Everyone dreams of having their own home. However, with the cost needed in purchasing one, it may not happen that soon to some. If you’re already in a point that you feel that you’re finally ready to purchase your first home, it’s best that you get to know more about the process and other important information that has to do with it. This would help you in making the right decision.
What is a Mortgage?
Mortgage is a loan for purchasing home in which the property becomes the collateral. Banks and lending companies offer this type of loan. Their requirements, terms and rates vary from each other. Search around and compare your options to see which would work best for you. The amount that will be lend to you would have an interest that would also be included in the payment. You’ll be given a specific period for you to pay the loan with its corresponding interest. You need to pay your monthly installments and avoid getting pass your due as you’ll incur penalties. If you default on the payment of your mortgage, your home will be claimed by the bank or lender.
Types of Mortgages
There are different types of home loans available and they have their own pros and cons. The three most common are conventional loans, FHA loans, and VA loans.
This type of loan is the most popular of the four. It often requires a down payment of around 20% of the total cost of the property. This means that you need to have enough money to pay for this out of your pocket. The good thing is that you don’t have to pay for private mortgage insurance or PMI, which is paid monthly. This secures the loan in case you default on your payment. If you have the cash to pay for the down payment, this could be your best bet.
FHA loan provides insurance to this type of loan given by approved lenders to prevent the risks associated with the borrowers defaulting on their payment. While it’s popularly known to be for low income earners and those with low credit score, other people who do not fall under these categories may still get this type of loan as long as they meet the requirements. The advantage of this is that the down payment can be as low as 3.5%. However, you’ll be required to pay the monthly PMI. If you don’t have the cash to pay for a minimum of 20% down payment, this could be an option, but you also need to consider the PMI that you’ll be paying on top of your monthly installments for the loan.
This type of loan is guaranteed by the Department of Veterans Affairs. Only qualified veterans can get a VA loan, but if you’re qualified, you may get this for no down payment.
Mortgage Interest Rate
One of the most important things to consider when applying for a mortgage loan is the interest rate. This would determine the total amount that you will be paying for the duration of the loan. There are generally two types of loan interest rate and they are fixed and floating rate. They also have their own benefits and drawbacks, which we will go through further below.
Fixed Interest Rate
As the term suggests, this type of interest rate would let you pay for the same interest rate for a set period. This is usually from six months to five years, depending on what you and the lender agreed upon. The good thing about this is that you’ll know exactly how much you’ll be paying for your monthly installments and your rate wouldn’t go up even if the interest rate in the market does. However, if interest rates get lower, yours would still be the same. Plus, you may not be allowed to make extra repayments or you may be allowed but for a fee.
Floating or Variable Interest Rate
This type of interest rate changes. It follows the interest rate in the market so the amount that you will pay would depend on it. If it gets down, then your rate would also go down. However, if it goes up, then the amount that you will pay will also go up. You can make extra payments, change terms and pay off the entire loan early without any penalty.
What You Need to Get Approved
Lenders have varying requirements that you need to meet in order for your mortgage to be approved. Here are some of the things to put into consideration to get a better chance on the approval of your loan.
Good Credit Score
Lenders perform credit check to determine your credit score. This would give them an idea if you’re responsible for paying your loans or you could be a risk to them. Not having credit is not good either as they will not have a basis on your ability to pay, which could also be considered as a risk. A score of 720 and higher is considered a good one. This will not just give you a great chance for having your loan approved, but you could also get better rates. While there are lenders that may still approve of borrowers with score lower than 720, the interest rate may be higher due to the risks involved.
Stable Source of Income
Your loan is more likely to get approved if you’ve had a stable job for several years. If you have your own business or you’re self-employed, you also need to prove that you have consistent source of income to ensure that you can pay off your loan.
Aside from paying the down payment, lenders may also check if you have enough cash as there would be other expenses associated with owning a home that you need to pay for.
Buying a home could be the one of the biggest purchases that you would ever make in your life. Make sure that you’re ready for the responsibilities that come with it. Remember that once you purchased it, there would be added expenses that you need to deal with including paying for property tax and making repairs.