Things You'll Need:
- Three or four consecutive pay stubs
- Two years W2's
- 12 months of bank statements
- Two consecutive years of tax returns
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Step 1
Decide how you want your loan to be connected to the stock market. ARM loans are tied to an index -- often the prime rate or the LIBOR (London InterBank Offered Rate) -- and deciding which index you'd like to attach your loan to is important. For a breakdown and history of fluctuations of both the prime rate and LIBOR, see Resources below. Generally, in periods of economic strength, interest rates increase, and vice versa. Therefore, regardless of the index you choose, your rate will fluctuate with the market.
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Step 2
Pull a copy of your credit report. You'll want to know where you stand in terms of creditworthiness. See Resources below for a free copy of your credit report. Look for negative marks on your report -- legal judgments, charge-offs, delinquencies, bankruptcies -- and attempt to clear these from your report before you refinance or obtain a purchase mortgage. You'll need to pay for a credit score (FICO score). You'll qualify for top-tier programs with a FICO over 720.
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Step 3
Research lenders. To find FHA-approved ARM lenders, see Resources below. Attempt to stay local in your search -- working with a local lender lets you meet your loan officer personally. Narrow your list to three to five lenders, and be sure to research each company on the Better Business Bureau's website. (See resources.) You'll want to make sure each lender has a clear lending record.
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Step 4
Obtain expert help from a lawyer not associated with the lender. A lawyer will be able to break down how an adjustable rate mortgage works -- when it's beneficial for a lender and when it's beneficial for a borrower. Choosing an ARM loan depends a lot on timing. You'll want to try to get one at the bottom of a housing slump -- when rates will be low -- as these will be the least costly. You should always maintain your credit score while involved with an adjustable rate mortgage -- if the rate starts to climb dramatically, you'll want to be in a position to refinance.
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Step 5
Keep an eye on the stock market after you close your loan. Make sure you know when your rate adjusts -- often bi-annually or annually -- how it will adjust -- usually by adding a margin to the index -- and what the corresponding payment will be after the rate adjusts. ARM loans usually have a margin (a constant number) and an index (e.g. prime rate) that are added together to get your mortgage rate. Be sure to know these numbers before signing mortgage paperwork.
