Need a mortgage to buy your first home? You are going to take the biggest financial decision of your life. So, it is necessary to research a bit, learn the nitty-gritty, and plan everything from start to finish. Getting a mortgage loan involves several stages and you need to pass through all these stages to realize the dream of homeownership. Here are some of the most important steps to applying for a mortgage at a lender.
- Understand Mortgage: Learning is the first step to execution. You need to learn the various mortgage terms and how they are related to the different stages of the approval process. The money you borrow is referred to as the Principal, which you repay in either fixed or variable monthly payments. Your payment comprises a portion of the principal, interest accrued on the unpaid principal, taxes and insurance. You should also note that a certain percentage of purchase price is paid down by you at the time of closing.
- Determine what you can afford: Is buying a better option than renting? You need to run a check on your financial resources to determine what you can afford. The best way to do this is to evaluate your debt-to-income ratio. Ideally, your total monthly liability should be less than one third of your monthly income. Your payment can go up to 30% of your income if you do not have any other debt on you. Use an appropriate calculator to determine how much you can afford to pay each month.
- Ensure you have enough to pay for the mortgage: You need to pay a good sum of money upfront unless you have qualified for a government approved loan. Most lenders require that you pay about 20% of the total cost of the house you intend to buy. The amount of down payment can vary from one lender to another and also depends on credit scores and several other factors. Besides, you need to ensure a healthy savings account to continue paying your mortgages and avoid default. Alongside, you must make it sure that you have a stable employment history and a steady source of income. To be on the safe side, you should be working for the same company for the last 2 years.
- Check your Credit: Though a mortgage is a secured kind of loan, you will still need a good credit score to get approval. For a quick and easy application, your credit score should be over 700, but a score between 600 and 700 can also be good enough to qualify for a home mortgage. People with less than perfect credit can increase the amount of down payment to improve their chances of approval. The higher your credit score the better is your chance to obtain a low interest rate and manageable loan terms. Get a copy of your free credit report from each of the three credit reporting agencies in the US. Scan these for any error and get it corrected before you can proceed with a mortgage application process. Also, you need to keep open all your existing accounts and avoid applying for new credit cards. Moreover, you must clear all outstanding bills and develop a habit of paying bills on time.
- Choose a Lender: Once you are confident you can afford a mortgage and possess enough eligibility to qualify for a loan, you need to search for a reputable lender in your area. Banks and credit unions are the most popular providers of home finance. You can also seek the assistance of a mortgage broker to negotiate well with the lender on interest rate and loan terms. Some of the leading providers of mortgage loans include Bank of America, JP Morgan Chase, Wells Fargo, Citimortgage, PNC Bank and US Bank.
- Obtain a Favorable Rate of Interest: Mortgage rates are subject of change, so you need to keep looking for a rate that you are comfortable with. Compare various lenders for the best offer and lock-in a rate that you think is the best for you. Note that a fee is applicable for this facility. Second thing to consider is whether an ARM can work for you the best. Adjustable-rate mortgages are popular for low interest rates, but they can be quite risky. Another option to lower rates is to purchase points from your lender. If you wish to stay in your new house for more than 5 years, then purchasing points can be a better option than to go for an adjustable-rate mortgage.
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