10 THINGS TO KNOW BEFORE GETTING A MORTGAGE
Conventional wisdom tells us mortgages are good debt because homes typically appreciate in value, but that doesn’t mean you should get a mortgage without careful research.
1. Mortgage prequalification and mortgage preapproval aren’t the same thing
A prequalification gives you an estimate of how much you can borrow based on your income, employment, credit and bank account information. Preapproval comes from a lender who has analyzed your finances carefully and can tell you how much you may be able to borrow and what your interest might be.
2. You’ll pay more without a minimum 20% down payment
Experts encourage buyers to save a down payment of at least 20% before applying for a mortgage, as the larger your down payment, the smaller your mortgage will be and the less interest you’ll pay over the life of your loan.
3. Mortgage fees should be factored in
Many buyers focus solely on saving for a down payment and don’t stop to consider the other fees associated with mortgages. You can expect to pay for things like commissions to your real estate agent or broker, application fees, appraisal fees, title search and insurance fees, closing costs and more.
4. The higher your credit score, the better
Buyers with lower credit scores have higher interest rates, so they pay more for their mortgage over time. And if your credit score is too low, you may not be able to get a loan. Review your credit report and make sure it’s error-free.
5. Lenders value job stability
While a stint of unemployment will obviously stand out, sometimes even changing companies can make lenders nervous. If you’re contemplating getting a mortgage, you should stay in your current job if possible. The same holds true for any co-signers. Once your mortgage is approved, you can start pursuing new career opportunities again.
6. Mortgage payments must fit your budget
Before you start looking at houses, you should know what you can realistically afford. As a rule, you shouldn’t spend more than 43% of your income on your monthly debts. Run your numbers through a mortgage calculator so you can see what’s in your budget.
7. There are many different mortgage options available
A 30-year mortgage is the most popular, but your loan term could be as little as 10 years. Most mortgages have a fixed interest rate, which doesn’t change over the life of the loan. However, if you’re willing to accept a degree of risk, you might opt for an adjustable-rate mortgage (ARM).
8. Mortgages require a lot of paperwork
Collect your financial records before applying – a month of recent pay stubs, two years of tax filings including the most recent year and the last two or three months of bank account statements.
9. Mortgage offers can help you save
Many state and local governments offer first-time homebuyer programs which encourage residents to buy within their home state. The Energy Efficient Mortgage program is ideal for people looking at green homes. Veterans or active-duty servicemembers, or members of the Guard or Reserve, may be eligible for a VA loan with low or no down payment options and no mortgage insurance requirements.
10. You should avoid making financial changes until your mortgage is finalized
While it can be tempting to finance some furniture for your new home, resist the urge to splurge. And it’s not just credit your lender has their eye on. Your bank account should stay stable, so don’t withdraw or deposit large amounts of money.
Becoming a homeowner is part of the great American dream. Understanding how mortgages work and how yours will affect your financial health can help you manage and make the most of your mortgage.