Important Things you Need to Know Before Taking Out a Mortgage
A mortgage is a unique type of loan because you can take a huge loan and for a prolonged duration. Once you take out a mortgage, you agree with the lender to repay the mortgage at a specific interest rate. Your house will be the security for the mortgage and when you default in payment of the mortgage, the lender can acquire the home. The mortgage payment is made every month and this payment is split into different sections. One of the sections that are covered by the payment is the principal which covers part of your loan.
The payment also covers the interest rate that the lender of your mortgage charges on your loan every month. Your monthly payment also covers taxes under the property bill and the taxes that you may depend on the amount that is assessed yearly and the neighborhood where your house is located. Some lenders may also ask you to take mortgage insurance to cover your house against accidents like fires and this payment is made separately from the monthly mortgage payment.
There are many benefits of taking out a mortgage. One of these benefits is that a mortgage gives you leverage. For example, when you buy a house worth 400,000 dollars with a down payment of 100,000 dollars and a loan of 300,000 dollars, this house will appreciate with time. When the value of the house increases, you will make a profit on your income. Other benefits of a mortgage include owning your house and improving your credit score. Before taking a mortgage, there are some things that you should know and they are explained below in this article.
1. Your credit score matters
A credit score refers to a numeric value that is gotten after analysis of your credit files to determine your creditworthiness. The score ranges between 300 and 850 and the higher your score is, that is, the closer it is to 850 the more creditworthiness you have. Your credit score is one of the most significant factors that lenders use to determine whether you qualify for the mortgage. Lenders also use the credit score to determine the amount of interest that you should pay on your mortgage.
You can find out what your credit score is by checking your credit report. Once you have the report, you can dispute any errors on the credit report that may be making your credit score to be poor. To improve your credit score, you can start paying your credit card balances and start keeping them low. Another way to improve your credit score is by ensuring that you pay your monthly bills on time. Different lenders have different credit score requirements and it is important to confirm with your lender about this.
2. Different lenders have different rules
Every lender has different rules and requirements for giving out mortgages. The lenders use different ways of calculating how much mortgage loan you qualify to take. They will consider different factors before deciding how much risk they are willing to take to give you the loan. Some of the factors that lenders consider before giving out mortgages include the type of property that you are getting and where it is located. Your employment and credit score are other factors that matter to the lenders. The differences in the requirements for mortgages among different lenders can be significant.
The Lender may even decline your mortgage request even when you think you can afford it. The loan that you get also depends on whether you are applying for the mortgage alone or as a couple. The number of dependents that you have also determined whether some lenders will approve your mortgage. However, you can approach different lenders and compare their terms to determine who has terms that favor you.
3. There are different types of mortgages
It is also important for you to know that different types of mortgages are available. These types include fixed-rate mortgages that pay a constant monthly payment till you complete payment and adjustable-rate mortgages whose monthly payments can vary with time. An interest-only mortgage allows you to pay the interest-only for the first few years and then pay the rest of the payment later. Other types of mortgages include discount, tracker, offset, and capped rate mortgages. Different lenders have different types of mortgages.
4. Decide the mortgage term that you want
The duration of completing the mortgage loan varies. You can choose a long-term loan that you are given up to 30 or more years to complete, but you end up paying a lot of interest. Short-term loans on the other hand require you to pay higher payments over a short duration like 10 years but you end up paying less interest than the one you pay for long-term loans. By evaluating your finances, you can decide which term of payment works best for you.
5. Find out the home you can afford
Most lenders advise that you take out a mortgage loan that is less than 3 times the amount of your annual income especially if you intend to make a down payment of close to 20%. The lenders may also discourage you from taking out a mortgage that exceeds 28% of your gross monthly income. However, these conditions may not reflect your true financial capability and that is why it is important to do a mortgage calculation for yourself. You can use an interest only mortgage calculator to assess the mortgage that you can qualify for. This will help you to know the house that you can afford and avoid straining your finances.
6. Your income is an important factor when considering mortgage
Most lenders will ask for evidence that shows that you have a steady income. Some of the evidence that the lender can ask for includes your payslips, income tax returns, and other support documents. The lender will also be interested in knowing how often you change your jobs and how long you have worked in your current job. Your ability to make the monthly payments can also be assessed using the debt-to-income ratio (DTI). DTI is the value that you get when you divide your monthly income with your monthly debt deductions. Different lenders have a different DTI value that they consider acceptable before giving you a mortgage.
7. Do you have savings or other reserves?
It is also important for you to think about alternative sources of money that you can use in case you were in a financial crisis that made you unable to pay your monthly mortgage payments. Having such savings and reserves can determine if the lender is willing to take the risk of loaning you the money especially if you have a poor credit score or a high debt-to-income (DTI) value. Some of the sources of income that can come in handy during such a time include the money that you have in your savings account, investments, or even the cash value of your life insurance.
8. Shop around for the best deal
Before taking out a mortgage, you need to check out different deals that are available. The interest rates and monthly payments vary among different lenders. Different lenders also have different requirements that you should meet before they give you the loan. You can choose three lenders and compare their rates before choosing the one that you will work with. This will help you to get a loan that you can comfortably pay back within the given duration.
9. Get your paperwork in order
Once you have selected the lender that you will work with and their terms of payment, the next step is getting the documents that you require to apply for the mortgage. Some of the documents that you should prepare include your pay stubs, credit card statements, tax returns for the past financial year, bank statements for a couple of months. You may also require other documents like proof of your assets, investments, and if you have a retirement fund.
In summary, a mortgage will enable you to become a homeowner and you can even get leverage when you take out a mortgage. By taking out a mortgage, you agree with the lender to repay them the money in the form of monthly payments with some interest. Different lenders have different requirements for you to qualify for their mortgage and it is important to research the terms of different lenders before deciding on the one you will work with. Before taking out a mortgage, there are some things that you should be aware of.
Some of these things include that it is important to have a good credit score when considering a mortgage, your income and debt-to-income ratio also matters and it is important to have savings that you can use to pay your monthly payments in case you are in a financial crisis. Different types of mortgages are available and you can decide the one that you want depending on the duration of payment. It is also important to choose a home that you can afford so that you don't strain your finances when paying back. When you choose the lender that you will work with, you should prepare the documents that you will require when applying for the mortgage.