Applying for a Mortgage? 7 Things to Know Before You Start

Considering buying a home? A lot of folks view home ownership as a significant goal and milestone – and with good reason: When you own a home, you build equity and you save money on your taxes. And in general, it’s cheaper to own than to rent (and there’s no landlord or property management company dictating things like what color you can paint your walls). So if you’re applying for a mortgage, here’s 7 things to know before you start.

But buying a home is a big commitment – and if you’ve never been through the process of searching for a home and applying for a mortgage, you might be surprised at just how much there is to learn. I thought I’d close out the month by sharing a few things that you should know as a new homebuyer. If you’re thinking about applying for a mortgage, here are seven things that are good to know ahead of time:

1. Not everybody puts 20 percent down. If you’ve spent any time researching home loans, you’ve probably heard that most lenders want your down payment to be at least 20 percent of the home’s purchase price. Sure, 20 percent is a good down payment if you can make it work. But that’s not always realistic. Let’s say you’re buying a $200,000 home. A 20% down payment would be $40,000. That’s not exactly pocket change, and not everyone has that kind of cash. The good news is that there are plenty of options – from Federal Housing Administration (FHA) loans to loans for veterans or first-time buyers – that allow you to put as little as three percent down. Some don’t require a down payment at all.
2. If you put down less than 20 percent, you’ll have to pay for PMI. This is probably the biggest downside to putting down less than 20 percent is that your lender will require you to pay for private mortgage insurance (PMI). Basically, this is your lender’s way of covering its bases, just in case you default on your loan. Your PMI payments will be rolled into your monthly mortgage payments, and the exact amount you pay will vary, depending on the amount of your loan and your credit score – but most folks are looking at an extra $50 to $75 per month added to their payments.
3. Your mortgage lender might change. There’s a good chance that, at some point, your lender will sell your mortgage to another lender. This is quite common, and there’s no reason to worry if it happens to you: it doesn’t mean you did anything wrong, and it doesn’t mean the actual terms of your mortgage will change. In fact, the only thing that will really change is the name of your lender (and you’ll know if this happens because your lender is legally obligated to notify you in writing if it does sell your loan).
4. You can lock in your interest rate before you close. If your lender is offering a particularly good rate that you don’t want to lose, you have the option to “lock in” your rate for a specified period of time (usually between 30 to 60 days). This can help you hang onto a low rate – but keep in mind it can also prevent you from getting an even lower rate. Despite this risk, a lot of folks choose to lock in. Your lender’s loan officer should be able to help you decide if and when locking in is right for you.
5. You shouldn’t change jobs if you’re applying for a mortgage. The mortgage application process is long, complicated, and requires a ton of paperwork – mostly because your lender wants to take the time to make sure you’re not too much of a risk. One thing that makes you look reliable? Having a steady, long-term job. They want to see that you’ve been with a company for a few years, not a few months. Even if you are super-unhappy with your job, I highly recommend sticking it out and postponing any job searches until you’ve closed on your home.
6. You shouldn’t finance any big purchases, either. Again, lenders like to see evidence that you’re a stable, responsible borrower – one that’s not likely to bite off more than you can chew, debt-wise. If you’re applying for a mortgage – or even thinking about doing so in the next few years – now is not the time to, say, buy a car.
7. To lenders, having no credit is basically the same as having bad Your credit history provides some kind of glimpse into how you handle debt. Even if there are a few not-so-positive things on your credit history, a lender can look at how long you’ve been using credit, get a sense of how you use credit, and see if you’ve shown any improvement. If you don’t have a credit history at all, your potential lender is flying blind – they have no idea how responsible (or not) you are because there is nothing to go on. (Need to start building a credit history? Check out this blog or this one for some tips to help you get started.)

Whether you’re getting ready to buy a home or simply trying to get your finances in better shape you can always reach out to Debt Guru for advice and information about debt, credit cards, saving, and budgeting.  Contact the Debt Guru team today for a free debt consolidation consultation.