Buying a house is an exciting time in your life. It is the beginning of the journey to owning something of incredible value. Perhaps it becomes your first real asset. It can also be an incredibly scary time, especially if this is your first house. There are so many things to consider. You probably have no idea where to begin.
You may not even know what buying a house entails. I know that while you are excited, you are also nervous. You do not want to make any mistakes, or miss something. Do not worry, I am going to provide you with all the mortgage tips you need. I will also tell you how to get a mortgage with good credit. So, let’s get started.
How Do I Know If I Am Ready To Buy A House?
Buying a house is a big deal. It is really important that you know you are ready. This is not something you should take on lightly. You want to make sure you can really afford the house you can buy. Often times, when getting a mortgage with good credit, mortgage companies approve you for a mortgage that you may struggle to pay every month. It is important to make sure you can pay the mortgage every month. There are some important indicators that help you realize you are ready to make the plunge into home ownership.
- Are you living paycheck to paycheck? You should realize that owning a home can be costly. Not only do you need some type of down payment, in most cases, but you need to be prepared for added expenses. Before you consider buying a house, you should have some money saved for unexpected expenses.
- Are you ready for stability? Buying a home is an investment. This means you need to be ready to stay in that home for a while. You do not have to plan to spend the rest of your life in that house, or that area. You should plan to be there for at least five years so you can see some growth on your investment.
- Do you know what you want? Is this a house you plan to settle down in and raise a family? Is this a house that you plan to sell and buy a bigger home? These are important questions to answer before you begin your house search.
What Is A Mortgage?
In an effort to make sure you have all the information you need, I am going to start with the basics. Consumer Financial Protection Bureau (CFPB) defines a mortgage as an agreement between you and a lender. The lender gives you the money to pay for the home and property and you make a promise to repay each money for the length of the mortgage. If you do not pay back the mortgage, the lender has the right to take your home.
There are different types of mortgages, which I will discuss a little further down. When you borrow money for a mortgage, you are borrowing the money for the house, in addition to interest on that money. Obtaining a mortgage with good credit allows you to get a better interest rate.
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As I mentioned above, a lender may qualify you for $400,000, but according to your budget, you can only afford $350,000. In this case, do not buy a house that is $400,000 because a bank gave you the money. You should find a house that is under $350,000 because you know that is what you can afford. You do not want to put yourself in a position of buying a house that you cannot afford. That only sets you up for failure because there is a chance you will make late payments or miss them. This negatively impacts your credit and may cause you to lose your house. Once you have made the investment to buy a house, you want to do everything you can to protect it.
Why Does My Credit Matter?
Your credit score directly impacts the interest rate you receive. Let’s talk a little bit about credit scores for a few moments. Credit scores are numbers that no one ever wants to talk about, but it needs to be done. You have to know your number and you have to understand it. Only
when you know it, can you actively do something to improve it, or maintain it. In this case, it could prevent you from getting the home of your dreams. If your credit score is bad enough, you might not be approved for a mortgage. Or, if you are, it may be so high, you cannot afford to pay it.
Your credit score is a three digit number that appears on your credit report. It is important to know the difference between the two. Your credit report is a detailed listing of all of your activities involving credit. It shows your payment history, how much debt you have and how you use it. Also, it shows the age of your credit. It shows all of your late or missed payments. It even shows loans on which you have defaulted. Your credit score is also highlighted on your credit report. Your credit score is built over time and it gives lenders an indication of your credit worthiness. It is much easier to get a mortgage with good credit.
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Typical credit scores range from 300 to 850. I am sure you know that the higher that number, the better your credit is and the more likely you are to get a good interest rate. Most people have a credit score somewhere between 600 to 750. Good credit falls somewhere between 70o to 850. Anything below 570 falls into the danger zone of bad credit.
What Do I Really Need To Know About Interest Rates?
One of the most important things you can understand when thinking about purchasing a home is the interest rate. Forbes has a short article about how interest rates impact your mortgage, and how your credit impacts your interest rate. I am going to provide you with a basic understanding of interest rates and their impact on you. Every mortgage has an interest rate attached to it.
Generally speaking, when it comes to mortgages, credit score has a big impact on your interest rate. You can save more than 1.25% from a 620 to 740 credit score as illustrated in the chart below. The graphic is based on advertised Zillow rates for $400,000 mortgage with an 80% loan to value ration for fixed mortgage over 30 years.
You will not find a mortgage that has 0 percent interest. Interest is what the lender charges you for borrowing money from them. The amount of the loan you borrow is considered the principal amount. The lender adds an interest rate to that. It is often used in combination with an annual percentage rate (APR). The APR is the additional annual cost of your loan. This can include things such as mortgage insurance and extra fees. Generally speaking
The good news is that the better your credit score often that means lower rates.
The interest rate a lender gives you is in direct relation to your credit. When obtaining a mortgage with good credit, you will get a lower interest rate. This means you pay less money per month for your mortgage. There are several factors that impact the Interest rates, which changes on a frequent basis. The Federal Reserve issues a benchmark rate, which is what banks charge to each other to borrow money.
This is the daily interest rate. This impacts the daily mortgage rates. Banks attempt to make interest rates competitive with each other. They want to make the most money they can as a return on loans and deposits, but they know they must keep their interest rates at a comparable level. So they have to keep it high enough for those with investments to allow them the best return on their money. They also have to keep it low enough for those that borrow money.
How Do Interest Rates Impact Me?
Now that you have a little bit of knowledge about interest rates, you should understand how they impact you. As mentioned above, interest is what is added to your principal loan amount. A lender determines what interest rate to charge you based on your credit score. Obtaining a mortgage with good credit is the best way to get the lowest interest rate. These easiest way to show you how credit impacts your interest is to show you.
Now let’s take a different example from from myFICO.com loan calculator, where the interest might be a little higher possible because there is no equity in the house. So, it’s a purchase loan versus a refinance loan. Also, this individual has good income and assets to show. Let’s look at the difference in what you might pay all because of your credit score.
In this example above a credit score above 760 would save you about $193 each month for a 30-year, $200,000 mortgage versus scores from around 620 to 639. Now on a 30 year loan that is a lot of money…It’s around $69,751 in just interest over that loan’s life.
Here is Another Example:
You have good credit, so your interest rate is 5% because your income isn’t as strong as the above example. You want to purchase a home that will cost $400,000. Also, you are putting down 10 percent of the cost for a down payment, which is $40,000. That leaves the amount you need to borrow as 360,000. You have to pay a PMI of 0.625 percent. If you get a mortgage for 30 years, your mortgage payment may be $2120.39. This does not include home owners insurance or taxes.
Let me show you that same mortgage but with a higher interest rate. Let’s say the interest rate increases to just 6.5 percent. That increases your monthly mortgage payment to $2462.94. That may not seem like a huge difference initially, but it is $342.55 per month. That totals up to $123,318 over the life of a 30 year mortgage. The only difference was an increased interest payment.
Since you are putting less than 20 percent down, you have to pay PMI. This is insurance that protects the bank, if you default on the loan. Remember the house you buy becomes collateral for the lender. If you default, they can take ownership of your house. When you put 20 percent down, you have already paid for 20 percent of the house. If you default, the bank sells the house to recoup their money. For them to get their money back the house has to sell for what you owe.
What’s the Conclusion?
The more you have paid into the house, the less you owe and the less money the bank has to attempt to get back. One of the easiest ways for you to determine how much your monthly mortgage payment will be is to use a mortgage calculator. It does all the work for you.
What Is A Fixed Rate Mortgage?
I have told you a little bit about interest rates and how they impact your regular monthly payment. Now, it is time for you to learn about the different mortgage options available to you. There are probably more than you think. Keep in mind a mortgage with good credit will draw a lower interest rate and a lower monthly payment. That being said, I am going to start with fixed mortgages.
The simple definition of a fixed mortgage is one that has an interest rate that does not change. It is “fixed” and your mortgage payment does not change based on an interest rate change. Even though, the prime interest rate changes every day, it does not impact your interest, or your mortgage payment. A fixed rate mortgage can have terms of 15, 20 or 30 years. A fixed rate mortgage gives you stability and a sense of knowing exactly how much money you pay each month. Keep in mind that your homeowners insurance and property taxes are rolled into your mortgage payment. Those two increase and when they do, your mortgage increases.
Are There Other Types Of Mortgages?
While a fixed rate mortgage is the most common and the best mortgage with good credit, there are some other types of mortgages. Ultimately, you have to decide which is the best mortgage option for you. I will get right to it. Another type of mortgage is an adjustable rate mortgage (ARM), which is a rate that changes. There are a different types of ARMs. The first is the traditional ARM, which has changing rates throughout the life of the loan. Typically, your mortgage rate adjusts every six month, or some other set schedule.
Often, a lender has a maximum amount of interest you pay. So, they may cap it at 8 percent. However, this type of mortgage can lead to high mortgage payments. There is a hybrid ARM, which has a period of a fixed rate before you are hit with adjustable rates. Basically, you may have a fixed rate for three or five years, then you will have adjustable rates for the rest of the period of your loans.
Another type of mortgage is a balloon mortgage. With this type of mortgage, you would have a short term mortgage, possibly ten years. During this short term, you have a low monthly payment, possibly interest only. When the term is over, at the end of the ten years, you have to pay the balance in full and immediately. There is a high amount of risk associated with this type of mortgage. You have to find a large amount of money to pay the lender. Possibly, you could save that much money, or you could take out another loan to pay the loan.
Interest Only Mortgage
An interest only mortgage is a mortgage where you pay only the interest on your mortgage for a set period of time. This helps keep your monthly payment low. After that set period of time, you begin to pay more money that you would with a traditional mortgage to catch up on the principal you were paying.
Do I Need To Be Pre-Approved For A Mortgage?
You may hear the terms pre-approval and pre-qualified used interchangeably. It is not quite right to use them in that way. They are slightly different. Let me explain the difference between the two. After you understand the difference, you can better understand why getting a pre-approval is a good idea.
A pre-qualification is considered a basic step in looking for a mortgage. It does not indicate to the seller that you are a serious buyer. A pre-qualification is intended to be informational and not a binding contract. It can indicate how much money you might be approved to borrow. A pre-approval indicates to the seller that you are serious about buying a house. It also signals that any offer you make should be taken seriously. When you have a pre-approval, you are considered a qualified buyer. It can also lock in your interest rate for about 30 days. This also helps guide you to know how much your monthly mortgage payment may be depending on the cost of the house in which you are interested.
Remember it is easier to obtain a mortgage with good credit. If you have bad credit, it may be harder for you to get a pre-approval. The only downside to a pre-approval is the hit to your credit report. However, if you are serious about moving forward with buying a house, the benefits to a pre-approval far outweigh the hit to your credit report. It really is in your best interest to obtain a pre-approval before you begin looking for a house.
Do I Need A Down Payment?
The dirty truth is a lender sees a down payment as your investment in the house. It significantly impacts that amount of money you need to borrow. Obviously, the higher your down payment, the less money you need to borrow. It also determines if you need private mortgage insurance (PMI). Usually, if you are not putting down a 20 percent deposit, the lender requires PMI. A lender does not like to loan more than 80 percent of the value of the house.
The PMI helps protect them. The higher down payment you have for a house, the lower your interest rate may be. If you have not noticed, there are many factors to help ensure you get a low interest rate. As I have stated before, it is much easier to get a reasonable mortgage with good credit. You should always try to put some money down on a house. There are ways to buy a house with no money down, but many lenders require anywhere from 5 to 20 percent.
How Much Should I Borrow?
Saving money for a down payment is not an easy task. Many people can afford the mortgage payments, but they just cannot save 20 percent. The more expensive the house and that dollar amount increases quickly. When it comes to deciding how much money you should borrow, you need to take a good look at your budget. The question should be how much can I afford to borrow. Here is the thing, you should not borrow more money than you can pay back. That is setting yourself up for failure.
Good to Know!
Next, you know that lenders typically do not like to lend more than 80 percent of the value of the house. They will lend it to you, especially if you are looking for a mortgage with good credit. However, even good credit cannot save you from PMI. If you are not putting 20 percent down, expect to pay PMI. It will be hard for you to find. You should do some mortgage loan shopping to find lenders that are willing to provide you a mortgage with less than 20 percent down.
Some lenders tell you upfront how much of a down payment they want you to have. From there, figure out how much you can afford to pay in a mortgage and that should lead you to how much you should borrow. Try not to get swept up in the magic of house hunting and start looking at houses outside of your price range. You are setting yourself up for failure that way. Be realistic and stay in the range that you can afford.
What Fees And Costs Are Involved With Buying A House?
It sure seems like buying a house costs a lot of money. I have not even told you about all the fees, closing costs and regular payments associated with a mortgage. I hope you know by know obtaining a mortgage with good credit will drastically cut down your home buying costs. So, let’s talk a little bit about those extras that you should expect.
As a reminder, there are additional fees worked into your regular monthly mortgage payment. You have the principal, which is the actual amount of money you want to borrow. Then you have the interest, which is the ‘fee’ the bank charges you for borrowing money from them. If you have borrowed more than 80 percent of the value of the house, you have primary mortgage insurance. You also have homeowners insurance and property taxes.
Your lender requires you to have homeowners insurance. Again, they want to protect their investment, too. Until you own the house in full, it is their investment also. Some houses are in neighborhoods with home owners associations. They have fees, also. It could be a monthly fee, or an annual one.
In addition to those monthly fees, you have some upfront fees to bring with you to closing. This is where it gets really fun for you, the buyer. Make sure you understand these fees. You have an origination fee. This is charged by the lender for handling your loan. This covers all their administrative costs, such as application fee, underwriting fee, processing fee, and any other administrative fee they would like to add. You may have points. Sometimes you can negotiate points with the lender.
Smart Money Tip!
By paying points up front at closing, you can reduce your interest payment, which makes your mortgage payment lower. However, you have to come up with the cash to pay the points. The amount of the points and how much they save you in the long term depends on the loan amount and your agreement with the lender.
Third Party Costs
Some other fees are third party costs. If a third party, such as an appraiser or title insurance, was involved in helping with your mortgage they have fees that you have to pay at closing. Sometimes, you can negotiate payment and you can pay another time and not at closing. Either way, you still have to pay for it. You should not be surprised that you have to pay taxes. You have to pay taxes on the real estate transaction.
How Do I Shop For A Mortgage?
I have shared a lot of information with you about obtaining a mortgage with good credit. Now, you are probably wondering where to start. There is so much information available these days, it can be overwhelming. First, find out your credit score. Then look at your budget and know what you can really afford. Realistically determine how much money you have for a down payment. With those parameters, start looking for a mortgage company that can meet your needs. A quick search can give you some lenders.
Once you have a few in mind, dig a little further to see who might be the best fit. You can also contact a mortgage broker, who will do all that work for you. That will be another fee added on at closing, but it saves you the hassle of doing some of this work. Looking for a mortgage with good credit, or any type of credit really can be time consuming and overwhelming.
Most mortgage loan shopping these days is done online. You can see rates from mortgage rate tables that seem to be all over the web. We’ve made it simple to shop for a mortgage through our money tools. Or, you can do it right here. Just put your information below and you may get offers that suit your needs best:
I am sure I have made that point that it is much easier to get a mortgage with good credit. However, it is not impossible to get a mortgage with bad credit. It just required more work. Before you begin down the mortgage path, you need to be honest with yourself. What can you afford to pay in a mortgage payment?
Check out Loanry’s budget website to get some helpful information on how to understand your budget. You should understand your income and your expenses and make an honest decision. Doing anything else puts you in danger of getting in over your head when it comes to a mortgage. Getting a mortgage with good credit is great, as long as you can afford it. If you cannot afford it, you will miss payments, or have late payments. This will cause your good credit to slip to bad credit really quickly.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.