If you are a first-time homebuyer, finding the best mortgage terms can be difficult. Though a mortgage is a product like a car or anything else you buy, it is likely to be the biggest purchase you ever make in your life. For this reason, it is imperative to go into the market prepared and with your eyes open. Here are some tips to help you.
Assess Your Budget and Improve Your Credit Score
First of all, estimate your ongoing income and determine how much you can afford to spend on a house before you look for a mortgage. Do not estimate on the high side. Take into account any other upcoming expenses or fluctuations in income. Next, learn your credit score. If it is already good, maintain it by not applying for new credit or closing any existing accounts.
If your score is a little low, the fastest way to raise it is by paying down balances on credit card debts. Check for errors affecting your score, such as debts erroneously listed as unpaid, or late payments that you paid on time. Do not close unused accounts. Instead, transfer balance from maxed-out cards to other cards. In some cases, taking a few months to improve your credit score can save you thousands of dollars in mortgage terms.
Prepare Your Paperwork
Before meeting with lenders, gather your financial paperwork. You will need tax returns from the past two years, W2 income forms, and recent pay stubs. Bring your recent credit card, bank account, and investment account statements. Have divorce decrees and child support documents ready, if applicable. Itemize your family budget, including both your income and total monthly expenses.
Types of Loans and Interest
Most mortgages have a maturity of 30 years (‘maturity’ in this case refers to the length of the mortgage). If you can afford higher payments, a short maturity saves you money on interest. The interest rate is the price you pay for the loan, and it may vary from lender to lender. Fixed-rate mortgages keep the same interest over the entire length of the loan, regardless of outside interest rates. In variable-rate mortgages, the interest payments go up or down during the life of the loan. These usually start out at lower interest than fixed-rate mortgages, but if you plan to keep the house for a long time, a fixed-rate mortgage is a safer investment.
Compare Lenders
Commercial banks, credit unions, mortgage companies, and thrift institutions all offer mortgages, and you should contact a number of them and compare to ensure that you are getting the best price. Mortgage brokers do not lend money directly, but instead arrange mortgages for you. Going through a broker might help you negotiate better terms, but it is still best to contact several brokers and compare offers. Be sure to factor in extra costs like broker fees, underwriting fees, private mortgage insurance, as well as transaction settlement and closing costs. Remember that fees, costs, and interest rates are negotiable.
As a first-time home buyer, to get the best mortgage terms possible, you need a good credit score and you need to offer at least a 20 percent down payment. Even if you do not meet both of these conditions, however, you can find reasonable terms if you compare lenders and carefully consider the type of loan, interest, and extra costs.
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Pablo Rodriguez is a freelance writer specializing in Personal Bankruptcy, Property Law, Mortgages, Banking Law, Financial Regulation and other related areas.
