A clearer path to an affordable home.

01 Fixed-Rate Mortgages A Basic Understanding

These are perhaps the most common mortgage loans as their interest rate is just as the name implies. Throughout the duration of the loan, the interest rate is fixed, which means it does not adjust. However, the amount of each payment applied to the principal and interest of the loan will adjust from payment to payment. Regardless, the actual monthly payments will never increase or decrease. This is ideal for those who wish to have a stable monthly payment, which helps simplify budgeting.

The primary advantage of a fixed-rate mortgage payment is that the loan is protected from erratic and potentially high increases to payments. If this is your first time dealing with home loans, you may find a fixed-rate mortgage ideal because it’s easy to understand. However, if you have a lower-than-desired credit score, you could face high interest charges throughout the duration of the loan, resulting in tens of thousands of dollars paid in interest.

02 Adjustable-Rate Mortgages A Basic Understanding

Just as its name suggests, an adjustable-rate mortgage is a mortgage where the interest rate fluctuates as the market changes. The majority of these loans begin with a fixed rate that’s relatively lower than the market average. However, this fixed-rate portion only lasts one to 10 years. After the introductory time frame is completed, the interest rate adjusts based on the current market. The rate of adjustment follows a pre-arranged frequency, which is made clear before you agree to the loan terms.

For many, an adjustable-rate mortgage is the ideal choice because its initial rate is quite low, which makes the monthly payment affordable. After this preliminary period, however, the monthly payment can significantly increase based on current market values and the lender’s adjustment terms. Some adjustable-rate mortgages are designed so the interest rate, and ultimately the mortgage payment, can double within a span of a few years. Before agreeing to an adjustable-rate mortgage, carefully consider the future financial requirements of the loan.

01 Pre-Qualify for a Home Loan

Perhaps the most important element in qualifying for a home loan is obtaining an official notice of your eligibility. When you pre-qualify, you provide a potential lender with basic information regarding your current financial stability and situation. Information such as income, assets, and debts is used to determine the potential loan amount and interest rate.

While this is an important step, it is in no way the final loan decision. When you’re pre-qualified, however, you’re able to walk into the home-buying process with confidence, knowing the rough loan amount you may receive.

02 Gain Pre-Approval for Maximum Negotiating Power

It’s vital to understand that pre-qualifying and pre-approval are two completely separate things. While you may qualify for a loan, that does not guarantee a loan package similar to the original quote. When you are pre-approved, the lender states that it will approve a loan request of a specific amount based on documentation provided in your application.

As a buyer, this gives you greater negotiating power because it informs the seller that you are ready to begin the closing process. Pre-approval also helps you understand the price range that’s best for you.

03 Understand the Factors for Final Loan Approval

You’ve found the ideal home in a price range that’s comfortable for you and your family. Now it’s time to seek final loan approval. Although many factors determine your final loan package, the following three are considered universally important:

• Debt-to-Income

  A mortgage lender will review your overall debt-to-income ratio, often referred to as DTI. This ratio compares your gross income with your monthly debt responsibilities. Most lenders will not lend to a borrower with a DTI greater than 43 percent, and many feature significantly lower maximums, such as 30 percent.

• Liquid Assets

  Along with ensuring you make enough money to cover your bills each month, most lenders will approve a loan only if you have ample assets for a reserve account—money left after paying bills that can cover emergencies. Lenders want to see that borrowers can afford their bills without lowering their quality of life.

• FICO Credit Scores

  Your credit score determines both your eligibility and your overall interest rate. FHA loans may feature minimums around a FICO score of 500, while many conventional lenders require at least 620. Requirements vary, and a score between 740 and 850 may put a borrower in a stronger position before applying.

01 Foregoing the Pre-Approval Process

Make no mistake: being pre-approved for a mortgage is not the same as being pre-qualified. This is confusing because many home buyers—and some lenders—use these terms interchangeably. However, there are several notable differences.

When you’re pre-approved by a mortgage lender, you receive a realistic loan amount based on your qualifying factors. This provides a better understanding of what you can afford and, in many cases, gives you an edge over other competitive buyers. Before beginning your search, it’s important to become pre-approved for a specific loan amount. You can then use this amount as a compass to guide you toward a home you can realistically afford.

02 Not Verifying Your Credit Score

The loan amount and interest rate are not based solely on your income or other assets. Rather, the final figures are heavily influenced by your overall credit score. Home buyers who forgo the process of reviewing their credit may be robbing themselves of a positive purchasing experience. Your credit score not only helps qualify you for a loan; lenders also use it to determine whether you’re a viable mortgage candidate. As a general rule of thumb, many lenders are wary when a credit score is in the mid-600s or below.

If a lender does approve the loan, the result may be a less-than-ideal mortgage package with a high interest rate and undesirable terms. Before seeking a mortgage, perform a full review of your credit reports from the three major credit bureaus. If your score is low, consider delaying your home purchase until it reaches the good-credit range—at least 700. A stronger score may help you secure better terms and save substantially over the life of the loan.

03 Not Asking the Tough Questions

While there are many questions you must ask a mortgage lender and real estate agent, the most important questions are those you ask yourself. It’s not uncommon to “fall in love” with a specific home, regardless of its price, and then become stuck with a mortgage payment you can barely afford or a location that ends up being less than ideal. Before purchasing a home, ask yourself:

• Can I afford the mortgage payments without suffering in other areas of my life?
• Are the taxes on the property too expensive?
• Can I comfortably pay the monthly utilities?
• Can I afford regular and unforeseen maintenance on the home?
• How long do I see myself living in the home?
• Can I comfortably afford fees associated with the property, such as HOA fees and zoning requirements?

01 Choosing a Monthly Payment Types of Interest Rates

The type of interest rate you select will ultimately determine how much your monthly payments will be. For millions, choosing the wrong interest-rate formula means the difference between living comfortably and living a tight financial life—or worse. There are four primary mortgage interest-rate plans. Each features advantages and disadvantages and should be carefully considered for both short-term stability and long-term comfort:

• Interest-Only Mortgages

  You pay only the interest on a loan for a specified amount of time. For example, in a 30-year interest-only loan, you might pay only interest for 10 years. After that, monthly payments are recalculated and you begin paying the principal balance. Because the loan amount is not reduced during the interest-only period, carefully consider how long you plan to own the home.

• Negative Amortization Mortgages

  These mortgages allow a borrower to pay less than the interest-only amount. With each payment, deferred interest is created and added to the principal balance. As time goes on, the principal balance increases. Although this may result in a stable and low monthly payment, you’ll ultimately owe more on the principal.

• Fixed-Rate Mortgage

  This common option secures a stable monthly principal-and-interest payment because the interest rate is locked for the duration of the loan. If you applied when your credit score was lower than it may be in the future, however, you could end up paying more than necessary unless refinancing becomes appropriate.

• Adjustable-Rate Mortgage

  Many homeowners select an adjustable-rate mortgage because the beginning of the loan features a low interest rate. These packages typically feature a fixed rate for the first one to seven years. Afterward, the rate fluctuates with the market, potentially resulting in an unaffordable payment. Do not assume you’ll move before the rate begins to adjust; plans can change.