6 Things Homebuyers Should Know Before Choosing a Mortgage

The decision to buy a home is one of the biggest that people make, and choosing a mortgage comes right along with it. The mortgage payments will be one of the most significant household expenses for up to 30 years, month after month. By learning about the different types of mortgages, prospective homeowners can find out the best strategies for making a down payment and keeping interest rates low. Keep reading to learn everything you need to know about choosing a mortgage.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Use Online Tools to Calculate a Mortgage Budget

A borrower has a monthly mortgage payment, usually principal, interest, insurance, and property taxes. However, that's far from the total cost of homeownership. There are also utilities, maintenance, repairs, and furnishings. If they're part of an association, there's an HOA fee.

On top of that, most people have other debts. Borrowers should heed the 43 percent rule. That is, no more than 43 percent of pretax income should go to debt payments, which include mortgage, car loans, student loans, and other personal loans. Using an online mortgage calculator can help home buyers gauge how much they can commit to.

Optimize Your Credit Score For the Best Mortgage Terms

A score of 620 is usually required for a conventional mortgage, although some programs will accept a score as low as 500. Anyone thinking about a mortgage should review their credit report and ensure it's accurate. People with high credit scores can qualify for loans with the lowest mortgage interest rates.

You can increase your credit for mortgage approval by:

• Limiting credit utilization rates to 30%
• Making all debt payments on time
• Conducting a credit audit and contesting inaccurate late payments

Use Mortgage Preapproval to Your Advantage

A potential borrower can get a mortgage preapproval without offering a home or applying for a mortgage. In preapproval, a mortgage lender issues a document stating how much the home buyer can qualify for based on their financial situation. It's not a guarantee, but it makes the loan likely enough that most sellers will accept it as proof that the buyer can afford the house. Some sellers are reluctant to consider an offer that doesn't come with a preapproval.

Before Choosing a Mortgage, Know the Types of Mortgages

The three principal types of mortgages are conventional, FHA, and special programs. Conventional loans come from banks or other mortgage lenders. They are available to the most qualified buyers, require significant down payments, offer reasonable interest rates, and aren't guaranteed by any government agency.

Federal Housing Association (FHA) loans allow smaller down payments and lower credit scores. Special programs include VA loans for veterans and USDA loans for low-to-medium income borrowers in rural areas. More unique options include co-op mortgages, which are more common in large cities.

States and localities also offer programs for first-time buyers. Many are for low-income borrowers, and they're different in every state.

Understand Interest Rates, Terms, and Down Payments

Mortgages can have either fixed or variable interest rates. Variable rates tend to be initially lower but can rise during the life of the mortgage. Most homebuyers choose fixed-rate mortgages.

The most common mortgage terms are 15 and 30 years. Interest rates are lower for shorter loans.

A sizeable down payment can reduce the mortgage amount and lower the payment. It also comes with lower interest rates. Twenty percent down is the "gold standard" for a conventional mortgage, but lower down payments exist. They can be as low as 3.5 percent for an FHA mortgage and even zero down for VA loans.

Know about Fees, Points, and Closing Costs

Points are upfront fees that reduce the interest rate. They can be a good deal for people who plan to stay in their homes for the long run.

There are high costs with every home closing, including appraisal, application fees, title insurance, and inspection fees. It's negotiable, which the buyer and the seller pays, but most buyers will have some closing costs. These can be paid outright or added to the loan.

Trust the Process and Get the Best Mortgage For You

It takes some time and research to understand all the factors in a mortgage. However, it has such a significant long-term impact on a homeowner's finances that it's worth making an effort.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.