When it comes to buying a home, one of the most important things to consider is your mortgage. Not only do the rate and amount matter immensely, but prudent homebuyers will look deeper than the surface. This includes investigating personal financial factors that may impact your mortgage, as well as making sure you’re ready to take on this new investment.
Oftentimes, new homebuyers will get caught up in the excitement of the process and forget to look at the bigger picture. This hastiness may lead to complications with your home and finances in the future, and could have negative consequences if not thoroughly considered. Whether in terms of employment status, rates and payments, or anything in between, asking yourself key questions will greatly reduce the potential risks of taking out a mortgage.
Here are some of the most important things to consider:
How Will My Credit Score Impact My Mortgage Rates?
Perhaps the most important and influential factor that determines your mortgage rate is your credit score. Just like any other loan, those with higher credit scores are more likely to get lower interest rates when taking out a mortgage. One thing all prospective homebuyers should consider is where their credit score currently is, and whether it’s worth it to hold off on buying until you can increase it.
Specifically, those with scores of 740 or higher will qualify for the most competitive rates, while those with scores below 620 will get much higher rates. If you know your credit score and want to estimate the rates you could qualify for, using online loan calculators can give you an understanding of what to expect.
Is My Employment Status Stable Enough?
Just because your tax records and employment verification make you eligible for a mortgage, doesn’t always mean that it’s a good idea. Before taking out a mortgage, all potential buyers should think about their current employment: How long have you been with the company? How long do you plan on staying? What factors may lead to job instability in the future? Make sure you’re at the right place in your career, and that you feel comfortable with the security of the company or industry, before diving headfirst into a mortgage.
Have I Covered the Requirements Needed for a Mortgage?
Before even beginning the process, save yourself time by considering and covering any requirements that come with applying for a mortgage. Although each lender is different in what they require of borrowers, there are certain guidelines that are general across the board.
Having a debt-to-income ratio of less than 43 percent is required for most lenders, as well as having a 10 percent down payment if your credit score falls below 580. Before you’re able to fully close on your new home, most banks will also require you to compare homeowners insurance quotes and provide proof of a policy in case of any incurred damages. Keep in mind that there are other non-essential “requirements” that will greatly increase your chance of low mortgage rates if fulfilled.
Have I Saved Enough for the Down Payment?
Given your credit score is above 580 and the 10 percent down payment isn’t necessarily required, it should be noted that a higher down payment often means lower interest rates. Putting a 20 percent down payment on the home will not only get you a better mortgage package, but will also save you money on mortgage insurance. Those who put less than that amount are required to purchase either a PMI (Private Mortgage Insurance), or purchasing through the FHA.
Can I Afford a Mortgage Right Now?
This last question is perhaps the most significant, and requires honesty and discipline to answer. Sure, the prospect of buying a home is exhilarating, but it is vital to take a step back from the excitement and consider your financial situation. Are there any potential instabilities in the long-run? Are you positive that your income will not only remain the same, but increase in the future? Being completely honest with yourself when considering this can make the difference between a prosperous investment and a hasty one that proves detrimental in the years to come.
The questions above provide a general overview of things to consider before taking out a mortgage. However, they are just a starting point. Buying a home is a big, long-term investment, and therefore has a lot of components that go into it. Take the time to calculate your risk carefully, and make sure that you’re ready to take on a new challenge. That way, you can keep yourself away from complications, and buy a home at the most optimal time for you.
You make some great points.
Over here, lenders won’t even look at you unless you have a good credit history and a stable job. It’s not difficult to get approved, but it isn’t easy either.
Saving as much as possible for the down payment seems to be the one ‘detail many forget about. Most people I know who recently became home owners borrowed against their retirement to be able to make the minimum down payment.