Mortgages are a huge financial decision for most people. For many, it is the biggest purchase they will ever make in their lifetime. As such, it can be difficult to know where exactly to start when you are looking into getting one. The good news is that there are more options than just going through your bank, and if you are just beginning the process, it's helpful to know what steps to take in order to prepare adequately.
Know your credit score
Your credit score is one of the most important numbers in your life. It can determine how much you pay for a loan, and also help you understand your mortgage eligibility. People check their credit scores all the time, but many don't know exactly what they are checking. They think they are checking their current score but are actually checking a "soft inquiry," or a score based on a limited set of information.
If you want to check your real credit score, you have two choices: You can buy it from one of the three main credit-reporting agencies - Equifax , Experian and TransUnion - or you can get a free report from AnnualCreditReport.com. If there are things you need to work on, like large amounts of debt, it's best to take care of these things before applying.
Save up for a down payment
The next step is to determine how much money you will need for a down payment. This can vary depending on the lender, but conventional mortgages typically require at least 10 to 20 percent. You also want to factor in other associated costs, such as closing costs and homeowners insurance. If you want to put down less than 10 percent and you meet other requirements, such as income limitations, you may want to look into a government-backed loan, such as an FHA mortgage.
Explore your mortgage options
There are several types of mortgages that homeowners in the United States can currently take advantage of, including conventional mortgages, government-backed loans, mortgages with varying terms, and mortgages with varying types of interest rates.
Various factors influence which type of mortgage you should apply for. One major factor is the interest rate. Some interest rates are fixed, whereas others are adjustable. There are pros and cons to both, so you'll have to discuss these options with your lender.
If you meet certain criteria, you may also qualify for special government-backed loans. Some of these mortgages include FHA mortgages, VA loans, USDA loans, and others.
You must also decide how long you want your mortgage term to last. If you plan on living in your home for a short period of time, the short-term adjustable-rate mortgages may be best for you because they are generally less expensive than other types. However, if you plan on living in your home for the long run, then a conventional fixed-rate mortgage will be best to avoid extra interest later on.
Decide whether you want to pay points
Another factor that should be considered when applying for a mortgage is whether or not you want to pay points. One point equals one percent of the total loan amount. For example, if you pay two points on a $300,000 loan, you would owe $6,000 at closing time. In many cases, it is advantageous to buy down your interest rate through points instead of paying a higher monthly payment. Points are usually paid in cash at the time of closing and can be deducted from the total mortgage amount before it is figured into the interest rate.
Find the right lender
Once you have an idea of what you can afford, it's time to start looking at lenders. There are a lot of them out there, so it's important to do your research and find one that fits your needs. Make sure to compare interest rates, as they can vary quite a bit.
After you've settled on a lender, the next step is to apply for a mortgage. This will include information about your income, assets, and debts. Be prepared to provide documentation, such as pay stubs and bank statements.
Get pre-approved
You will have to go through a credit check when your application is processed. This is done in order to gauge how risky it would be to lend you money. If everything looks good, you may be able to get pre-approved for a mortgage! Since you already pulled your credit at the beginning of the process, there shouldn't be any surprises.
As soon as you're pre-approved, it's time to start looking for houses. Once you have found a house, you can sign the offer to purchase agreement. This will be contingent on your lender's approval, of course. There is no set timeline that lenders must use for this process, so just try and remain patient with them.
If everything goes through as planned, it shouldn't be long before you are the proud owner of a new home! Just make sure to keep up with your payments and you should be good to go!
