No, you do not need great credit to get a mortgage, but there are certainly advantages to having a good credit score. Better credit will increase your flexibility as to the type of mortgage you can get, lower the down payment you will need to come up with, and make your mortgage cheaper.
Higher credit scores will open up the possibilities of lower down payments and getting an adjustable-rate loan, if desired.
It depends on whether you want to count both your incomes when applying for a mortgage. If you do, then you have to apply jointly and that means both credit scores come into play. If your spouse has a bad credit history then you could apply on your own, but that means only your income would count towards qualifying. That could result in qualifying at a lower loan level than you would like.
Here are the key elements:
Once you have shopped around for interest rates, have the lender you choose walk you through the qualification process even before you have found a house. That way you will have time to identify and address any issues in advance.
You can get pre-approved for a mortgage before you are ready to make an offer on a specific house. This essentially involves going through the basic elements of the approval process and getting a commitment from the lender for a specified loan amount and terms.
This pre-approval is good for a limited time – perhaps as long as 90 days, but often only between 45 to 60 days. The pre-approval letter should specify the length of the commitment. Also, pre-approval is limited by conditions as well as time, so if there is a change in any of the key conditions under which pre-approval was granted, it may void the pre-approval.
This means your loan has been reviewed and is likely to be approved as long as everything is as it appears on the application. However, the lender’s underwriter – the person who decides whether or not the application meets the lender’s standards – may want additional information or documentation on a specific item or two. Conditional approval means that the loan will be approved if you can satisfy that need for additional information or documentation.
You can get a mortgage with as little as 3 percent down. However, if you can afford a bigger down payment, there are good reasons for putting more money down. First of all, putting more into a down payment means borrowing less money, which will result in you paying less interest. Also, mortgages with a high loan-to-value ratio are likely to have to pay mortgage insurance premiums, and may not qualify for the lowest interest rates. So, putting more money down up front saves you in the long run.
Closing costs include a variety of fees for things like the inspection and appraisal of the home, as well as fees to the lender for underwriting and originating the loan. You are also likely to have to pay taxes on the loan. Depending on the type of mortgage you have, you may also have to make an upfront payment of a mortgage insurance premium. All told, these closing costs typically run between 1 and 3 percent of the value of the home.
The two big decisions you will face about what type of mortgage to get are between a fixed or adjustable-rate mortgage, and the length of the loan.
A fixed-rate mortgage will mean your monthly payments will stay the same throughout the repayment period. An adjustable-rate mortgage will have payments that vary as market rates change over time. This can work to your advantage if rates fall, but it would work against you if rates rise. With an adjustable-rate mortgage you run the risk that the payments could become so expensive you can no longer afford them, which is not a risk most home buyers find acceptable.
As for length, the two most common mortgage durations are 15 years and 30 years. Naturally, spreading repayment out over a longer period results in lower monthly payments, which makes buying a home more affordable. However, a longer loan also means paying interest over a longer period of time, and usually at a higher rate. Before you opt for a longer loan, you should run the numbers on a mortgage calculator to see just how much more a longer loan will cost you in interest payments over the life of the loan.
Financial advisors throw around rules of thumb about this that are typically in the neighborhood of 30 to 40 percent of income, but the truth is that no one percentage is right for all home buyers.
One variable is that in some markets housing is so expensive that you may have no choice but to devote a larger portion of your budget to your mortgage. Another factor that makes the percentage vary is that higher earners can often afford the houses they want with a lower percentage of their incomes. Finally, a big key is how much other debt you have. For example, if you are facing years of substantial student loan payments that may mean less of your income can go towards your mortgage.
Since locking in a rate typically involves paying a fee to the lender, it is best not to commit until you have had an offer on a house accepted. Prior to that, you should be able to get a reasonable enough estimate from the lender of what you will pay to be able to plan a budget and target your price range accordingly.
Heritage Trust Home and Real Estate Lending offers members a wide variety of options.
We have many programs – from first time home buyers to rural housing loans, to lot/land programs and jumbo loans. It is our goal to work with members and find the right product to fit individual needs.
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