Buying your first home is an exciting time, but it can also be stressful. Since you have never taken out a mortgage before, your mind is full of questions, such as: “Do I qualify for a mortgage? Can I afford all my house payments? How do I navigate the approval process?”
This blog will go over some mortgage basics so you will feel prepared before you take out a mortgage for your first home.
What is a Mortgage?
It is challenging and uncommon for anyone to afford paying the full cost of a home upfront. That’s why you take out a mortgage—a loan from a lender. You agree to pay off the loan, and the lender uses your home as collateral. If you cannot make the payments, you risk losing your home.
Typically, you will give your lender a monthly payment during the length of your agreement. This usually ranges between 15 and 30 years.
Parts of a Mortgage
Taking out a mortgage is not always simple; you will need to know about the different parts:
Principal: the amount you borrow to purchase the home. Most lenders want you to make a down payment that equals a minimum of 5 to as much as 20 percent of the home’s price.
Interest: The lender will charge you interest for taking out the loan. When you make your monthly payments, you will pay off part of the principal, along with interest.
Taxes: Taxes also may be included in addition to your monthly payments, which finance your community (for instance, schools, roads, and public services).
Insurance: Your lender won’t let you take out a mortgage unless you are paying home insurance. That’s because if you don’t have insurance and something happens to your home—flood, fire, theft, etc.—both you and the lender lose.
How Do You Qualify for a Mortgage?
Before a lender approves you for a mortgage, they want to make sure they can rely on you to make your payments. They’ll consider the following:
Credit history: Lenders will examine your credit history to determine whether you pay bills on time and to evaluate any debts you may have. The higher your credit score, the easier it is to get a loan.
Income: Your total monthly house payment—including taxes and fees—should not exceed 32% of your monthly income.When this amount is added to all of your other contractual debts, the combine total should not exceed 42% of your gross monthly income.
Before determining the type of mortgage you qualify for, lenders compare your monthly housing costs to your total monthly income. They also compare your debt to your income.
Once the lender has done their calculations, you can ask your lender for a prequalification letter, which will give you a good idea whether they will approve your loan. The letter will also tell you how much you can borrow and how much you will need for a down payment. You will want to obtain this information before you start searching for a house so you can find one in your price range.
What Should You Know Before Taking Out a Mortgage?
Before you take out a mortgage, examine your budget and create a financial plan.
Your biggest asset in taking out a mortgage is your credit history. This is the best indication to a creditor that you are ready to be a homeowner. Make sure you are paying your debts on time and not buying items on credit if you can’t pay for them quickly.
Your lender may also need other information, such as bank account statements, tax returns, loan statements, and former landlord information. Gather this information in advance so you are ready to provide it to your lender.
A common mistake first-time homeowners make is that they exhaust all their savings to pay for the down payment on their home. It’s important to keep a generous amount of money in savings in case something happens (such as a job loss or medical emergency) and you can’t pay your monthly payments in the future. Instead, choose a home with a lower down payment, or take out mortgage insurance.
Why Should You Work with a Mortgage Specialist?
Buying a home for the first time can be a complicated process. If you try to find a lender on your own, you may not end up with the best rates.
Working with a mortgage specialist saves you time. The specialist will do the mortgage shopping for you; he or she will know how to find leading lenders and will be able to provide you with a variety of options to choose from. This way, you can find a mortgage that works with your budget and your needs.
A mortgage specialist can also give you advice and guidance so you can make the best mortgage decision for your circumstances.
In addition, if you have been declined for a mortgage for some reason (for example, if you have experienced a bankruptcy), a mortgage specialist will know how to work with your unique situation and will connect you with the right lender.
Contact a mortgage specialist when you are ready to buy your first home.