A mortgage is defined as a loan given to finance the purchase of real estate where the borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.
How much mortgage you can afford is an essential part of the home buying process. To determine what you can afford you must take into account your gross income, credit score, liabilities (expenses), and down payment amount.
Possessing a pre-approval letter from a lender is to your advantage. It shows the seller that you are a serious buyer and it allows you to know the price parameters that you must work within.
There are both conventional and government loans. All the various mortgage programs may be classified as fixed rate loans, adjustable rate loans and their combinations.
Fixed rate mortgages have the same interest rate for the life of the loan. The rate at the beginning of the loan will be charged for the entire life of the loan. The interest rate does not change for a predetermined amount of time. A high percentage of home loans are fixed rate mortgages. They generally have terms of 10,15, or 30 years. The advantage here is that the homeowner knows exactly what rate will be charged the entire length of the mortgage.
An adjustable rate mortgage (ARM) is one in which the interest rate charged is based on a specific schedule after a fixed period at the beginning of the loan. An arm is considered riskier than a fixed rate mortgage because the payment can change significantly from year to year. Due to this risk the homeowner generally has an interest rate that is lower than that of a 30 year fixed rate.
Look at several loan programs and compare rates, points, and terms. There exists a good deal of variation in the mortgage market, not only from week to week, but from lender to lender.
What NOT to Do When Applying for a Mortgage
New Credit Is Bad Credit
Never apply for any new credit while you’re trying to get a home loan. Opening new credit decreases your net worth by giving you more available debt. This makes you a riskier investment in the eyes of a mortgage lender.
As such, you can suffer from higher interest rates or even get denied a loan. This includes co-signing for other people’s credit, which is the same as applying for your own credit in the eyes of the bank.
Opening new bank accounts and moving money between existing accounts is also a bad idea, even though you aren’t technically applying for any new credit.
And while we’re at it, leasing a car might not be the same as buying one but it also falls under this general category of avoiding new debts.
Quitting Your Job
This one is pretty much a no-brainer. While your credit score and credit history pay a big role when it comes to whether or not you get a mortgage, so does your income.
Quitting your job without having another one lined up is never a good idea, but when you’re applying for a home loan, it’s just about the worst idea out there. Switching careers isn’t the best plan either, even if you have a job waiting for you.
Lenders want to know that you have a steady income stream that (probably) isn’t going anywhere.
Depositing Phantom Funds
Underwriters want to be sure that all funds in your bank accounts are actually yours and not money your parents gave you to make it look like you have more funds than you actually do.
Talk to a mortgage advisor before you put anything into your bank account that doesn’t come from a payroll within 60 days of applying for a mortgage. After 60 days, mortgage lenders are less interested in having a paper trail for everything.
If you’ve just had some kind of cash windfall, keep the money in your mattress until after you’ve closed.
The exception? Properly documented gifts. Talk to your mortgage advisor about creating the right paper trail for gifted money.
Ins and Outs of Credit
Closing old credit accounts can potentially lower your credit score, as the length of your credit history is as important as what you’ve done with your credit. Discuss it with your advisor before you close any outstanding accounts.
The same goes for paying off unsecured credit lines or credit cards while you’re applying for a loan. When you pay off your outstanding consumer credit accounts, you might not be able to use the money for a down payment.
While on the subject of credit cards, we should say that you generally should not be charging significant sums on your credit card before or during the loan application process.
Try and pay off whatever you charge every month. This is because even a few points can make a significant difference in what you pay for your home over the life of the loan in the form of interest.
Discuss your specific situation with your mortgage advisor.
Listen To Your Advisor
If there’s one piece of advice that you should take away from this article, it’s consult closely with your mortgage advisor throughout the process. They’ll be able to tell you what to do and not to do in a manner far more specific to your situation.
Still, be mindful of your credit and remember it is under especially close scrutiny during the mortgage process. Keep your eyes on the prize — your new home.