Purchasing a home is a significant financial decision and will likely put you in a considerable amount of loan debt. Applying for a mortgage gives most Americans the ability to own a home. However, with a high-interest rate, it’s possible you could pay for your house twice, which won’t bode well for your retirement savings. To ensure you keep payments down, follow these steps.
Step 1: Knowing Which Mortgage is Right for Your Needs
Before you can shop around for the best mortgage rate, you need to know what kind of mortgage you want and need for your home you wish to purchase. There are plenty of small details to consider, so it’s in your best interest to plan ahead before you speak to a lender. While a lender can help you iron out the details, it’s also important to have a plan.
Here are all of the details you should research before deciding on the best mortgage loan:
- Mortgage Payments:How much are you willing to spend on paying off your mortgage? Do you have enough to pay for the interest plus the principal?
- Mortgage Type:Do you prefer a fixed-rate or an adjustable-rate mortgage? With a fixed-rate, the interest percentage won’t rise, whereas it does on an adjustable-rate mortgage. Typically, fixed-rate mortgages are easier to manage.
- Interest Rates:What is the interest rate of your mortgage? Check out this page if you want to compare different interest rates from multiple lenders.
- Amortization Period:How long do you want to spend paying off your mortgage? While a 15-year atomization period will help you pay off your mortgage faster, you’ll be subjected to higher monthly payments. A 30-year mortgage will charge you more in interest.
- Payment Frequency:Do you want to make weekly, bi-weekly, or monthly payments?
- Down Payment:The minimum downpayment for most lenders is 5%, but if you give your lender a higher down payment, you can reduce your monthly payments.
- Mortgage Insurance:Mortgage insurance lets you freeze your monthly payments if you’re unable to make payments for various reasons.
While this isn’t everything you need to consider, you’ll have the bases covered if you focus on these details. Having a good idea of what you want can make the lending process smoother.
Step 2: Getting Pre-approved
Now you can start looking for lenders that will provide you with the best mortgage, but you also need to do a little more homework before knocking on a broker’s door.
Request a Credit Score Report
Your credit can significantly improve your chances of getting a low-interest rate and getting pre-approved. As a rule, you want to be 660 or higher because that makes you a low default risk, but 750 or higher will provide you with a rock-bottom interest rate. If you’re not happy with your credit score, wait two years to up it by 20-40 points through paying bills on time and reducing debt.
The pre-approval process starts by speaking to your potential lender to discuss the maximum amount of money they can lend you and what the interest rate could be. After getting pre-approved, your interest rate is guaranteed for 120 days, you’ll understand your monthly mortgage payments, and you’ll have an idea of what your maximum budget will be.
Being pre-approved doesn’t guarantee you’ll be approved for a mortgage because the lender must verify that the home you want to purchase meets their standards. Banks, insurance companies, mortgage companies, loan companies, trust companies, and credit unions can pre-approve you. All lenders work differently, so shop around for one that suits your situation.
Step 3: Qualifying for a Mortgage
The lender will consider your household income and debts before giving you a loan. There are two key factors in determining this number: gross debt service ratio and total debt service ratio. Gross debt is the amount of registered debt you’ve incurred with loans and credit cards, while total debt is what you’ll need to pay for all home-related costs plus debts.
The closing costs and upfront costs may be included in this ratio. For example, appraisal fees, legal fees, and land registration is considered a home-related cost. However, moving costs, storage costs, and real estate costs aren’t likely to be included. Ask your lender for more details.