Six Things You Need to Know for a Mortgage
As a potential homebuyer, you will almost certainly seek a mortgage. However, since the financial crisis began in 2007, lenders have imposed stricter requirements for granting mortgage credit. Although circumstances vary for each lender and would-be homeowner, some factors are common to nearly all mortgages. Consult with a financial professional who specializes in mortgage lending with specific questions pertaining to your situation.
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Mortgage Price
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Housing prices in nearly all markets across the United States have declined significantly since the height of the housing bubble. If you can qualify for a mortgage, you may find that you can afford a more expensive house than you could have hoped to purchase a few years earlier. In addition, homeowners who find themselves "underwater," or owing more on their mortgages than the appraised value of their homes, may be especially motivated to sell, even at a loss.
Interest Rates
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Mortgages are comprised of two parts: principal and interest. Even if your credit scores do not qualify you for the lowest interest rates, you may lower your interest rate over the term of your mortgage by paying making up-front payments of "points." You may also save money in the short run by opting for an adjustable rate mortgage when interest rates are low. On the other hand, a fixed-rate mortgage guarantees a steady rate of interest over the entire life of the mortgage.
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Down Payment
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Traditionally, banks and other mortgage lenders have required a down payment of at least 20 percent. However, mortgages guaranteed by the Federal Housing Administration require a much lower down payment, as little as 3.5 percent. Loans administered by the Veterans Administration and Navy Federal Credit Union require no down payment.
Length of Mortgage
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The terms of a mortgage are set so that you own your home free and clear by the end of the mortgage term. Many mortgage terms are set for 30 years; however, the terms vary. In addition, some borrowers make accelerated payments to pay off their mortgages early, while others refinance their mortgages, either to take advantage of better interest rates or to draw from the equity they have built into their homes.
Alternative Mortgages
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At the height of the housing bubble, mortgage lenders were often eager to make unconventional loans such as interest-only loans that allowed borrowers to make lower monthly payments, but at the expense of not building equity in their homes. Since the housing bubble burst, such unconventional loans are much more difficult to obtain. However, alternatives such as rent-to-own contracts allow flexibility to both sellers and buyers during difficult financial periods.
Credit Requirements
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Another consequence of the financial crisis is that lenders have imposed strict credit standards on would-be homebuyers. Self-employed individuals or individuals who cannot afford a 20 percent down payment often find that conventional lenders are reluctant to lend to them. So-called subprime borrowers with poor credit may even find themselves closed out of FHA-guaranteed loans.
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References
- CNN Money: The New Rules of Mortgage Lending; Les Christie; February 2009
- Bankrate.com: Can Bad Credit Sink Your Mortgage?; Michele Lerner; September 2010
- Bankrate.com: Four Mortgages That Require Little Money Down; Holden Lewis; June 2010
- Bankrate.com: What Is Mortgage Insurance?; April 2005
- "Money Sense": Bucking the Conventional Wisdom on a Fixed Rate Mortgage; May 2009
- "The New York Times"; What You Need to Know to Get a Mortgage; Alina Tugend; June 2008
Resources
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