Whether you are a first time home buyer or someone who is moving up the property ladder, visiting a mortgage company to inquire about a home loan can bring up questions. A mortgage is a massive financial commitment, and you may find yourself uncertain as to whether you can afford the costs involved in owning a home. In many situations, along with taking out a home loan for the purchase of your house, you'll also need additional cash up front. For example, you may need money for a down payment, out-of-pocket for property inspections, and/or closing costs. If you are planning to apply for a home loan, the following tips will help prepare you for the process.
What is a Mortgage?
Before starting the process of acquiring a mortgage, it is important to understand exactly what a mortgage is and the different options available through a mortgage company. Basically, a mortgage is a loan taken out for the purpose of purchasing land or property. Mortgages are different from a personal loan in that the mortgage is secured against the property. If you cannot make the payments, the mortgage company, bank, or other lender can take the property back. The average term for a mortgage is 25 years, but, depending on the terms of your agreement, it can be shorter or longer.
Credit Checks and Credit Score
In the majority of situations, regardless of where you are applying for a mortgage loan, the lender will require you to go through a credit check. The lender will also take into account all of your incoming and outgoing income. You may be required to produce paycheck stubs, bank statements, proof of any debts, and household bills. One of the most important factors of applying for a mortgage is your credit score. Your credit score typically alerts the lender as to whether you may be a high risk loan or not. Although there are mortgage loans available for those with a poor credit score, most lenders require a credit score in the high range. If you are able to obtain a mortgage loan with a poor credit score, in many situations, you may be required to pay a higher interest rate and/or have a large cash down payment. Knowing your credit score will help you know ahead of time as to whether you should work on repairing your credit or not.
There are a number of things you can do before applying for a mortgage that may make the process go much smoother and quicker. For example:
- Save your cash. Lenders typically require a down payment, and putting down a higher down payment will lower your balance and may lower your monthly payments. You will also need cash for credit report fees, title searches, home inspections, closing costs, and application fees.
- Stay at your job. A change in your employment and/or your income status can have a significant effect on the mortgage process.
- Avoid new debt. Paying off your current debts and avoiding any new debts will help raise your credit score as well as show the lender that you are financially responsible.
The first and most important thing you can do before going to the mortgage company for a home loan is to know what you can afford. Getting a pre-approval for a mortgage will help you choose a home that fits into your budget. Although it is common to get pre-approved for more than you expected, it is essential that you only look for homes within your budget and that you are confident you can afford.