Things to Consider Before Applying for a Mortgage

Renting is generally not a bad option for many people, but having a house of your own comes with a myriad of advantages. Being a homeowner provides a sense of stability, not to mention that you will be able to sell your house whenever you need or use it as collateral later on.

However, houses are not exactly cheap, so unless you are a millionaire, chances are that you will not be able to buy your dream house on the spot. This should not stop you, though, as financial institutions like banks offer mortgages that can help you buy your dream house. While getting a mortgage is easy nowadays, you need to keep some considerations in mind when applying for one. So, check the following tips for more details.

Pick the Right House

A mortgage is just like any loan, meaning that it is a way of providing you with some quick liquidity. Nonetheless, this does not mean that you should abuse such an option. Receiving a mortgage can indeed help you buy your dream house, but you have to be reasonable when you are picking the house you want to buy. While the “go big or go home” mentality might work in some instances, it is a terrible idea to pick a big house just because you feel like it. Big houses come with hefty price tags and require substantially bigger mortgages as well. The more expensive the house is, the bigger the monthly installments you need to pay will be. So, do yourself a favor and avoid any sticky situations by picking a house with a mortgage you can actually afford.

Make Sure That Your Credit Score is Adequate

Financial institutions like banks or lenders, in general, always look for trustworthy borrowers, but how can they know if an applicant is responsible enough? Well, it all boils down to the concepts of “credit score” and “creditworthiness.” Whenever you receive a loan or use your credit card, your transactions and monthly payments are tracked. So, if you have ever defaulted on paying a loan or have not settled your credit card debt on time, your credit score might be less than optimal. Lenders usually place a lot of importance on your credit score, favoring applicants with excellent credit scores.

In essence, mortgages are not really different from other types of loans, as they require a specific level of creditworthiness. However, if you are a millennial or Gen Z, then you might not have had the chance to build your creditworthiness yet. The Federal Housing Administration facilitates the process by allowing first time home buyers with low credit scores to get a mortgage. However, there is no need to worry if this does not apply to you because you can improve your credit score by settling your debts. Improving your credit score is essential, as it opens many doors and enables you to land better offers with lower interest rates and monthly payments.

Get Your Down Payment Ready

Unfortunately, getting a mortgage is not enough on its own; you need to provide a down payment from your savings. This is why it is important to save a bit before you apply for a mortgage. As a general rule of thumb, you are required to pay 3-20% of the total value of the house upfront while the mortgage should cover the rest. This does not mean that paying only 3% as a down payment is a good idea if you have enough savings to cover more. Applicants who are willing to pay less than 20% of the house’s value are required to buy personal mortgage insurance (PMI). Indubitably, this can form a source of financial stress for you because it will increase your monthly installments. On the other hand, paying 20% upfront can help you get better interest rates and enables you to avoid the extra costs of PMI policies.

Choose the Best Interest Rate

Not all mortgages come with the same interest rate. Generally, there are two main types of interest rates: fixed and variable. Fixed interest rates do not change throughout the term of the loan regardless of any economic disruptions. On the contrary, variable interest rates are subject to change based on economic fluctuations. You may be tempted to get a mortgage with a variable interest rate, thinking that this can help you save some money if the economy suddenly improves. However, this entails a huge risk because the interest rate can suddenly shoot up during periods of economic stagnation, effectively increasing your monthly payments. So, it is better to stick with a fixed interest rate than the risk it all in hopes of saving an insubstantial sum.

Consider the Loan Term

Mortgages are long-term financial commitments, as borrowers usually pay them back over 15-30 years. Understandably, these long loan terms may not appeal to everyone. For this reason, some applicants look for mortgages that have shorter terms. Getting a short-term mortgage is beneficial because it entails a lower interest rate. On the downside, the monthly installments you will have to pay if you get a short-term mortgage are going to be considerably higher. If you think you can handle high monthly payments and want to benefit from the low-interest short-term mortgages can offer, then it is definitely a viable option.

Be Prepared to Make Some Budget Cuts

Monthly payments, interest rates, and loan terms are all details that should not be taken lightly. Your monthly budget and spending habits dictate whether or not you will be able to pay your monthly installments on time. So, unless your income can cover the installments and allow you to maintain your current spending habits, be prepared to make some cuts here and there to be able to afford the mortgage. Keep track of your expenses and eliminate any unnecessary purchases to avoid defaulting on your payments.

 

The process of applying for a mortgage is fairly simple, but you need to understand how mortgages work in order to make an informed decision. Interest rates, repayment terms, and even your credit score determine the monthly installments you will have to pay down the line. So, take your time and compare your options. Also, make sure you find a reputable lender to avoid the complications associated with shady institutions.

Consider alternative mortgages such as the home equity conversion mortgage insured by the FHA Federal housing administration a part of HUD housing and urban development. The federally insured Reverse Mortgage is a program for seniors age 62 and older that allows to tap equity without requiring a structured monthly mortgage payment. This program is safe and available to all homeowners 862 and older with at least 50% equity in their homes for a rough calculation check out this free HECM calculator.