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When’s the best time to apply for a mortgage?

Are you thinking about buying a home? Purchasing a home or property is one of the most important financial steps we make in our lives. While we’d all like to be able to pay for a new home in cash, the reality is that the majority of people must apply for a mortgage loan to become homeowners.

If you’re considering purchasing your own home, you’ve come to the right place! Learn everything you need to know about mortgages with this helpful guide prepared by our own SABEResPODER team.

What is a Mortgage?

A mortgage is a type of loan in which the collateral for payment is a piece of real estate (i.e., land, an apartment, or a house). These are granted by an institution — the lender — to a person or a business — the borrower.

The most common scenario for taking out a mortgage is acquiring the same property used as collateral for the loan. This article will focus on mortgage loans to purchase a home.

Types of Mortgage Loans in the United States

Before we can determine when is the best time to apply for a mortgage, let's first learn about the two types of mortgages available in the U.S.

Fixed-rate mortgages

Fixed-rate mortgage loans guarantee that your payments will remain stable for the entire term of the loan. The bank will offer you a fixed interest rate when you take out the loan, and this rate will stay the same until the loan is paid off.

Pros

  • You'll know what your monthly payment will be from the start, and it won't change.
  • You'll protect yourself against movements in the market that may cause interest rates to rise in the future.

Cons

  • Initial interest rates are usually higher than those of variable-rate loans.
  • In the event of a downturn in the real estate market, you won't take advantage of lower interest rates in the future.

Adjustable-rate mortgage

Adjustable-rate mortgages (ARMs) are loans in which the amount of interest paid each month will depend on changes on the index rate,  resulting in your payments increasing or decreasing periodically during the repayment period. 

It's common for these loans to have a fixed interest rate during the initial period of the loan. However, after this predetermined time, the interest rate on the loan (and how much you pay each month) will change periodically to reflect changes within the market.

Pros

  • The initial interest rate you'll be offered on ARM loans is usually lower than those offered on fixed-rate loans.
  • By starting with a lower interest rate, your first payments will contribute more to the principal amount owed, resulting in lowering your debt faster.
  • If the index lowers in the future, the interest rate on your loan may decrease as well.

Cons

  • Your monthly payments may increase in the future.
  • Your long-term financial planning will become more complicated due to the uncertainty of  your monthly payments.

What To Consider When Applying for a Mortgage

Applying for a mortgage is one of the most important decisions you'll make in your financial life. Before making the decision to commit to this long-term loan, we recommend that you consider the following factors:

Your credit score

You'll need to have a good credit score to be eligible for a mortgage. Check your score for free once a year on this website. If your score isn’t high enough, we recommend that you read our guide on how to build your credit.

Your financial situation

A mortgage is a long-term loan that typically ranges from 10 to 30 years, so you must evaluate the stability of your financial situation before making this commitment. To start, analyze your current savings, monthly income, regular expenses, and outstanding debts. With this information, you'll be able to make a budget and calculate the monthly amount you'll be able to pay for the mortgage.

Insurance and extra fees

When taking out a mortgage, you'll have to pay a monthly amount to cover the interest earned during the period and a portion of the principal you borrowed. However, it’s important that you also consider the additional payments that may arise when acquiring a property. Some of these expenses include:

You may qualify for financial assistance

The U.S. government has several financial assistance programs to help citizens purchase a home. We recommend checking if you're eligible for any of these programs and receiving the support if you qualify.

The amount you can borrow

You can go to your bank and ask how much money you can borrow on a mortgage loan. The bank will evaluate your income, debt, credit score, the time frame you require, and even the area where you plan to buy the property before giving you an estimate. Keep in mind that this will be the maximum loan amount you are eligible for; it's recommended to ask for an amount lower than the maximum to avoid any future financial problems.

Keep in mind: While mortgage loans are an excellent tool for purchasing a home, they also carry a risk. When a borrower defaults on their mortgage, the lender has the right to seize the property and all payments made will be lost. This is known as a foreclosure.

Requirements to Obtain a Mortgage Loan

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The requirements to obtain a mortgage loan will depend on the lender, the amount of the loan, and your financial situation, among others. Nonetheless, the most common requirements for obtaining a conventional mortgage are:

  • Down payment. To obtain a mortgage, you must cover a portion of the home’s total value as a down payment. The minimum down payment for conventional mortgages is 3%. 
  • Mortgage insurance. If you make a down payment of less than 20% of the value of your home, you must purchase mortgage insurance (PMI). This insurance usually costs between 0.15% and 1.95% of the total amount of the loan each year.
  • A good credit score. To obtain a conventional mortgage, you must have a minimum credit score of 620. A higher score will qualify you for better interest rates and PMI premiums.
  • Proof of income. Most mortgage lenders require a review of your employment history for at least the last two years. This applies to both company employees and self-employed workers.
  • A good debt-to-income ratio. The debt-to-income ratio (DTI) is calculated by dividing your total debts by gross monthly income. Generally, lenders require this figure to be below 45%.
  • Have a cash reserve. How about those rainy days? In addition to paying the down payment on your new home, most lenders require you to have enough savings to cover your monthly payments in case you lose your monthly income. This amount is variable and can be as much as six times your monthly mortgage payment.
  • Use of the property. Conventional mortgage loans only apply if the property is the borrower's primary residence, as a second home (summer home), or as a rental property. 
  • Property types. Conventional mortgages allow you to finance properties from one to four dwelling units in regular subdivisions, condominiums, cooperatives, and planned unit developments (PUDs). Some loans may also be used to purchase manufactured homes, however, mobile homes don’t apply.
  • Have a home appraisal. A property appraisal is a written document issued by a third party giving an opinion of the property's value. Most mortgage loans require you to hire a real estate appraisal agency to obtain this document, although you can avoid this if you pay more than 20% down.

When Is the Best Time to Apply for a Mortgage in the U.S.?

As you can see, there are numerous factors to consider before applying for a mortgage. However, the ideal time to take this big step will depend entirely on your current financial situation, life plans, and other external factors, such as market interest rates. 

To find out if this is the right time for you to apply for a mortgage loan, we recommend that you answer the following questions truthfully:

  • Can I commit to paying a mortgage for a decade or more with my current job and financial situation?
  • Do I want to live in the same house for an extended period of time?
  • Can I cover the extra expenses involved in owning a home?
  • Is the mortgage plan offered by the bank competitive?
  • Do I have other debt to pay off or future projects to finance that could interfere with my mortgage payments?

Be Smart with Your Finances!

We hope you find this information helpful in better understanding mortgages, the options available, and what factors are considered when applying. It’s important to consider all your options before making a decision. 

If you have any remaining questions about this topic or any other subject, please do not hesitate to contact our team of experts! Remember that knowledge is power and the team at SABEResPODER is here to support you in your financial journey!