Mortgages. Whether you’re a new homebuyer or 20 years in, this word likely inspires a sense of dread. The good news is, mortgages don’t have to be scary. In fact, they are quite simple if you just boil them down to their basic parts.
Let’s start with the definition of a mortgage. “A mortgage can be referred to in a variety of different ways, with the most common being a ‘home loan,’” says The Truth About Mortgage. Essentially, a mortgage is what happens when you want to buy a home, but you don’t have the entire amount of money saved up to buy it outright. In this sense, mortgages are no more complex than student loans or a new car loan.
Essentially what happens when you apply for a mortgage is a lender assesses your credit and a few other factors to determine how much they can offer you, at what interest rate, and for how long. Credit and salary can play a huge role in determining your loan offer. Typically, the worse credit you have, the higher your interest rate will be. Once a mortgage lender figures out how high your interest rate is, they can run the numbers to figure out roughly how much per month you’re able to pay, based on your salary. By adding principal and monthly interest payments, lenders can get an idea of how much they’re able to lend you.
Beyond that, lenders also take into consideration your local taxes. Taxes are complicated enough to warrant their own discussion, but it’s crucial to realize that your monthly tax payment can double the amount of money you have to pay each month (which you should know up front). Lenders look at tax trends to see how much you’ll likely pay in taxes in the coming years and include this amount in their loan offer decision.
Although this is a very simplified explanation of the process, there are three things I suggest to do before speaking with a lender.
- Do your research. Look up all local lenders and find out what rates they have. If you’re a first-time homebuyer, many banks offer programs that may cut your interest rate. See what options are available to you before you commit to one company.
- Know your limit by calculating your budget. To do this, add up all of your take-home pay for the month and subtract all necessary expenses. Then, subtract any expenses that you would reasonably spend in a month (such as fast food and gas). Make sure to not include rent, since you’ll be making mortgage payments instead. Whatever you’re left with is about how much you can afford to pay a mortgage each month.
- Search houses for sale in the area you want to live. Take note of how much they cost. Only include houses you would be interested in, but stay realistic. If you’re a couple without a family, you likely won’t need a four bedroom, three bathroom home.
Once you’ve compiled this data, begin reaching out to mortgage lenders to schedule meetings. In order to apply for a mortgage, you will need personal financial documents, such as tax returns. Lenders will let you know which documents you will need at what time.
After you speak with mortgage officers, you will quickly be on the way to owning a house. Congratulations! This is an exciting time in life and luckily, mortgages are less daunting than they seem. In the end, a mortgage is as simple as any other loan.