Need to finance a new home?

Buying a home is not like buying a bag of chips.  Unless you have a lot of money saved up, you don’t go to the owner, pull out your wallet, hand them some cash then walk away with a house.  Instead, you pay for a house in increments through a loan, called a mortgage.

This article will lay out the basics of what you will need to do to take out a mortgage.

What Is a Mortgage?

Mortgages are loans.  If you find a home that costs more money than you have, you have somebody else, usually a bank, front the money for you, then you pay them back with interest.  If you don’t pay them back, they get to repossess (and sell) the house in a process called foreclosure.

After the lender forecloses on the house, you can be forced to move out.

There are many different types of mortgages.  Some involve balloon payments (your monthly payments rise over time), high interest rates, and other undesirable qualities.  Make sure you know exactly how your mortgage works.  If you need help, consult an accountant, mortgage broker or an attorney.

Budgeting Your Mortgage

So, you succeeded in finding a dream home.  Great.  Before you even consider buying that home, though, you need to take the time to create a budget for yourself.  Otherwise, you might find yourself tied to a mortgage that you can’t pay.

  • Down Payments – Do you have saved up that you can use to pay for your home up front?  The more you pay up front, the less interest you’ll have to pay in the end.
  • Monthly Payments – How much do you earn each month?  How much do you spend (not including rent or a current mortgage)?  This should leave you with the amount that you have available for monthly mortgage payments.
  • Future Expectations – Look into the future five years.  Do you anticipate making more or less money?  Do you have any investments that you expect to pay off by then?

Making your own budget is an extremely important step in taking out a mortgage, which many people skip.  Lenders can offer you a mortgage with the belief that you will probably be able to pay it; however, only you know what you can comfortably afford.  Simply because you get a mortgage offer does not mean you will be able to afford it.

  • Closing Costs – remember that closing costs must be paid in cash upon closing, and this will amount to 2-5% of your total mortgage.  These cost must be paid even if you are financing your home purchase 100%.

Get Mortgage Quotes

Once you know how much you can afford to pay for a mortgage, it’s time to get some quotes.  There are two ways to do this: (1) hire a mortgage broker or (2) talk directly to lenders.

Mortgage Brokers

Mortgage brokers are intermediaries who help you decide what type of mortgage you need.  They then contact lenders and banks to get that type of mortgage.  You will have to pay your broker, but for many it’s money well spent, because brokers can help you with your financial planning and are much more skilled at communicating with lenders.  For these reasons, a majority of American use mortgage brokers.

If you hire a mortgage broker, your mortgage broker will start by getting some information from you.  You will need:

  • Pay stubs
  • Bank Statements
  • W-2’s
  • Income Tax Returns
  • Credit Report

From all of this information, the mortgage broker will assess your qualification ratio (ratio of mortgage payments to total income), by calculating 28% of your gross income, and begin to contact lenders to find the best loan(s) for you.

Contacting Lenders

You can simply contact your bank or other lenders on your own in order to get a mortgage.  Most banks have home financing departments.  If you do this, you should be well aware of how mortgages work and the terminology used in them.  If you don’t, leave the negotiating up to a mortgage broker, who can then explain the details to you.

Also, don’t forget, on top of budgeting your mortgage you’ll need to budget your move.