What Kind of Borrower Are You?

by Elizabeth Rosen, Contributor

If you are seeking mortgage advice, make sure to do your homework and meet with several reputable mortgage lenders. When it comes to borrowing money, three key factors are important: loan approval, affordability, and the type of repayment plan.

What type of borrower you are determines your best approach for obtaining both loan approval and the most economic repayment plan. Your strength as a borrower depends on your credit rating, credit history, debt-to-income ratios, employment status, and/or your relationship with other lending institutions.  Knowing the kind of borrower you are helps you determine the type of strategy and mortgage loan that’s best for you.

If you have excellent credit, access to the proper supporting financial documents, low debt-to-income ratios, and you are a long-time employee of one company, you can probably expect loan approval from nearly any lending institution (bank, broker, internet lender, etc.). These factors all contribute to increasing your power as a borrower. You will be able to negotiate for the best mortgage rates and loan terms.

READ: How the self-employed qualify for mortgages

If you are self-employed and you prefer not to make your income or assets available to a mortgage lender, your best advice is to shop for a mortgage is through a reputable mortgage broker. A mortgage broker is someone who acts as an intermediary party between you (the home buyer) and the lending institution (a.k.a. mortgage lender). Mortgage brokers often have a network of contacts with access to home loans that aren’t advertised or directly available to consumers.

If you are an investor or a repeat homebuyer, and you are financially savvy, you could consider shopping online for a mortgage through an Internet lender. Regardless of your experience, it’s always a good idea to do your research and shop around before settling on a particular loan product.

If you have an established, long-term relationship with one particular financial institution (through multiple accounts, savings, checking, business, etc.), you are likely to get your best deal by negotiating your mortgage through that same institution and seeking their advice.

If you are a convenience shopper who isn’t concerned about the cost and you want to locate the easiest/quickest home loan available, you may be able to get a mortgage through your real estate agency or home builder.

Your real estate agent should be able to offer advice and information regarding this type of situation.

If you’re looking to repay the mortgage loan in as little time as possible, you’ll need to make a larger down payment and arrange a shorter repayment term (such as 10-15 years). Do you want to avoid paying Private Mortgage Insurance (PMI)?  Unless you can provide a 20% down payment, or you are fortunate enough to purchase a home at considerably less than its fair market value, you should expect to pay mortgage insurance on your loan. PMI is typically required until the amount you owe on the home is 80% (or less) of its market value.

READ: Reverse mortgages can be poor choices… especially when they seem like the only choice

As an additional bit of mortgage advice, depending on how long you plan to stay in the home, you’ll need to decide whether you want an adjustable-rate mortgage (ARM) or a fixed-rate mortgage (FRM). ARMs tend to have lower initial monthly mortgage payments, but can expose the buyer to higher payments later on in the loan term. An FRM may seem to have higher payments in the early years, but these payments will not increase over time.

The interest rate on a fixed mortgage is “fixed” for the life of the loan ― with the exception of any non-fixed expenses you’ve consolidated with your mortgage payment (such as property taxes and homeowners insurance).

It is often recommended that you select a fixed-rate mortgage if you plan on staying in your home for at least 7 years and you can afford the regular monthly payments. Fixed mortgages are also generally less complicated than adjustable-rate mortgages.

Overall, there are many home loan options available today to accommodate fluctuating incomes, and the best mortgage advice is to do your research and thoroughly understand the terms before signing a contract.