Shopping for the right mortgage might not be as fun as shopping for a new dress or pair of shoes, but buying a property is one of the biggest purchases you can ever make, and the wrong choice can lead to many problems down the road. With many types of loans and various payment terms to choose from, it’s important to find the one that best fits your needs. With careful consideration, research, and these tips, you can make the process as stress-free as possible.
Evaluate Your Budget
The first step to finding the right mortgage that fits your needs is figuring out whether you can afford the property you’re planning to buy. You can do this by using the 28/36 percent rule, meaning that you should only spend 28% of your monthly income on housing expenses while and 36% on your total debt, including credit cards and car loans. If you’re planning on purchasing a home with your partner, you can combine both revenue sources to figure out what your budget is.
It’s also important to remember that mortgage lenders consider your credit score when you apply for any loan, so if you have a good credit score, they may suggest deals that are higher than you can afford. Consider doing this step as early into the process as you can. If possible, any research or planning should be done months in advance. By doing this, you’ll not only have a smoother mortgage application process, but you’ll be ready for any additional costs you might need to fork out.
When computing your budget, remember to allot a part of your budget for your personal expenses and the things that make you happy, especially during these uncertain times.
Save Up for Upfront Costs
As we mentioned earlier, planning and research should happen months before deciding to apply for a mortgage loan. This allows you ample time to save for upfront expenses such as down payments and closing costs. The down payment is one of the heaviest parts of a mortgage loan, but the more money you put down on a down payment, the easier it is to build your home equity. The real estate market is volatile, and one small downturn in the market can cost you, especially if you make a smaller down payment. This could lead to a bigger loan overall and decrease your home’s value, which spells bad news, especially if you ever decide to move out.
Decide How Long You Want to Pay Off Your Loan
There are different payment terms available to mortgage loan applicants, but the most common mortgage terms are 15 and 30-year fixed-rate mortgages. However, other options range from 5-year to 40-year plans. While extending payments to cover a longer period results in lighter payments, it also increases the interest rate that you will have to pay over time.
Choose a Mortgage that Applies to You
Depending on your lifestyle and needs, there are special mortgages that may apply to you.
VA loans apply to U.S. veterans, military personnel, and spouses. The loans are generally guaranteed by the Department of Veterans Affairs and often don’t require a down payment.
If you’re tired of the city and are interested in living in rural or suburban parts of the country, then this type of loan may be the right one for you. It is guaranteed by the U.S. Department of Agriculture and, like VA loans, don’t usually require a down payment.
Building and maintaining a good credit score is something not everyone can achieve. FHA loans are a great choice for those who don’t have a high credit score and have little savings, which is why this type of loan is popular among first-time homeowners. However, unlike the previous types of loans, this requires a down payment of at least 3.5%.
If you want to push the envelope and splurge on a house that you plan to live in for a long time, you might consider applying for a jumbo loan. This type of loan helps finance properties that surpass the limits set by Federal Housing Finance Agency (FHFA)
If none of these apply to you, conventional loans like conforming and non-conforming loans may be the better choice. The choices can be overwhelming especially if you’re a first-time home or property buyer, so if you’ve done your research but still can’t decide which deal is the best for you, you may want to seek the help of a broker that can help you with the mortgage process.
Do Some Window Shopping
The best way to find the perfect mortgage deal that fits your needs is to shop around and lay out your choices. Treat it the same way as when you shop for important appliances. Have at least 2 or 3 lenders in mind, list down the pros and cons of each deal, and by process of deduction, figure out which deal is the best one for you.
Mortgage shopping is intimidating, especially when you’re new to the mortgage process. It’s important to remember to take your time when considering which mortgage deal you should get. No matter which loan you choose, know your financial standing and make sure that you can afford to pay off your loans. And when you’ve finally reached the time to make a decision, remember that what you save on a good mortgage deal can lighten your load and allow the extra savings to go to other important living expenses.