If you've been finding it hard to choose a mortgage, you're not alone. Home loans…
For many people, mortgage loans are just an inevitability in life. If you’re lucky, you get to have the funds needed to afford your dream home that you can opt to pay for upfront. But when you’re just in your early working years and starting to build your savings, payment in cash is just not an option.
If you are already at this point in your life, or better yet, before you even get to this point, there are some important things you need to prepare for to increase your chances of securing the mortgage loan you need.
In this article, we will discuss some of the types of mortgages out there as well as the responsibilities you must take note of if you are planning to apply. Even if you are just fresh out of university, you might discover that there’s a mortgage loan available that can suit your profile.
What is the best mortgage loan for me?
To know which kind of mortgage is best for you, first, we need to become aware of the different mortgage types out there.
There are generally three different ways we can classify mortgages: according to the length of the loan term, according to who guarantees the loan, and according to the interest rates applied. For the purposes of this article, we will only be focusing on the latter two.
According to Who Guarantees the Loan
If you are getting a mortgage that is not secured by the federal government, then you are getting what is called a conventional loan. These mortgages tend to conduct stricter background checks and ask for more competitive requirements. At the very minimum, you might need to have a credit rating of at least 680 in order to qualify for one.
The interest rate also tends to be much higher than interest rates offered by government-backed loans (which we’ll discuss after). But if your credit rating makes the cut and you do need to borrow a higher amount, you can get up to $548,250 (as of 2021) via a conventional loan.
The opposite of a conventional mortgage is a government-backed loan.
Here are three of them.
If you are applying for a mortgage for a property located in a rural area, we have good news for you because you might be eligible for a USDA loan. These loans are secured by the U.S. Department of Agriculture and do not ask for any down payment. Application is also not as challenging as for conventional loans because while you might expect to experience a smoother application process if you have an at least 640 credit rating, a lower credit score will not mar your chances of securing a USDA loan. You just need to prove U.S. citizenship and a dependable source of income.
Furthermore, if you are a veteran or an active duty service member, you can also be qualified to avail a loan that’s backed by the U.S. Department of Veterans Affairs. This mortgage type has the most perks as one of the hard-earned benefits of services rendered for the country. Another zero-down payment mortgage, just like a USDA loan, VA loans do not ask for a deposit. Even better, these loans have the lowest average fixed interest rates in the market. You just have to make sure that you are able to keep your credit score above the 580 range.
As its name implies, this is a government-backed mortgage you can secure via the Federal Housing Administration. FHA loans were created specifically with the first-time home buyer in mind. Even a credit score of only 501 will allow you to move into the house of your dreams! However, for optimal benefits, you will need to have a score of at least 580; this will allow you to borrow up to 96.5% of your house’s purchase price through a low down payment of just 3.5 percent.
According to the Interest Rate
Fixed Rate Mortgage
Mortgage lenders let you borrow their money because they are able to earn through the interest you pay for on top of the original price of your home. When the interest is unchanging, you have what is called a fixed rate mortgage.
This kind of interest is best for protecting your money in case of steep increases. The loan terms can be anywhere from 10 to 30 years.
Adjustable Rate Mortgage
On the other hand, if the interest rate applied to your home loan is bound to change according to a specified index, you have an adjustable rate mortgage or ARM. For an ARM, you do still have an initial period wherein you can experience a fixed rate of interest, until such time that it steadily increases according to the frequency you agreed to.
When the market is unsteady and a fixed rate is already financially hurting you, it is oftentimes best to switch to an ARM through negotiation with your lender.
What are my responsibilities as a potential mortgage borrower?
Now that you have read about the different home loans you might be able to apply for, you probably have a slight idea of the the type of mortgage that’s right for you. Remember, the best mortgage for you might not be the best one for your neighbor. It will really depend on your particular circumstances because mortgages do not come in a free size.
Here are some of the things you need to take note of once you decide that it’s time for you to get a mortgage.
Your credit score is really just a number. And no, there is no such thing as a zero credit score. You either just have available credit history or you don’t. In which case, you might want to start building relationships with financial institutions.
To understand how you will need to prepare yourself as you take the next step to securing your dream home, you will need to decide which type of mortgage you want. As we have discussed for each loan type, they all have minimum credit score requirements you must satisfy in order to get qualified.
Before you even start applying for mortgages, there are also several things you can do in order to boost your credit. You can build a habit of paying your bills on time because late payments will definitely show up in your credit report. You might also want to take a look at this personal report so you can get it corrected fast in case of errors. It is actually quite common that the Consumer Financial Protection Bureau has written this helpful article to guide you in case of a mishap.
Know Your Estimated Monthly Payment
It’s time to hustle and make more dough!
As a borrower, you will need to show the lender that you have a dependable source of income, because your monthly payment amount will also depend on how much income you are able to earn. Before you even start talking to lenders, it is essential that you know how much you can afford to borrow and pay for each month. With this information in hand you might also be able to negotiate better with your lender and make a deal leading to lower monthly payments.
Know What You Will Be Paying For
There is a Truth in Lending Act passed in 1968 that protects borrowers from abusive lending practices. Among the rights it preserves is the right of the borrower to know exactly what he or she will be paying for when availing a loan.
Annual Percentage Rate
When you apply for a loan, you will notice that there is an annual percentage rate (APR) that will be quoted to you. While this looks like an interest rate, you will also observe that the APR is not the actual interest rate that will apply to your loan. In fact, it will always be higher than the interest rate of your home loan.
That is because the interest rate is just part of the APR. While it is expressed as a percentage of your loan balance, it will also include several other transaction fees. It might cover insurance premiums, closing costs, or loan origination fees. These vary depending on each lender and if it is something that they do not explain or disclose outright, know that you have the right to find out.
Remember, not all loans are the same, and not all lenders engage in the same practices. Make sure that you are able to cover all your bases by demanding to know all the pertinent information about your home mortgage. After all, you may be borrowing from the bank, but you are also bringing business to lenders.
Mortgage Loans For Everyone
It’s not every day that you will need to apply for a mortgage loan. But once you do and you do get approved, it is a long term commitment in monthly payments. Remember to enter only in this business once you have saved enough in the bank. This way you’ll be able to afford higher home equity and possibly forgo any mortgage insurance.
If you find that your income or your credit score does not qualify you for loan amount you prefer, there’s an FHA loan you might be able to lean on until you are able to save enough money to purchase your dream home.
With the right mindset and enough determination, nothing is impossible!