Mortgages: 5 things you need to know now
Are you planning to buy your dream home? Thinking of getting a mortgage to finance the purchase? Before jumping on a mortgage, knowing these five things will help you make a smarter decision.
- Check your credit report
Mortgage lenders determine your loan qualification based on your credit score. A score of 620 is the minimum acceptable baseline for many lenders to even consider your loan application. But most lenders will insist on a higher score.
Based on your credit score, mortgage lenders decide on loan and mortgage rates. With a better credit score, you’ll be offered better rates and can bargain for concessions. It is thus essential to pre-check your credit score before taking a loan.
You can get your free credit report from the Consumer Financial Protection Bureau (CFPB). With a credit report in hand, you can:
- Know where you stand as a borrower
- Assess your debt status
- Identify any errors and make corrections
- Improve your credit by strategically paying off debt
- Get a mortgage pre-approval
In all the whirlwind excitement of buying a new home, you may dive into house hunting straight away. But experts advise to get your finances ready first. The best way to do this? Securing a mortgage pre-approval.
Getting pre-approved has many benefits:
- You can know the precise loan amount that you’re eligible to get. (This saves you hours in search time since you’ll be able to weed out pricier listings.)
- You can make a better offer and close a deal with the knowledge of how much you can realistically spend.
- There will be less chance for the lender to delay or reject the mortgage.
That’s all good stuff. But don’t confuse pre-approval with pre-qualification. With pre-qualification, the lender will give you an estimate of the loan amount that you could get, but it’s based on an informal evaluation of your finances.
On the other hand, getting a pre-approved mortgage from the lender means you will know the exact amount of loan that lenders can offer you. The lender makes the calculation based on your credit score and other financial information.
- Decide on the loan term
Typically, a mortgage term is for 15 or 30 years. If you want to pay off the loan faster, take the 15-year mortgage, of course. The advantage: mortgage rates are lower for short-period loans. But your monthly payments will be higher than 30-year loans.
Whatever your choice, choose a loan term by calculating the monthly payment that you can afford.
- Go mortgage shopping
Before applying for a loan, go mortgage shopping. By comparing lenders, you’ll get an idea about the various mortgage offerings available.
Things to look for while mortgage shopping:
- loan amounts offered
- loan terms and conditions
- term structure of interest rates
- type of loans available
- Be aware of closing costs
When calculating your mortgage payments, always include closing costs. These are expenses incurred by the lender for servicing your loan.
Some of them are:
- Appraisal fees
- Attorney fees
- Insurance premiums
Be aware of closing costs as these will vary depending on the mortgage lender, loan type, and state of origin.
Make an informed decision
Knowledge is power, my friend, and you’ll soon have more of it. You likely already know that the current mortgage rates in the U.S. are at a historic low. It is an opportune time for many new home buyers and real estate investors to secure property. With deeper insights on your mortgage possibilities, you can make an informed decision about a loan to buy your dream home.