore you will be paying more for that loan. It’s easy to get up with the interest rate when shopping for a mortgage, but the APR is a better indicator of the total cost of the loan.
Loan officers are obligated to provide you with a Good Faith Estimate (GFE) and a Truth in Lending Statement (TIL) no later than three days from you application date. These can be useful tools to compare loans as the GFE will give you an estimate of the closing costs of the loan and the TIL statement will detail out the terms of the loan. The interest rate and APR of the loan will be listed in these documents.