Most people are aware that a mortgage is a financial loan provided to eligible applicants interested in purchasing a new property or refinancing an existing one. Unfortunately, however, for most first-time homebuyers, that’s the extent of their knowledge. As securing a mortgage is a legally binding contract for an extended period of time, it is essential that you educate yourself on the ins and outs before signing on the dotted line. Here are a few things you need to know:
Types of Mortgages
Believe it or not, there are several types of mortgages you can apply for. A loan advisor can help you in discerning which loan is best for you. The most common are fixed-rate mortgages. These are loans in which the interest on the loan is fixed. This is an ideal choice for those who prefer predictable monthly payments.
Last, but not least, there are government-funded mortgages which have become increasingly popular. This is essentially because there are a lot of different programs buyers can take advantage of including low or no down payment and closing cost assistance. They also tend to be more lenient on credit requirements. You can reach out to Chenoa Fund if you are interested in learning more about affordable housing.
What You Need to Apply
Last on the list of things you need to know about a mortgage loan before purchasing a home is what you need to apply. The application, underwriting, and approval process are very tedious and require a lot of information. So, you want to make sure you have all your ducks in a row so that there aren’t any monkey wrenches thrown into the process.
- Regular Income – Lenders are looking to see if you have sufficient income to afford the loan you’re applying for. They will review your pay stubs, tax returns, and bank statements. They will also review your debt to income ratio to ensure you don’t have too much debt to pay back the loan.
- Decent Credit Score – Before applying for a mortgage it is good practice to review your credit history and score. Mortgage companies will review this information to determine your creditworthiness and level of debt. While there are home loan programs available where you can have a fair credit score and still qualify, having at least a 650, good payment history, a low debt to income ratio, and minimal delinquent or charge-off accounts is recommended. If not, you should work on improving your score before trying to apply.
- Assets and Savings – Mortgage companies are taking a risk when they approve loans for borrowers. Those risks are greatly reduced when a borrower can show that they have sufficient assets and savings that can be used to cover the cost of the mortgage in the event that their regular income gets tied up.
- Positive Rental History – If this is your first time owning a home, lenders want to see how good you are at paying housing costs in a timely fashion. They will often want to review your bank statements, canceled checks, or rental receipts to see proof of timely payments. They may also request letters of recommendation from your previous landlords.
Not All Lenders Are Created Equally
As with any product or service, there are several service providers including banks and privately funded financial institutions you can secure a mortgage with. On the surface, it may appear that all financial establishments offer the same types of loans, interest rates, and services, but that is not always the case. It is important to look for more than just an affordable rate, but do your due diligence on various service providers to discern who will help you in purchasing a property with the least hassle.
You’ll Pay More Than the Principal Balance
It’s not uncommon for individuals purchasing their first property to make the assumption that the principal loan amount they’ve been quoted is all they’ll have to pay. This can cause serious problems for your budget down the line. There are a lot more associated costs with securing a mortgage. This includes your principal balance, interest, property taxes, homeowners insurance, and closing costs (closing costs are a one-time payment required for processing and servicing the loan).
The prospect of buying a new home is exciting, but it comes with a lot of responsibilities. As such, before signing on the dotted line and committing yourself to a 15, 20, or 30-year mortgage, it is highly recommended that you have a clear understanding of all the above information. Doing so ensures that you make the best choice of mortgage loans.