As one of the most important purchases you’ll ever make, taking out a mortgage can be quite intimidating if you don’t know what you’re doing. However, it doesn’t have to be that way!
Take a look at this simple guide to mortgages to learn more about how mortgages work and how to pick the right one for your needs.
What Is A Mortgage?
A mortgage is a type of loan that uses your home as collateral. It's a way for you to purchase your dream home while giving the lender a guarantee that they'll get paid if you default on the loan.
Maintaining steady income and making payments will ensure that your home isn't taken away if you don't pay your mortgage. Keep in mind, with any type of loan, it's important to repay both principal and interest in full.
How Are Different Types Of Mortgages Different?
Different types of mortgages are different in that they each come with their own set of pros and cons. A 30-year fixed mortgage, for example, comes with certainty over monthly payments, but requires a larger initial investment and has the potential for higher monthly payments compared to base if the bank interest rate is cut.
A 15-year fixed mortgage also comes with certainty with monthly payments.
The most popular type of mortgages are often those known as hybrid mortgages. These combine both a 10-year adjustable rate and a 30-year fixed mortgage into one loan program.
This can be advantageous because it offers protection if interest rates rise while still allowing some flexibility should circumstances change and we want to refinance our home sooner than expected.
Am I Eligible For A Mortgage?
You are eligible for a mortgage if you have been working for two years. To be eligible, you must earn two times the average annual salary of the area you live in. The average annual salary is usually determined by looking at all members of your profession in your area and figuring out what they make.
You will also need a deposit of 20% to put down on your house. This money can come from gifts, investments, or other sources, such as parents or grandparents who want to give you money to help with getting a home of your own.
A credit score is required as well. If this sounds like something that would work for you, then read below on how mortgages work and get started!
How Do I Qualify For A Mortgage?
For most applicants, the main hurdle when getting a mortgage is having sufficient cash for the down payment. The following are also criteria for eligibility. Generally, if you're looking for a home loan in your 20s or 30s, you should have at least 5% of the purchase price saved up for a down payment.
If you're in your 40s or 50s, that requirement increases to 10%. In order for an applicant's monthly income to qualify them for a certain level of home loan debt ratio, they must provide proof of their gross monthly income and submit pay stubs from their current employer or bank statements that show assets and income.
What Factors Do The Lenders Consider When Approving Me For A Mortgage?
Before you apply for a mortgage, it's important to understand what the lender is going to consider before approving your application. Some things the lender may take into account are your credit score, income, down payment, and debts.
If you have a low credit score or any large outstanding debts it will be harder for you to get approved for a mortgage because of your risk of defaulting on the loan.
However, if your score is high and you make an adequate down payment and don't have many obligations then lenders will be more likely to approve your application.
Should I Take Out An Interest Only Or Principal And Interest Mortgage?
There are many ways you can structure your mortgage and make it work for you. For instance, if you expect your income to increase in the next few years and intend on living in the property for the long term, then it may be best for you to take out a standard, or principal and interest mortgage.
On the other hand, if you expect your income level will remain relatively low while owning the property and intend on leaving after five years or less, then an interest only mortgage would likely be your best option. Take a look at both options below.
Which Type Of Property Should I Buy, Where And Why?
Some good places to buy property are in the suburbs of big cities, as well as rural areas with low crime rates. Consider what you will use the property for.
If you need space for a family or plan on renting out rooms then go for a three bedroom or larger house.
If you just want one place that's yours, you might prefer a condo or apartment close to work and amenities. You'll also want to think about other costs like utilities, maintenance, and upkeep that comes with any kind of home purchase
How Much Can I Afford To Spend On My First Home?
The average price of a home in the United States is £319,000. This means that if you make an average salary of £60,000 per year and want a mortgage between 10-20% then you can afford around £230,000 (£56,000 annually).
When looking for homes, take your savings account balance into consideration and factor in the cost of moving and any associated costs with the purchase of a home.
Buying a house on credit will mean added monthly payments which can be stressful when money is tight! However owning a house is cheaper than renting over time so if you plan to stay for more than 7 years it could be worth investing in.
Is There Any Extra Help Available To People Who Want To Buy Their First Home But Have Low Incomes Or Bad Credit History?
Yes, there are programs that will work with people in these situations. Consider the Federal Housing Administration's Streamline Refinance program, which can assist eligible homeowners in refinancing their mortgages and reducing their monthly payments.
Homeowners may be able to lower their monthly mortgage expense by tens of thousands of dollars. The USDA Rural Development Guaranteed Housing Loan Program is another option for those who do not qualify for a traditional loan because they have low incomes or poor credit history.
What Documents Will I Need To Apply For A Mortgage?
In order to be eligible for a mortgage, you will need a few documents handy. A list of required documentation will depend on the lender or institution that you are working with and the loan type that you would like to get. In general, however, these are the main documents needed:
-Recent bank statements. Your most recent six months worth of bank statements showing all account activity including credit card balances and deposits as well as your balance on hand should suffice. If it's been less than six months since your last statement then please provide an explanation of what has changed since then.
-Wage stubs from your employer over the past month or two. This includes any additional income such as severance pay, bonuses or even overtime wages if applicable.