Finding the ideal mortgage or loan can seem like a daunting task, especially if you’re new to this process. However, with some thoughtful consideration and careful planning ahead, finding the ideal loan will be easy with minimal stress.
First, ensure your credit is in excellent condition by checking all three bureaus’ reports on you. This will give you your credit score and allow you to determine which loan type is available to you. Once you know what kind of loan you qualify for, begin working on improving it until it reaches a high enough mark that guarantees the best interest rate.
Next, strive to reduce your debt-to-income ratio and save for a down payment. Doing this makes it more likely that lenders will approve you and ensure your monthly payments won’t become an over burden. Generally speaking, lenders require no more than 28% of income be dedicated to housing costs such as mortgage payments, property taxes and insurance – no exceptions!
Another way to reduce your debt-to-income ratio is to pay off other obligations, such as student loans or credit cards. Doing this allows you to save for a larger down payment which in turn could lower both your mortgage payment and interest over the loan’s term.
You can ask your lender for a loan estimate, which is an Excel worksheet that illustrates how the terms of various loans might impact your monthly payments and overall cost. These estimates can be useful when researching potential homes or selecting a lender.
Finally, speak to a broker who isn’t affiliated with any particular bank or mortgage company and who can help you compare rates and fees across lenders. Typically, brokers receive payment in the form of a percentage of the loan amount, so it’s in their best interests to help you get the lowest possible rate possible for your situation.
Finally, before applying for any mortgage, check your credit. This is free once a year with each of the three credit bureaus.
A higher credit score can help you avoid paying private mortgage insurance (PMI), which protects the lender if you default on your mortgage. You can improve your credit score by making timely payments and eliminating debt.
Government-backed mortgages may be an option for those without much cash saved to put down on a house. They tend to offer lower interest rates than conventional loans and may be ideal for those with good credit and steady income who wish to purchase in an active real estate market.
There are also other loan types to consider, such as fixed-rate and adjustable-rate mortgages (ARMs). With a fixed rate loan, your interest rate remains fixed throughout its entirety; an ARM typically has shorter terms and fluctuates with market fluctuations, meaning your monthly payments may rise or fall over its lifetime.