If you are looking to own a new home, the chances are that you will need a mortgage. At times, a mortgage can seem complicated and intimidating to new and inexperienced buyers. However, this doesn’t have to be the case.
Understanding how mortgages work, some necessary information, and what to expect smoothens the process.
This article will answer questions related to mortgages, to prepare you for when you want to buy a new home.
What Is A Mortgage?
A mortgage is a loan that you acquire to purchase a property. It follows the criteria of other types of loans, whereby you must apply and wait for the approval. After receiving the loan, you will have to repay it monthly for a specified number of years.
However, there are some factors lenders consider before they can approve your loan. Here are some of the factors.
Credit score
This is arguably the most crucial factor they consider. It reveals your financial responsibility and history of repaying loans. A perfect credit score will increase your chances of acquiring the loan. If the credit score is low, you are likely to receive a loan with a higher interest rate or none at all.
Your income
When you receive a mortgage, the lender expects you to repay a fraction of the loan every month. It is why lenders must first confirm your income. It will help them ascertain whether you can consistently repay the loan.
The lender may request you to provide the necessary documentation.
Debt-to-income ratio
The debt-to-income ratio is the calculation of the gross monthly payments divided by the gross monthly income. The lower the DTI number, the better chance you have of securing a mortgage. On the other hand, you can lower a higher DTI number by increasing your monthly income or repaying existing debts.
What Costs Are Included In A Mortgage?
When applying for a mortgage, there are several other costs and expenses that you should consider. They include:
• Down payment- This is the money you pay upfront. In most cases, lenders request 20% of the total cost of the property. You are likely to pay more if your credit score is low.
• Principal- this is the amount of cash the leader offers you.
• Interest- it is the rate a lender charges you for the loan.
• Tax- after successfully purchasing your home, you will have to pay property tax.
• Insurance- you will have to pay for homeowner’s insurance, which will insure your home against damage as a result of theft, fore, and so forth.
What Are The Different Types Of Mortgage?
Since everybody has their own mortgage needs, lenders offer a variety of loan types. Here are the most common types of mortgages.
Fixed-Rate Mortgage
Most individuals prefer this loan option. It is because the rate doesn’t change throughout your loan repayment period.
Adjustable-Rate Mortgage
This type of loan allows you to pay lower, fixed interests for the first ten years or less. After that, the interest rate changes on an annual basis, depending on the current interest rates.
FHA Loan
An FHA loan is ideal for new buyers who can’t afford the 20% down payment and those who don’t have a perfect credit score.
VA Loan
Only veterans, national guards, surviving spouses, reservists, and active-duty personnel are eligible for this type of loan. It does not require a down payment or a perfect credit score.
How Do You Apply For A Mortgage?
Applying for a mortgage should be quite easy if you have the necessary documents. The lender must verify your identity. Therefore you need to provide your driver’s license or passport.
It is advisable to consult your lender to understand what else they require from you. Make sure that you exhaust all your questions about a mortgage.
After filling the application, the lender will review it and later arrange a valuation of the property. The purpose of the evaluation is to determine whether the property is worth the amount you are requesting.
Where Can You Apply For a Mortgage?
It is advisable to shop around for the best deals. You can get a mortgage from a building society, a bank, or a mortgage broker.
Finding the right mortgage is crucial. It is important to note that the deal you secure will depend on your monthly income, the down payment, and the price of the property you intend to buy.
