3 Tips for Applying for a Mortgage
Getting a mortgage is one of the biggest financial transactions of most people's lives. Because it's one that most people typically only take on once, aspects of it can be unfamiliar. Learning more about the process in advance can help people know what to expect at every step and help them make the right choices.
Learn About Credit
A person's credit score and history have a strong effect on what kind of deal they can get when they go shopping for a mortgage. Credit scores generally range from 300 to 900. Someone who has a score between 800 and 900 has excellent credit, and is likely to get very favorable terms on their mortgage.
Checking credit reports independently with both major bureaus can help ensure that there are no surprises. Have errors corrected before applying, since some, such as duplicate records of debts, can lead to costly drops in a credit score.
Ensuring that a buyer is also not overusing their available credit is one thing lenders will look at. If someone has too much debt, it can affect their ability to take on new commitments.
Lenders will also want to see a mix of credit types and a good payment history. These factors show that the borrower can be trusted to keep up their obligations and can use different types of credit responsibly.
Set a Budget
Lenders want to make sure that the people who borrow from them don't get overextended. They'll look at a buyer's potential mortgage payments relative to their income. When the buyer is thinking about what they can afford each month, they should consider costs that include:
- the mortgage principal and interest
- property taxes
- a fund for repairs and maintenance
The buyer should also determine how much money they can supply as a down payment. The larger a down payment, the less there is to pay later on.
Once a budget is set, it's time for the buyer to look at probable houses. Different areas will have different prices for otherwise similar houses. Looking in a few markets can help a buyer find the place that gives them the size and amenities they want at a price that fits what they are likely to be able to borrow.
Understand Different Mortgage Types
Mortgages come with different lengths and different structures, each with their own benefits and drawbacks. A 15-year mortgage will have higher payments, for instance, but will lead to paying substantially less in interest over the life of the loan. On the other hand, a 30-year mortgage means paying more in interest, but leaves more funds available each month. Buyers should look at the terms on different mortgage lengths to see which one will give them the best outcome.
Adjustable-rate mortgages typically start with lower interest rates and are then re-evaluated after several years. These can lead to higher payments if interest rates rise. However, someone who expects to sell within a few years may find that adjustable-rate mortgages offer a better monthly rate than a fixed-rate mortgage.
Potential buyers should run several scenarios to see which type of mortgage fits their circumstances best. There is no set answer that will work for everyone. By looking at all the variables, people can pick the option that will give them the security and flexibility they need.
Applying for a mortgage can be an intense and sometimes stressful process. By understanding what a bank will be looking for and what a buyer can do, people can put themselves in the best position for success.