How to Determine Which Type of Mortgage to Apply For

There are many different types of mortgages available to individuals. However, not every mortgage is right for every financial situation, so it's a good idea to study your options.

Difficulty: Moderate

Instructions

Steps to Determining Your Borrowing Position

1. Determine your credit risk level by reviewing your FICO score. You can obtain your FICO score online by contacting any or all of the three major credit monitoring companies. Be aware that if your FICO is lower than 620, you will probably need to improve your credit score before you apply for a mortgage. A score between 620 and 699 indicates a moderate to moderate/high credit risk, while a score over 700 is considered good to excellent.

2. Document your income sources. If you have a regular job, your proof of income will be your income tax returns, paycheck stubs and photocopies of your commission checks. If you are self employed and plan on documenting your income, you will need copies of your federal income tax returns from the past two years, profit and loss statements year-to-date, bank records and a balance sheet from your company.

3. Create a list of your financial liabilities. The list should include debts from credit cards, car loans, student and personal loans, promissory notes, home mortgages, etc. Make sure to document the total outstanding balance as well as what you owe for minimum monthly payments.

Steps to determining which mortgage is right for you

4. Determine if you qualify for a special loan program that offers low down payments or even no a money down option. Sometimes, these loan types are available to veterans, first time home buyers and even for people who want to buy houses in rural areas.

5. Determine which loan programs you qualify for based on your FICO score. Generally speaking, the higher your FICO score the better the mortgage terms available to you. A higher FICO score also means you will qualify for a wide variety of mortgages. If your FICO score is under 700, be aware you will probably have to apply for mortgages with higher closing points, higher interest rates, and perhaps other restrictions attached to them. FICO scores over 700 will help you qualify for better mortgage terms. If you are self employed, a FICO of at least 700 is generally needed to qualify for any loan program.

6. Use your employment status to determine which loan programs might approve your mortgage application. If you are self employed, traditional loans may not be an option. If you can document your company's profit via tax returns and receipts, use them to apply for a full doc or a stated income mortgage. However, if your actual monthly income cannot be documented in a tax return because, for example, you write off a lot of expenses, you will probably want to apply for a no-doc mortgage. If you are employed, move on to step four.

7. It is important to know how much you can afford for the down payment. If you have stashed away several thousands of dollars for your down payment, you might be able to put down 20 percent on your home loan. That would save you money in the long term since you will likely not have to buy private loan insurance. You can also save money by obtaining a lower interest rate on your mortgage. Having a few thousand dollars for a down payment will allow you to look for a low down, or no money down payment mortgage such as an FHA, VA, 80/20 loan, or 100 percent loan. If you don't have funds for a down payment, try using a down payment grant available to everyone who qualifies for a loan.

8. Determine your preferred interest structure. If the interest rate is supposed to decrease over its term and you have secured a shorter term loan, the variable rate mortgage may be a good option. However, if the interest rate is already low and the future of interest rates is uncertain, a fixed rate loan is probably a better option.

9. Determine your preferred payment structure. If you plan on selling the property in a few years, an interest-only loan may be a good way to acquire and maintain a property while you fix it up for re-sale. If you earn a large enough monthly income to afford it, you can save a lot of money in interest by obtaining a 15-year mortgage rather than a 30-year mortgage. Be aware that a 50-year mortgage is also now available in some states. That mortgage term makes it possible for some debtors to qualify to purchase a more expensive property.

10. Compare all your options and decide which mortgage is most appropriate for your situation and budget. If you have any questions, speak to a mortgage professional.

Tips & Warnings

• You can use your credit report to obtain your financial information, including account numbers, outstanding balances due and minimum monthly payments.
• By gathering this information prior to looking for a mortgage that's right for you, you will have a better idea which mortgage programs will be most appropriate for your financial situation.
• Shop around before you commit to any loan company.
• Make sure you read and understand all of the terms of your home mortgage before you sign anything.
• If you are considering using a loan company you found on the Internet, check their background with the BBB before signing a contract with them. It's important to know long the company has been in business and whether any bad or negative reports about the company have ever been filed against it.
• Some mortgage companies may hide fees when you first request a quote. Be diligent!
• Interest rates fluctuate throughout the year, so sometimes waiting for interest rates to decrease is a good idea. Of course, that day may never come.
• Home values generally increase from year to year, but there's no guarantee about that.