10 Things You Need to Know About Home Loans

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shutterstock_130441406Deciding to purchase a home is a big step towards building long-term wealth. For most Americans, their home is their biggest asset, so purchasing a house is an important investment in your family’s future. Since home prices are still down and mortgage interest rates are also historically low, now could be a good time to buy.

[Mortgage Help: Get your free credit report and see if your credit score

is mortgage qualified]

But for most potential homeowners out there, the process of securing a mortgage to purchase the home with can be daunting. Even those experienced with borrowing money are sometimes stumped by the ins and outs of applying for and obtaining a home loan. As you get started on your path to homeownership, take a look at the list below for ten important facts about mortgages:

1. Your credit score determines whether or not you can get a mortgage

These days, banks are much more selective about who they lend to than they have been in the past. This means that in order to qualify for a loan, you’ll have to have a pretty good credit score. If your score is less than stellar, you may want to work on improving it before you apply for a home loan.

2. Your credit score also determines the interest rate you’ll get

Not only will your credit score impact your ability to get a loan, it will also be a key factor in determining your interest rate. The best interest rates go to customers with the best credit, so if your score is only ok, be prepared to pay more.

3. The amount of debt you have could impact your ability to get a mortgage

Lenders look at your whole financial picture when deciding whether or not to provide you with a mortgage, and they don’t like to see a lot of debt. If your monthly debt payments exceed 35% of your monthly income, you’ll need to work on paying it off.

4. The interest you pay on your mortgage can be deducted on your taxes

Unlike a lot of other types of loans, the interest you pay on your mortgage can be deducted at the end of the year on your taxes. This could end up saving you big bucks, so be sure to ask your accountant about this important tax incentive.

5. There are two basic mortgage lengths: 15 and 30 years

In general, you’ll have two options when it comes to how long you’d like your mortgage term to be: 15 or 30 years. Thirty year mortgages are more popular, but if you can afford the payments on a 15-year loan, you’ll probably get a better interest rate. Think about this carefully before committing.

6. There are two types of mortgage interest structure: fixed or adjustable

In a fixed-rate mortgage, the interest rate remains constant throughout the life of the loan. In an adjustable rate mortgage, the interest rate changes based on market conditions. Most experts these days recommend a fixed-rate loan, as they are less risky.

7. To get a conventional mortgage, you’ll need to put down at least 5%

Most lenders require you to pony up 5% of the home’s price in order to qualify for a “normal” mortgage. If you can afford to put more down, you should, as this provides you with instant equity and can help you avoid costly private mortgage insurance (PMI).

8. There are government programs out there to help you get a mortgage

If you don’t meet the typical requirements for obtaining a home loan, there are government programs that can help. The federal housing administration (FHA) provides loans to borrowers with less than 5% down, and the veteran’s administration (VA) provides special loans for members of the armed services. These programs are worth looking into!

9. Mortgage interest rates change every day

Mortgage interest rates are tied to indicators in the overall economy, which means they change every day. Once your lender gives you an interest rate quote you’re comfortable with, lock it in.

10. You’ll need to document everything to get a mortgage

When you’re finalizing your mortgage paperwork, your lender will need copies of all of your financial documents: bank statements, tax returns, etc. Be prepared to turn over a lot of information!

Getting a home loan can seem overwhelming, but if you keep the information above in mind, it will go more smoothly than you think!

[Mortgage Help: Get your free credit report and see if your credit score

is mortgage qualified]