How to Find a Mortgage Loan to Fit Your Needs

Home buyers often make the mistake of shopping for a house before they find a mortgage loan. In reality, the mortgage you take for your home will have as much of an impact on your life as the home you ultimately choose. Shopping for a mortgage, then, is just as important as shopping for your house. To get the right loan, approach the process with attention to detail.

Shop for a Loan First

Pre-approval for a mortgage loan will help you gauge the true budget you can apply to a house. Many home buyers think they can afford a specific budget only to find out they would not qualify for a mortgage of that size. Similarly, it is a bad idea to purchase a home that is under the level you can afford, as you may quickly outgrow the property. To avoid these scenarios, start with the money. Consider a few sources for your mortgage, such as traditional and alternative investors, and get basic quotes from each. Once you have found a lender you feel comfortable with, apply for pre-approval. This will tell you exactly what you can afford to spend during your home search.

Concentrate on Monthly Payment

The total size of your mortgage will affect you much less than your monthly payment; this is the number to focus on. Create a budget that sets your monthly payment plus an estimated tax and insurance cost at no more than half of your annual income as an individual or family. If you have other debts, like student loans or car payments, your monthly payment may need to be even lower. Even a mortgage that is equal to your current rent may be too much, because owning a home comes with additional financial responsibilities beyond those of a renting.

Consider Adjustable vs. Fixed Rates

The interest rate on your loan will largely affect the monthly payment. You may have reason to believe you will be able to afford a higher payment in the future than you can right now. In this case, an adjustable rate mortgage may be a possible solution. However, when shopping for an adjustable rate, it is wise to set limits on how high the rate can adjust. One model of limit capping allows you to pick a maximum the rate can rise over the initial interest before the adjustment period. You can also determine a set amount over prime that the rate cannot exceed.

Ask about Buy Downs and Incentives

First-time home buyers in particular often forget to ask about buy-down opportunities and incentive programs. With a buy-down, you can purchase "points" on your mortgage by paying interest up front. Not only will the interest be discounted, but also your monthly payments will remain low during the buy-down period. First-time buyers often qualify for additional lender incentives. When you are shopping around for quotes, ask potential lenders if they have programs for first-time buyers. You may find low down payment options or reductions in closing costs. Lenders will not often volunteer this information if you do not ask.