Mortgage Basics for Buyers
When you’re buying a home for sale in Ellicott City or another community, you’ll most likely have to get a mortgage loan to do it – most people do.
But even if you’ve had a mortgage loan before, check out these basics before you dive into house-hunting.

Mortgage Basics for Buyers

Mortgages aren’t as complex as they seem, but there are a few things you need to know. This guide walks you through:

  • Why you need mortgage preapproval
  • The differences between fixed-rate and adjustable-rate mortgages
  • What kinds of credit scores you need to get a mortgage
  • What documentation you’ll need to provide your mortgage lender

What is a Mortgage?

A mortgage is simply a loan you get from a lender to buy a house. You’ll put down some of your own money – the down payment – and the lender will put up the rest.

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Why You Need Mortgage Preapproval

Before you start house-hunting, you need a preapproval letter from your lender. It’s not a legal requirement or anything, but you need it because:

  • You’ll know exactly how much house you can afford
  • When you find a home you love, you’ll be able to make an offer immediately – and showing the seller your preapproval letter proves that you’re serious and able to buy

Many real estate agents will ask if you’re preapproved before they take you to tour homes. That’s because an agent’s job is to help you find the best possible home for your needs – and he or she wants to make sure you’re looking in the right price range. Your agent also knows that homes in this market sometimes sell very quickly, and with a preapproval letter, you have a better chance of having your offer approved.

Fixed-Rate vs. Adjustable-Rate Mortgages

Types of Mortgages for HomebuyersYou have a lot of options when it comes to mortgages, and two of them are fixed-rate and adjustable-rate. They’re very different types of loans.

Fixed-Rate Mortgages

Fixed-rate mortgages are loans in which the amount of interest you pay stays the same for the life of the loan. If you start your loan at 3.5 percent interest, it’ll be the same until you’ve repaid the entire loan.
Your monthly payments will always be the same (unless you refinance), so you can budget accordingly.

Adjustable-Rate Mortgages

Adjustable-rate mortgages start out with a fixed interest rate that won’t change. However, after the introductory period – usually 5, 7 or 10 years – your interest rate will start to fluctuate based on market conditions. If interest rates on new mortgages go up, so will yours; if they go down, yours probably will too.
Every adjustable-rate mortgage has its own terms and conditions, though, and some may not let your interest fall below a certain point. Likewise, some have caps on the amount of interest you’re required to pay. Your monthly payments can change when your interest rates change, so that’s something to be aware of if you’re thinking about an adjustable-rate mortgage.

Your Credit Score and Mortgage Eligibility

Many lenders want you to have a solid credit history and a good credit score to buy a home. That’s because your credit score reflects how likely you are to pay back a loan on a home – and if yours aren’t up to par, lenders might be hesitant to let you borrow.
Required Credit Score for a Mortgage
Qualifying for a mortgage depends on more than just your credit score. Lenders will also look at your:

  • Income
  • Debt
  • Down payment amount
  • Debt-to-income ratio
  • Savings accounts
  • Home price

You still need a solid credit score, though, and that means making sure it’s above the 620 mark. A FICO score that’s below 620 is considered “sub-prime.”
The higher your credit score is, the better interest rates your lender will offer you. Mortgage rates change every day, so you’ll need to talk to your lender when it’s time to apply.

Documentation Your Lender Will Need

Your lender will need a lot of documentation from you in order to process your mortgage loan. Here’s a quick list – but remember that your lender may need more:

  • W2s from your current employer
  • Your most recent check stubs
  • Current and past bank statements
  • Tax returns from the previous two years
  • Lists of all your assets and debts

Are You Buying a Home in Ellicott City?

If you’re ready to buy a home for sale in Ellicott City, we can help you find the right one.
Call us at 410-465-5822 to tell us what you want from your next home or to schedule a tour in a home you’ve seen online.
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