When considering significant financial decisions, obtaining a mortgage and purchasing a home is near the top. It’s a complex process entangled with real estate jargon, financial checks, and stacks of paperwork, but it doesn’t have to be overwhelming. With the proper preparation, you can get a mortgage and make the journey to homeownership smooth and less daunting.
Understand Your Financial Health
We’ve all heard of financial wealth, but what about financial health? Evaluating your financial health involves:
- Reviewing credit scores.
- Taking a look at current assets.
- Preparing for any financial documentation needs that may arise during the mortgage process.
Your credit score, for example, will significantly impact the process to get a mortgage and the interest rates available to you. If you’re looking for a rate on the lower end, but your score needs to improve, consider postponing your mortgage application and taking time to improve it before attempting the application process.
Accumulate Your Savings
Have you started saving for a down payment? While not all mortgages require a down payment, it is considered standard to have approximately 20% saved for this cost. By preparing for this part of the process early, it will seem more manageable. While many programs allow for a lower down payment, they may require additional monthly charges, like private mortgage insurance, and should be considered carefully.
Calculate Your Budget
Creating a budget doesn’t always sound fun, but it’s essential to get a mortgage and find a home within your means. It’s recommended that a mortgage payment should be at most 25% of your gross monthly income. This should include all taxes and fees and be adjusted based on additional debts, and other non-housing-related costs, such as groceries, transportation, entertainment, and emergency or savings funds. Just because a lender approves you for a mortgage at the top of your budget, doesn’t mean it’s wise to spend that amount on a home.
After ensuring you’re financially ready, it is time to get a mortgage pre-approval. This application will give you a better idea of how much a lender will lend you and at what rates. It also makes you appear more attractive to sellers because they can see you are in an excellent position to purchase.
Choosing the Right Mortgage
Once you’re pre-approved, it’s time to choose the right mortgage. Do you want a fixed-rate or adjustable-rate mortgage? How long do you want to be paying your mortgage? These are crucial questions to answer.
A fixed-rate mortgage offers a constant interest rate throughout the life of the loan, making the monthly mortgage payments predictable and stable. This is beneficial for budgeting as the payment amount doesn’t change over time.
On the other hand, an adjustable-rate mortgage has an interest rate that can change periodically, and thus, monthly payments could fluctuate. Adjustable-rate mortgages can be beneficial in a falling interest-rate environment or if you plan to live in the home for only a few years. However, they come with the risk of monthly payments rising significantly over the life of the loan.
The most common terms for a mortgage are 15-year and 30-year. Essentially, the longer loan term allows for smaller monthly payments, but be sure to understand how this will impact the amount of interest that will be paid over the life of the loan.
Work with a Reputable Lender
Finally, pick a reputable lender. Do your research, ask for recommendations, and shop for the best rates and terms. There are so many lenders out there, finding the best one may take some time, but it is worthwhile to find the best match.
In conclusion, home-buying can be overwhelming, but with research and preparation, you can navigate the process to get a mortgage effectively and confidently. Remember, owning a home is a significant commitment, and taking the time and effort to prepare yourself financially and emotionally is crucial.