March 1, 2018
March 1, 2018
Getting a mortgage as a first-time home buyer can be daunting, especially because you’re probably looking at taking out the biggest loan of your life. But getting a mortgage doesn’t have to be difficult or scary. You just have to know what you’re in for and gather your facts so that you can find the right mortgage for you.
The first thing you should do is make sure you understand what you’re getting into with a mortgage. A mortgage is a loan – you’re borrowing money to buy your home and promising to pay the lender back, with interest. Your home is the collateral – if you default on the loan, the lender can foreclose and sell the property to get their money back.
The mortgage only covers the cost of the property. You’ll have to pay separately for property taxes, property insurance, utilities, homeowner’s association fees, and mortgage insurance. Mortgage insurance is insurance for the lender, i.e., protection for them in case you default on your payments. It is usually required if you have a down payment of less than twenty percent of the purchase price of the property.
There are different types of mortgages. The most common one is a fixed-rate 30-year mortgage, where the interest rate remains the same for the life of the loan, which is 30 years. However, there are many other types of mortgages, including different lengths and interest rates that vary over the life of the loan. You may also be eligible for special loan programs, such as FHA or VA loans.
Once you understand what a mortgage is, it’s easier to understand how to make yourself an attractive borrower, i.e., one that banks will agree to lend money to.
A steady income is extremely appealing to lenders, who will want to review your last few tax returns and recent pay stubs. If you’re self-employed, be prepared to document your income for the last few years, especially if it fluctuated from year to year.
A great credit score is key to getting the best interest rate, so be sure to check your credit reports for any errors, pay off as much debt as possible (especially credit cards), and refrain from closing accounts or opening new lines of credit.
The higher your down payment, the less risky you appear to lenders. Therefore, when you’re applying for a mortgage, it’s best to have as large a down payment as possible. Keep in mind that you’ll need money not just for the down payment but also for closing costs and other fees. Lenders also want you to keep some money in savings, since this reduces the likelihood that you’ll default right after the purchase is finalized. But you should also keep in mind that many lenders will approve a mortgage with just five percent down.
Another factor loan officers look at is your debt to income ratio, or the ratio of all of your debts, including the prospective mortgage, compared to your income. It is difficult to get a mortgage if that ratio is over 43%, and a high ratio can also have a negative impact on your credit score, especially if you have a lot of credit card debt.
It pays to shop around for the best mortgage and interest rate. So be sure to check with multiple lenders to see who offers you the best rates, terms, and fees. Your real estate agent can be a great asset when it comes to finding the right mortgage, but you should also check with any credit unions or special associations you belong to that might offer low interest rates.
Finally, make sure you have all of the paperwork you need document the information you put on the loan application. This includes tax returns, documents that establish the source of your down payment (such as bank or brokerage statements), and employment verification. Collecting all of these documents ahead of time will ensure that you can respond quickly to requests from lenders, which will help you get your mortgage as quickly as possible.