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The Washington Independent
Why you should think first and think hard before getting into a mortgage payment

Why you should think first and think hard before getting into a mortgage payment

Jun 14, 2021 09:09
finance
Anderson Patterson

Table of Contents

Getting QualifiedProcess of getting a mortgageProof of incomeAssetsEvaluation of debtCredit scoreFind a mortgage that works for youGovernment mortgagesCalculating interest ratesOptions outside banksYour budgetIdea of refinancing

For many people, a house will be the largest purchase you will make in your life. This is an exciting time in many people’s lives and marks a new stage in life, but the process is not always simple and straightforward. Because this is such a huge commitment financially, you want to ensure that you understand and research everything there is to know about a mortgage and getting the best possible option for your financial situation. Here are some things that you should consider when you are looking at your options and before first committing to a mortgage payment.

Getting Qualified

One of the first things that you need to do long before you consider buying your home, and even before you start looking at different properties and real estate, is to get prequalified. Getting prequalified means that you reach out to a bank or credit lender to work with them and go through the basic credit process. This will determine with the bank if they are willing to work with you to get you a loan in the first place. If you do not prioritize this aspect first, you will waste a lot of time. Think about the idea of going through the process of looking at a property and loving the home. If you put your offer in at this point that gets accepted and then do not qualify for the mortgage you require, you will have wasted not only your own time but everyone else’s time, including any property owners and real estate agents. This can add months of headaches, trying to get approved by banks and lenders. If the person trying to get a loan eventually gets rejected, a seller now has lost months when the listing could have pulled in potential buyers. Getting a prequalification before you begin your home searching process, you will have the edge over other interested parties as property sellers see you with more certainty to complete the transaction.

Process of getting a mortgage

When you are applying for a mortgage, there are several things that you need to show the bank to prove that you are a good candidate for a loan. This is important because if a bank or lender sees you as a qualified candidate, you will be eligible for a larger loan, and oftentimes at lower interest rates. This is because the lender will see you as a better investment than others with lower credentials. Any lending party is trying to make money off their mortgages, but they cannot do that if the person in question cannot make their payments, no matter how much interest they charge. Ultimately, they want someone that will be a guarantee to pay off the full mortgage, and if you can sell yourself to the banks as someone that can meet their financial requirements, they will be more than happy to work with you.

Proof of income

The first thing that you have to show a bank or lender when you are applying for a loan is your proof of income. This essentially shows how much you can afford in terms of payments, and gives banks or lenders an idea of the money you will have at your disposal for the long term. Your proof of income will usually be work or tax forms that indicate a steady income for the past several years. It is not enough to show a couple of months, as they want to know that the money you make is coming in at a consistent rate.

Assets

Other factors that you will need to have proof of are any assets. These will provide an idea of what else you have of value. This could include things like investments in real estate, business ventures, and the stock market. By doing this, you showcase your wealth and capability to repay your mortgage, but also assets to be used as collateral, which puts your lenders more at ease.

Evaluation of debt

The banks will also look at your debt to income ratio when they are determining if you are a good candidate for a loan and what loan you qualify for. This is important because even if you have a consistent amount of income and have assets, your debt could outweigh those positives, making you a liability for lenders to negotiate with. This will include all types of debt, ranging from credit cards, car loans, or school loans. The amount of debt a bank is comfortable seeing in relation to your income will vary from institution to institution, but be sure to have this information ready to provide to your lender. It is in your best interest to pay off your debt as early as you can when you are considering purchasing a house and taking out a mortgage.

Credit score

The last thing you will find that banks will look at when you are looking to take out a mortgage is your credit score. This is reflective of your ability to make your payments on time and your ability to manage your finances. As mentioned, a bank wants to enter a contract agreement with a candidate that is going to be a good financial investment for them. If you have a bad credit score, this tells the bank they may not be seeing payments on time and risk not being able to complete the payments for the mortgage throughout your lifetime. This makes you a much bigger risk for them, and they will be unlikely to offer you a mortgage that is ideal for you. 

Find a mortgage that works for you

There are different types of mortgages on the market when you go to the bank looking for a loan for your home. The main two mortgage types are categorized or labeled as either a fixed-rate mortgage or an adjustable-rate mortgage. A fixed-rate mortgage charges you a specific interest rate that will not change, neither increase nor decrease, over the length of the mortgage. With an adjustable-rate mortgage, the amount of money you pay will change depending on market interest rates. There are also structural differences in the contracts associated with adjustable-rate mortgages, changing the number of months you may not see changes or increases to the initial interest amount you are paying, and then after a period of time, your interest rates will follow the market value. In times when interest rates are relatively low, it may make sense to get a fixed-rate mortgage, as you would expect rates to only increase. With either mortgage, it can be either positive or negative, as the rate of the market interest rates may decrease over the period of your mortgage, but can also increase. Unfortunately, you cannot determine the cost with full certainty. A lower fixed-rate mortgage provides you the certainty of knowing exactly how much you will pay over the period of your contract, which is ideal for some people, even if that means they pay a little bit more some years.

Government mortgages

Another option to look at when you are looking for loans and mortgages is to get a government-based mortgage. These types of loans will vary and differ from your traditional or conventional mortgage through several factors. First, the total amount of the mortgage in a government may be lower than some conventional mortgages, meaning you will not always be able to afford some higher-end properties. With a government loan, the credit score demand is not quite as high but will come with higher interest rates and insurance or upfront fees as part of the contract. The goal of government loans is to provide assistance for people that don’t have access to more traditional loans. This includes people with lower incomes or lower credit scores, people that live in rural areas, or military veterans.

Government mortgages

Calculating interest rates

Your interest rates will play a huge role in your mortgage. It is important that you understand what factors come into play when calculating your interest rates on your mortgage loan. As previously touched upon, some of the factors that impact your interest rates are the type of loan and the market interest rates. Understand that your credit score not only translates to the loan amount you are eligible for but also the rate of interest you will have. Additionally, the amount of money that you are putting down on your initial mortgage payment, as well as the length of the loan impact the amount of interest you will have to pay as well. Using an interest calculator, you will utilize these different factors to determine the cost of your interest throughout the length of your mortgage. If you find that the interest is more than you would like to pay, there are ways to reduce those costs, such as restructuring your loan length to be something shorter, meaning you would have to pay back the total amount plus interest much faster. Additionally, you could look at different loan options or ways to improve your credit score. This is why it is crucial to think well in advance before you decide to get a mortgage. There are so many variables that can be impacted early on with time that will change the amount you are able to borrow.

Options outside banks

A lot of people immediately look to banks for their financing needs when they are looking to purchase a home. Of course, there is nothing wrong with that, as they do provide great options. However, if you are not finding the rates or the amounts you are looking for with a bank, there are other financial institutions and lenders that you can connect with that will provide you options. Some lenders may even give you better rates in terms of interest than banks do. This is why it is important to shop around, even if you find great options, but especially if you are not finding the financing terms you want. There is no downside to seeing what is available out there since many options are available through a variety of online resources.

Your budget

Before you commit to a mortgage, it is your responsibility to understand your budget and what you can afford. It is not the responsibility of your real estate agent or even your bank, although they can provide you options for finding a home within a price range as well as giving you financial advice, they both make money off of you in the way of commissions and interest. Ultimately, it is your job to set your financial limitations, so be sure to do your homework and research. Just because you can qualify for a higher mortgage, does not mean you should take it, as this will be a huge financial commitment. Be comfortable in the amount you spend and consider your budget carefully.

Idea of refinancing

One thing you should be aware of when you are getting a mortgage is your options to refinance. This usually occurs when you have gotten a specific type of mortgage, like a government one, and are paying extra fees like insurance fees, and higher interest rates, and are looking to refinance into a mortgage with lower rates after a certain amount has been paid off. This provides great flexibility on your finances, but it is important to consider that not everyone will be able to refinance their loans, and you should not commit to your mortgage thinking this is going to be the case for you. If it is available to you, it will be great, but you should ultimately feel that you can afford your home with the budget you have.

There are many factors that go into purchasing a new home, and it is important that you go over everything, fully understanding what you need and how to be fully prepared. Home buying starts well before you even begin looking at properties, and your financial history can have huge monetary implications for your loans and eligibility. Be sure that you start learning as soon as possible, and you will make the process much easier to go through.

Anderson Patterson | Anderson is a video editor and developer who believes in the power of visual organization. He recently graduated from the University of Washington, where he concentrated on post-production during his studies. He was first exposed to the mystical world of visual art creation while watching his father edit advertisements when he was a child, and he has been working towards his dream of becoming a video editor ever since.

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