First time home buyer, questions regarding mortgage

[Ecky]

Getting a mortgage doesn't seem difficult, but getting the best rate seems to have some subtlety.

I have a friend who is a retired agent, and she has advised that I contact a bunch of potential lenders to get pre-qualified so I can get a rough idea of what kind of rates I can get. She also advised I don't let any of them pull my credit yet. However, the first credit union I walked into told me they couldn't do anything beyond an off-the-books guess unless I allow them to pull my credit. I understand this will affect my score, but also that if multiple lenders pull my score within a brief period, it won't be any worse than a single inquiry.

I'm uncertain how to proceed. Do I get applications for a bunch of local credit unions and maybe a few national ones, and submit them all at once? What's the best way to go about this? I don't have any specific house in mind yet, just starting to learn the market.

I could also use an opinion on picking a house in terms of commute time vs cost - these seem to be directly proportional here, since most businesses are roughly in the same place. Within 0-20 minutes of my work, the median home price is ~$500,000. 20-30 minutes out it's closer to $400,000. At 30-40 minutes, it's more like $300,000 and at 40+ it's $200,000. Places farther away generally have more and nicer land and lower percent taxes, but also worse schools and lower accessibility in winter, nevermind eating up a ton of my day in driving.

I know this is very personal, but where would you choose, and why?

[Ecky]

Getting a mortgage doesn't seem difficult, but getting the best rate seems to have some subtlety.

I have a friend who is a retired agent, and she has advised that I contact a bunch of potential lenders to get pre-qualified so I can get a rough idea of what kind of rates I can get. She also advised I don't let any of them pull my credit yet. However, the first credit union I walked into told me they couldn't do anything beyond an off-the-books guess unless I allow them to pull my credit. I understand this will affect my score, but also that if multiple lenders pull my score within a brief period, it won't be any worse than a single inquiry.

I'm uncertain how to proceed. Do I get applications for a bunch of local credit unions and maybe a few national ones, and submit them all at once? What's the best way to go about this? I don't have any specific house in mind yet, just starting to learn the market.

I could also use an opinion on picking a house in terms of commute time vs cost - these seem to be directly proportional here, since most businesses are roughly in the same place. Within 0-20 minutes of my work, the median home price is ~$500,000. 20-30 minutes out it's closer to $400,000. At 30-40 minutes, it's more like $300,000 and at 40+ it's $200,000. Places farther away generally have more and nicer land and lower percent taxes, but also worse schools and lower accessibility in winter, nevermind eating up a ton of my day in driving.

I know this is very personal, but where would you choose, and why?

[secondcor521]

I'd use something like CreditKarma to get an idea of what your score is likely to be, then call a bunch of lenders on the same day and ask them what their rate at par (meaning no points buydown) is for a credit score of <insert your score here> and a down payment of <insert your downpayment percentage here>.  Since rates go up and down daily (sometimes even morning and afternoon nowadays), you'll want to call (or check online) at the same time so you're comparing apples to apples.  After doing this a few times, you'll get a feel for who is the most competitive on rates pretty quickly.

You might also get a sense of how easy it would be to work with the mortgage company.  A lower rate is fantastic but you'll probably have a mortgage for a few years, and them doing everything accurately and properly is worth something.

For now you just need to get a sense of the top few companies that you want to work with.  No need to start an actual loan application or anything (which you can't do anyway - one of the things on the loan application will be the address of the property you're buying, a data point you obviously don't have).

Note that many lenders will compete on rate and then make it up on fees, so you are actually probably better served for asking their APY (which is supposed to incorporate the fees).  The APY will be higher than the APR; the larger the difference between the two means the larger fees.  You don't really care much; the APY is probably as close to a true price as you can get without getting really into super-nitty-gritty details (which you're not ready for).

When you've found the house, make the offer and start the loan process with your top candidate.  When you really start, they ask you to put down a deposit of some sort to discourage you from starting the loan process with your top three.  If you continue and get the loan with them then they'll credit the deposit to you at closing; if you switch you'll lose the deposit.  IIRC the deposit was about $500 when I did my last loan about 10 years ago, but things vary by market and company.

I didn't choose my current home based on distance from work, but it ended up being about 15-20 minutes from my final job.  I liked that amount of commute - not too long, not too short.  If I lived right next to work, I don't think I would have liked it as much (also the area around my final jobsite wasn't really a residential area).

Sometimes you can be clever or contrarian and find places that are not far away in time but may be far away in distance.  Around here, suburbs right off freeway exits are popular.  At one point I lived closer into town and worked further out, and that was nice because I was commuting the "wrong" way and had very little traffic issues.

Honestly what I did was put together a big spreadsheet and list all of the factors that were important to me and then give points to each house I was considering, weighting the points by how important each factor was.  Then I looked at the house or two that were the top point-getters.  Basically a Kepner-Tregoe decision analysis, although I hadn't learned that technique at the time.  Sure enough,  the top point-getter was also the one that I subjectively liked the most, and it's the one I now own.

Point for you being that it's pretty specific to each person what their factors are, and closeness to work is only one factor (albeit one that MMM seems to emphasize).  Lots of other things come into play.

Good luck.

[Kwill]

A lot depends on your personal situation. You don't necessarily need the median house. I just bought my first place for 57% of the median price in my area, but it's because my place is a tiny condo. I chose to be a mile and a half from work instead of getting a big place. I could do that because I am on my own.

There should be mortgage calculators online to help you estimate how much you could afford. I would get a good idea of what you basically need and want and can afford before starting to formally pursue this with a bank.

[Ecky]

A lot depends on your personal situation. You don't necessarily need the median house. I just bought my first place for 57% of the median price in my area, but it's because my place is a tiny condo. I chose to be a mile and a half from work instead of getting a big place. I could do that because I am on my own.

There should be mortgage calculators online to help you estimate how much you could afford. I would get a good idea of what you basically need and want and can afford before starting to formally pursue this with a bank.

I'm paying off student debt still so I would not be getting the median house in any of these areas. The relative bottom of the market is in different places  though, depending on how long the commute is.

[Ecky]

That was super helpful, thank you.

[AMandM]

All other things being equal, I would choose the higher-priced house with the shorter commute. Here are my reasons: 1. The longer commute will cost you money (more gas, more vehicle maintenance and depreciation, possible higher insurance rates) as well as time, so the savings you get by living farther out aren't quite as big as they seem at first. 2. The older I get, the more I value time. It's the most limited resource of all, and instead of spending it in a car I'd rather spend it doing stuff I enjoy with people I love. 3. In most places, traffic gets worse over the years as the population grows, so the time cost will get higher. 4. Living far from work makes it harder to socialize with colleagues (though this may not matter if your job isn't the kind that leads to real friendships). 5. Although I don't think of my house primarily as an investment, it will eventually get sold, if only by our kids after we die. At least around here, urbanism is definitely on the rise, so closer-in houses have stronger long-term value.

But I realize that all other things are usually not equal.  Maybe the kind of neighbourhood that's 30 minutes away is way more attractive to you than the closer-in ones.