There are many steps in the ladder of home-buying, and somehow the first one is always the one we skip: getting pre-approved by a bank. It so happened that my two siblings recently bought a home and had problems getting a mortgage, so I’ve decided to learn from their experience and write this post.
One of them, my brother, single and with a steady job, came across a one-time offer on a very appealing property right when he started his search. The other one, my sister, married and with kids, had to look for almost a year before finding the right home for her whole family. Even if both situations were very different and didn’t take place in the same city, they both found themselves in a similar situation: they almost missed their chance because they didn’t look into the numbers.
My brother decided to make the deal without giving much consideration, since the flat was way below the market price. But at the moment he asked for a mortgage, he discovered he actually couldn’t because of his bad credit score and had to fix his record before the bank would even consider to sign him up for a loan. He suddenly found himself having to repay a high amount of money in a rush, or the sellers would move on. If he hadn’t had the cash at that moment, he would have missed his chance. And he is now struggling with the money every month.
My sister, in the other hand, had a good credit score, but the house they fell in love with was way over their budget. Getting her mortgage pre-approved wasn’t a piece of cake, but it got worst when she discovered that they would actually need a bigger loan to make the necessary repairs before even moving in. This also meant paying an allocation while the makeover was being done!
What happened to both of them is a very common mistake for a first-time home-buyer: they didn’t check their mortgage prospects before starting to scoop the market, and it almost costed them the home of their dreams. So here are the steps to avoid finding yourself in the same situation:
Steps
1. Check your credit score
This is vital to the process. You can pretend to ignore its existence, but the banks won’t, and this will affect the interest rate of your mortgage. Once you have done your homework, you will know how much money of your savings is actually yours. This is an important matter, because you will need it for the down payment and also banks want to make sure that you have a safety net in case of emergency (repairments, unemployment, etc.). Plus you’ll need that money to pay all the costs that come from buying a home.
The better your credit record is, the lower interest rate you will have to pay.
2. Shop around
You’ll need to visit. Yes, I meant that plural. You’d better check with different banks, like when you go to different stores to compare the prices of a TV. They will ask you for several kilograms of paperwork (be prepared!): assets, income, tax returns, inheritances, liabilities… going back a few years, so you better start preparing them now. Consider that this may show you that buying a home right now is not a wise decision.
3. Choose the lender that will suit you
Each bank have different offers and you have to think long term if you don’t want to risk finding yourself in an ugly situation. For that, you will need to understand what are they offering to you. These are some of the issues that you need to pay attention to:
- Interest rate: this will change depending on the bank and on your credit score (the more they trust you, the lower it will be).
- Prepayment penalties: sometimes you need to pay a fee if you want to pay off your loan early.
- Extra fees: always calculate the fees included in the home-buying process, such as the mortgage closing costs and the fees of the staff involved.
- Incomplete documents: never ever ever sign any document with blank fields, not even the dates!
- Rush: it’s your worst enemy. You really need to know what you are getting into, so take your time to read carefully.
4. Get pre-approved
Once you have chosen your lender and your new home, you need to have certain security that they will grant you the loan they have offered to make an offer on the house. This is an official paper that isn’t binding but it will allow you to be an eligible candidate for the house you have chosen.
5. Submit your final application
At this time, you will probably be already dreaming about moving in your new home, but try to be practical and solve the issue at hand: closing your mortgage deal. You are very likely to be accompanied during this process by the lending company, but nevertheless it’s probably going to be a stressful moment, given that getting a mortgage isn’t something we do everyday. Just keep calm and, if you need to know about the process in detail, follow these easy steps by Freddie Mac Homes.
If my siblings had followed these steps, then they wouldn’t have so much trouble closing the deals, because they would have had budgeted accordingly. It didn’t end that bad for them, but it would have save them countless headaches and sleepless nights.
Now, there’s something else you need to know:
Types of mortgage
Each kind mortgage is designed for a person’s specific needs. Try to find out which one is going to offer you not only a lower interest rate, but also long-term security.
Fixed-rated mortgage
A loan where the interest rate is set from the beginning and it doesn’t change. This type may not let you take advantage of the financial market lows, but it lets you plan ahead and rest in peace without minding the market. They are usually slightly higher than the other ones and even higher if they are long-term.
Standard adjustable / Variable rate mortgage
The interest rate of this type varies along with the financial market, plus a percentage set by your lender. This kind of loan allows you to take advantage of the lows of the market, but it can also go up very quickly (although there’s often a rate cap). It’s usually attractive at times of crisis, because the market is at its lowest. But it always fluctuates, so be careful and put some money aside for this!
Discount rate variable mortgage
It’s the same as the previous one, only offering a lower rate for the first few years. This is interesting in case you are sure you are studying or at the beginning of your career. But don’t take it just because it’s cheaper, cause that will change even if your payroll doesn’t.
Tracker Mortgage
These loans are directly linked to an interest rate (for example, the Central Bank) that is not your lender, meaning that it will change constantly but with the whole market. These mortgages are often short-term.
Offset mortgage
This is a very interesting method. It links a savings account to your mortgage, so the interests that you need to pay lower because you only pay the difference. You can still use that money, but it is taken into account and you might be able to pay off sooner.
We hope this guide poured some light into the “scary” mortgage process, but remember that reading about it is not the same as living it: you should always ask around so you can learn from other people’s experiences, like we did today with my siblings.
