Baking a birthday cake, learning a language, knitting sweaters—just like a mortgage, all of these endeavors require dedication and time. The main difference? They don’t exactly hold the same threat over your retirement funds.
Since the 2008 recession, mortgages have become almost a dirty word, smeared by a reputation of unreliability. But with the proper preparation and care, you can dodge any shady deals and reduce your mortgage risk exposure. Here a few guidelines to safely secure financial backing for your dream home.
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#1: Save and Prepare Your Finances
If the term “credit score” makes you go full deer-in-the-headlights, it’s time to shape up your personal finances. Without good financial standing, most mortgage companies won’t agree to lend to you, and you’ll be stuck taking higher-risk options.
To up your options, start strengthening a few key financial areas:
- Employment & income – Maybe it’s obvious to say, but trying to buy a house while unemployed is not the best move. Make sure you have a stable income source that can provide a sizable portion of the down payment.
- Debt-to-income ratio – Yet another way that student loans will haunt you forever. Your DTI divides your debt by your gross income, and mortgage lenders like to keep it below 45%. Debt consolidation can help pay off your loans in a timely manner.
- Credit score – The one, the only, the notorious credit score. Start slow and steady by using a low-limit credit card and always paying your bill on time. Apps like TransUnion can help you track that number’s climb to 700.
#2: Shoot Under
As with dessert and nights out, self-restraint comes into play with mortgages. It’s not romantic, but choosing a cheaper house over a pricier castle can end up saving your financial future.
Mortgage companies will often set an affordability approval, capping the real estate price at which they’ll lend you money. Don’t take this as a challenge. Try and pick homes priced much lower than your approval limit. And with sites like Realtor, you can compare up to 98% of all listed homes for the lowest prices in your desired neighborhood.
And of course, never agree to a mortgage that you can’t pay with certainty. Stick to affordable options, and you’ll keep your debt-to-income ratio low and potentially later qualify for better loan terms.
#3: Research, Read, and Review
Has anyone ever actually read the Terms and Conditions before clicking Agree? Logging onto Facebook may not require much contract scrutiny, but your mortgage loan does. Before you jump into any agreement, do some research to decide which mortgage type best fits your needs.
Some of the most common mortgage categories include:
- Conventional – This is a highly coveted private option, but for good reason. While they do require stable financial credentials, conventional loans have lower interest rates and can waive insurance requirements.
- Government-issued – While not an official mortgage lender, the FDA, USDA, and VA all help back private mortgages for specific borrowers. If you have a lower credit score or prefer open fields to city life like in Ohio, look into government-backed loans. You can check the USDA loan map Ohio to see if your area is approved.
- Fixed vs. adjustable rate – You could listen to fixed vs. adjustable arguments until you pass out, but both have pros and cons. Fixed interest rates suit long-term payment periods, while an adjustable rate can cut costs over a shorter period of homeownership.
#4: Track Your Mortgage Status
Secured the bag? Shook hands? Signed the papers? Congratulations! Now, you get to sit back, relax, and—no, of course you don’t, because that would just be too easy, wouldn’t it? Once you have a mortgage, keeping tabs on your payments is crucial.
A quality mortgage lender will often provide accessible means to track your mortgage and its interest rates. Look for companies that utilize mortgage servicing software to track their own portfolios, as well as website portals or apps for you to check on your payments.
Budget for Bricks
While predatory loan sharks do exist, a lot of mortgage risk comes down to your personal finance decisions. By using these tips to properly prepare for mortgage deals, you can snag your fantasy home without losing everything else.