What to Know Before Applying for a Mortgage

With mortgage rates at an all-time low, you may be considering taking the plunge into homeownership. However, rushing into such a large financial decision just to get a good deal could end up costing you in the long run. Slow down and take the time to do some research before calling up a mortgage broker. To help guide your search, check out this list of what to know before applying for a mortgage. 

What You Can Realistically Afford

Taking out a mortgage before doing some serious budgeting is a recipe for disaster. When considering how large of a mortgage you need to take out, make sure that you’ll be able to comfortably meet the required monthly payments.

As a rule, the monthly payments on your mortgage shouldn’t account for more than 28 percent of your gross income. Ultimately, taking out a larger mortgage to purchase a house outside of your budget typically isn't worth the financial strain and stress that it will cause as a result. Do yourself a favor and crunch those numbers ahead of time.

What the Different Types of Mortgage Options Are

There are essentially two main types of mortgages—a fixed-rate or an adjustable-rate mortgage. A fixed-rate mortgage charges a set interest rate, while an adjustable-rate mortgage’s interest rate may fluctuate after a specified introductory period ends.

In addition to these two main mortgage options, there are also several other types, such as hybrid-adjustable-rate mortgages, balloon mortgages, and buy-down mortgages. By familiarizing yourself with the many different mortgage options and what their terms are, you’ll be able to make an informed decision on which is ideal for your unique financial situation.

How Long You Want Your Mortgage Term to Last

Another important thing to know before applying for a mortgage is how long you want the mortgage term to last. Mortgages are typically available at either 15- or 30-year periods.

The main advantages of choosing a 15-year mortgage are that interest rates are generally lower, and they allow homeowners to pay off their loan in half the time as a 30-year mortgage. However, 15-year mortgages also require higher monthly payments, which can place more financial strain on homeowners than a longer, 30-year mortgage option. Before committing to a mortgage term, craft a detailed budget to determine which mortgage option will allow you to live comfortably.

Guest Post - Home Mortgage Approval: 8 Tips for First-Time Home Buyers

Buying your first home is probably one of the most important purchases that you have to make. Not to mention that it can be both an exciting and stressful experience. 

You would be surprised to know as well that a lot of people buy homes on impulse. Hence, a home that is supposed to give them peace and happiness ends up as a source of financial struggle and stress. 

So, if you have been shopping around for homes and mortgages, make sure that you follow these tips:

1. Know how much you can afford

Keep in mind that the monthly payments that you have to make in your mortgage are only part of your overall monthly expenses.

You also have to pay for homeowner's insurance, property taxes, and repair and maintenance costs. 

Create a budget and then pick a mortgage payment that you know you can afford. Ideally, financial experts suggest that you should not spend more than 30 percent of your total income on your housing. 

So, if you are bringing home $5,000 every month, your mortgage should not exceed more than $1,500 each month. 

No matter what sort of calculation you use, the most important thing here is not to overburden yourself. 

2. Check your credit score and history

Before considering you for a mortgage, the first thing that lenders will do is to pull out your credit report and check your credit score. 

Ensure that you check your credit card in advance to make sure that there are no errors. Keep in mind that you're entitled to at least one credit report every year from one of the major credit bureaus. 

Having a better credit score means that you could also have lower mortgage rates. If you're concerned about your credit score, then you could always find proactive ways how to improve it before you could go looking for houses. 

Paying your bills in time and making sure your credit card balances are kept low will always help. 

3. Save for the down payment

Requirements on how you can get a mortgage loan changes constantly. So, if you're thinking of applying for a home loan, then you have to be prepared. 

Going to a lender's office without any cash at hand is one of the fastest ways for your home application to be rejected. Most of these mortgage lenders are cautious to the point that they would even require a downpayment. 

4. Be financially stable

Lenders will tend to avoid working with risky clients, so it is always best that you place your best foot forward. 

Be financially stable. Have a steady cash flow so that you will avoid acquiring new debt. Staying with your employer while you are in the process of buying a property is crucial.

Taking on a low-paying job, or quitting your job to become self-employed is usually one of the major red-flags for lenders. This might cause your application to be delayed or rejected altogether. 

5. Manage current debts

Debts are not necessarily bad, especially if you could pay for it.

But in your mortgage application process, any kind of liability on your part could be an additional problem in getting approved. So, it is best that you lower your debt as much as you can.

Ideally, your debt-to-income ratio should not be more than 36%. Meaning, your debt repayments should not exceed 36% of your monthly income. 

6. Prepare your documents

Now, if you're ready to apply for your first mortgage, you have to provide lenders with copies of your most recent paycheck stubs, bank account statements, and tax returns. 

Having these documents will help you prepare in advance and will make the entire process a lot easier. 

7. Get pre-approved for your loan

Getting your loan pre-approved allows you to know how much you can purchase before you officially start house-hunting. This lets real estate agents and sellers know that you're a serious buyer and you already have your finances in order. 

All of these can be advantageous for your part when it comes to making an offer. Without it, especially in a highly competitive housing market, you might not have the chance to be taken seriously. 

It also speeds up the closing process because most of your financial information is already there in the lender's system. 

8. Consider hiring a mortgage broker

A well-qualified mortgage broker can help you identify the kinds of mortgage that will suit your needs and budget. Thus, you can acquire your first home without having to bend backward just to pay for the monthly amortization. 

In relation to this, the people at ServicePros Mortgage Brokers Auckland advise to not go with the first offer that you will come across. Hence, it is best to compare offers first. 

The whole process can be tiring, but for most people, the stresses that come with home-buying are outweighed by the pleasures of owning a home. Just make sure that you do a little advance planning in your part, and saving as well, as it makes the whole process a lot easier.

Author Bio: Meredith Davis, is a freelance writer.