Applying for a mortgage for the first time can be both exciting and daunting. After all, for most of us, a house is the most expensive thing we’ll buy in our lives. Just think of how many of our working years will be dedicated to paying off that loan.
Of course, a mortgage requires a lot of financial commitment, so it’s essential to understand how it works along with the other factors that surround and influence it. This will prevent you from the struggle with mortgage payments.
In this article, we are going to talk about how a mortgage loan works, how it can influence buying and the things that you need to avoid during the mortgage process. Let’s get started!
How Does a Mortgage Loan Work?
In a nutshell, a mortgage is simply a huge loan that allows you to buy a house. This large amount can then be divided into more manageable monthly payments that you can settle over time.
There are different types of mortgages. The most common, though, is a 30-year, fixed-rate mortgage. This means that your mortgage will come with a fixed interest rate that has already been calculated and determined in your contract and you have 30 years to pay a constant monthly rate that includes both your principal loan and interest.
Now, this doesn’t mean that you will be completely obligated to pay and live in the same house for the next 30 years. In fact, most homeowners don’t. You will still have the chance to sell your home or refinance your loan in the future should you wish to do so.
How Can a Mortgage Rate Influence Buying?
There are different factors that can affect your mortgage rate. Your credit score and income are just two of them. The economy of the country and current wage growth plays significant roles as well.
For instance, economic challenges can lead to lower mortgage rates that can give consumers more buying power. It can even make more expensive properties available to more buyers. However, economic challenges can also mean a higher unemployment rate and slower wage growth.
On the other hand, higher mortgage rates signal an improving economy. While it’s true that it can also dampen our buying power, it can also mean higher wages that will eventually help us make those payments.
This is where personal financial management and planning will come in handy. It can help you find the best rate and timing for your application.
Mortgage Rate Impact on Purchase Decisions
Speaking of buying power, your mortgage can also impact your purchase decisions. For instance, it’s not a good idea to make any big purchases (like a car) if you’re planning to apply for a mortgage or if you’re already waiting for your application to be approved.
That’s because mortgage lenders will check your credit score and debt-to-income ratio. The timing of your purchases will also give them an idea of your financial responsibility.
Things to Avoid During the Mortgage Process
Buying a car is not the only thing that you should avoid during your mortgage process. Here are others to keep in mind:
- Avoid Any Employment Changes
- Don’t Ignore the Benefit of Maintaining Good Banking Relationships
- Pay Attention to Your Credit Card Activities
- Don’t Ignore Your Lender
- Don’t Be Afraid to Ask Questions
Your credit history is not the only aspect of your life that your mortgage lender will inspect. You can expect your income and work history to be examined as well. Thus, it probably won’t be in your best interest to quit or switch your job right now. In fact, you don’t want the lending company to think that there is even a slight risk that you won’t be able to pay your loan in the future.
A person’s financial history is not just based on his credit and income alone. Mortgage lenders also look into an applicant’s banking relationships to get a clearer picture of his finances. This is why it’s not a good idea to make significant changes to your bank accounts right now. Avoid closing your savings accounts even if you only intend to transfer them to another bank.
We have already advised you to avoid making big purchases, but how about smaller ones? While we’re not completely discouraging you from buying anything, we do want to remind you that even smaller purchases can add up and impact your credit utilisation ratio.
It’s also not a good idea to apply for a new credit card, much more multiple ones as that can impact your credit score as well. It doesn’t matter if you’re planning to use them or not. It’s just the possibility of being in more debt than you are now is reason enough for your mortgage lender to deny your application.
In fact, we recommend you avoid any possibility of hard credit checks for the time being. Hard credit checks made within a short period of time can impact your credit score. Keep in mind that credit card companies and lending institutions are not the only ones that perform such checks. Utility and service providers like internet and cable companies perform them as well during applications.
There are times when mortgage lenders need to verify some of the information you’ve provided them and request supporting documents. This is a good sign. This means that you have passed the initial steps and they’re considering approval. Hence, make sure to be as responsive as possible and provide them with the necessary documents promptly.
Finally, your mortgage lender is not the only party allowed to ask questions and do their research, you should too. Remember, you will be committing to this loan for a very long time so be sure that you completely understand what you’re getting yourself into.
Here are some of the questions that you might want to ask:
- How long is their average loan processing time?
- What’s included in the monthly payment?
- Will they perform a background check on your spouse as well?
- If so, how will my partner’s financial history affect my application?
The process of buying your first home shouldn’t be too stressful. Taking your time to do your research and prepare for your mortgage application can significantly reduce anxiety and frustration, and even make the process exciting and enjoyable, as it should. After all, you are accomplishing one of the biggest milestones of your life.
Aside from taking note of these steps that you should do; it would also help to be aware of those that you should avoid. You can start by referring to the list we have shared above. By keeping these tips in mind, we are confident that you will get approved for the mortgage plan that best fits you and your needs. Good luck!
This article was written by George Relish. George is the Editorial Director at Quidable. Before starting his work at Quidable, he spent five years in banking. He is passionate about reading science fiction, travelling, and football.
Are you a thought leader or industry expert, like George, and have some insight to share? Don’t hesitate to get in touch today!