For the average American, paying for a home – up-front, in cash – is just not in their financial wheelhouse. Does this mean you are doomed to live in your car, rent forever, or move back home with your parents?
Of course not! You’ll need a mortgage. Just what exactly is a mortgage?
Simply put, a mortgage is a loan from a lender or financial institution (like USALLIANCE) granted specifically for the purchase of property. Houses and properties don’t come cheap, so a mortgage is used to cover the difference between your down payment and the purchase price of your future home. When you enter into a mortgage contract, your financial institution agrees to finance you, and you agree to pay off that loan off over time (usually 15 to 30 years) with interest. (FYI: Interest is basically the “price” of borrowing money from your lender.)
Getting A Mortgage
To get a mortgage, you’ll need to apply with a lender or financial institution (like USALLIANCE).
When shopping for your mortgage lender, you will need to take into consideration what interest rates are offered. Interest rates will vary depending on a number of factors, each related to it the amount of risk your lender is taking on by lending you that money. When it all comes down to it, your financial institution must decide how likely it is that you will be able to pay back your loan then determine what to “charge” you in interest.
All About Interest Rates
There are 3 main factors that affect your interest rate when it is determined by your lender. Your credit score, the length of the mortgage (also known as the mortgage term), and the amount of your down payment.
Your credit score gives the financial institution a glimpse of how well you handle your debt as reassurance that you will not default on your loan. If you have a high credit score, you have shown that you have a history of paying off your debts, therefore you will most likely be given a lower interest rate than somebody who has a low credit score and a history of missing payments or taking out more credit than they can afford.
A mortgage term is the amount of time will have to repay your loan. In general, the longer you take to pay back your loan, the more you will owe in interest. Therefore, loans with shorter terms tend to have lower interest rates, and loans with longer terms, tend to have higher interest rates.
Your down payment is the amount of money you will be paying upfront towards the price of your house. When discussing your down payment with your mortgage lender, it is usually indicated as a percentage of the total sale price of your house. For example, if the house is $150,000 and you put $22,500 down, you’ve paid 15%. A good rule of thumb is to put down at least 20% of the sale price. If you make a down payment under 20%, lenders will likely make you get mortgage insurance. This is to protect lenders from loss if you’re not able to make your monthly payments.
The Mortgage Process
Once you compare interest rates and find a few lenders that may be right for you, it’s time to start the mortgage application process. Applying for a mortgage is a 3-step process.
- Step one: Pre-Qualification
Getting pre-qualified is basically getting a sneak peek at what mortgage amount you could be offered based on your financial history. It is important to remember that pre-qualification is NOT a firm offer of credit from a lender. The lender is in no way obligated to loan you that amount of money.
- Step Two: Pre-Approval
Your pre-approval is your official offer from your lender detailing the amount they are willing to loan you, including the interest rate and fees.
- Step 3: Application
Actually submitting your application doesn’t come until you’ve found a house. Once you have your pre-approval offer, you will start seriously shopping for properties in the price range you now know you can afford. Then, when you’ve found your dream home, you will officially apply for your mortgage with your chosen lender.
It’s important to start your home buying process as a well informed and prepared consumer. Evaluate your financial standing, shop for lenders, and then go for pre-approval. With that your pre-approval letter in hand, you can focus on homes that you can afford as well as demonstrate to the seller that you are a serious buyer.
Now get out there and buy that house!
Whether you’re a first-time or repeat homebuyer, let USALLIANCE’s Home Lending Center help find the mortgage that best meets your needs. To learn more and start your mortgage journey, click the button below.