5 things to consider before taking out a mortgage

According to Statista, the mortgage debt in the US totaled more than $17.6 trillion at the end of 2021. That's 10 trillion more than twenty years ago in 2001. For those of us who are math-challenged, that's a difference of 10,000 billion dollars — or 10,000,000 million dollars. Whew!

So, it's pretty safe to assume that mortgage debt is huge for American households. Nobody likes being in debt, but mortgages are typically seen as good debt because homes generally appreciate in value — the skyrocketing housing prices of the last two years are proof positive. 

That doesn't mean you should dive into getting a mortgage without doing your research. Start with these five key considerations!

1 – Prequalification and preapproval are two different things

Before making an offer on a house, most people get prequalification or preapproval for a loan from a mortgage lender. And while they sound the same, they aren't.

Being prequalified for a mortgage lets you generally know how much you can borrow. It's an estimate of how much they might lend you based on a quick look at what you reveal about your income, employment, credit and savings in your bank account.

Preapproval, on the other hand, is more precise. That's when your lender analyzes your finances and approves you for a loan of a specific amount before you find a home. Being preapproved gives you a leg up when competing with other buyers who might not be officially preapproved. 

2 – Monitor your credit score. It matters! 

You don't need a perfect credit score to get a home loan. Depending on your situation, mortgages are available with different credit score requirements. A FICO credit score of 620 is typically the benchmark needed to buy a home, but some loans allow for slightly lower credit scores. 

How can you keep building a better credit score? Know what goes into it. Your FICO credit score is:

• 35% payment history: Are you making payments on time?
• 30% debt-to-credit ratio: Compare how much credit you're using with how much is available to you
• 15% length of credit history: Do you have ten months or ten years under your belt?
• 10% credit mix: What kinds of credit do you have? Does it include credit cards, student loans and car loans?
• 10% new credit accounts: How frequently have you applied for new credit in the last two years? 

Always speak to a loan officer to determine the credit score requirements for the type of loan you're looking for in your location.

3 – Saving a larger down payment has big benefits

In basic terms, the more you can save for your down payment, the smaller your mortgage will be and the less interest you'll pay over the life of your loan. A general rule of thumb has been for buyers to save at least 20% down payment before applying for a mortgage. However, newer loans are available today that require as little as 3.5% down. And if you're qualified, some loans require $0 down.

It's harder and harder to save up 20% — especially with home prices as high as they've been for the past few years. But if you can manage it, there are some real benefits. 

For example, most lenders will require a higher interest rate for homebuyers with smaller down payments. So while it's less money you need to get into a new home, you'll pay more over time. Also, you must pay Private Mortgage Insurance (PMI) if your down payment is less than 20% on a conventional loan. This is insurance that protects the lender if you default on your loan. 

4 – Remember to save for all those pesky mortgage fees

If you've put the spotlight on saving for a down payment, you may lose focus on all the other fees that go into getting a mortgage. There are broker fees, application fees, appraisal fees, title search fees and insurance. Closing costs – the amount you need to pay on the closing day before you get the keys to your new home — can really add up. Some lenders also charge fees if you pay off your loan early.

You'll want to know how much you'll need to save ahead of time so ask your lender. They'll give you a list of all the fees you can expect to encounter.

5 – Wait until keys are in hand before making big financial moves

After you have been preapproved for a mortgage, you need to pause. Closing credit card accounts — or worse, opening a new account — is a big no-no, but so is financing a new car or furniture for your next place. Your bank account is also under a magnifying glass. Try not to take on big expenses. Resist the urge to splurge, and don't withdraw or deposit large sums of money. 

Once you close on your new home and have the keys in hand, go for it (but keep the responsibility of making on-time mortgage payments top of mind). 

Talk to a local loan officer or apply online 

Understanding how mortgages work and how yours will affect your financial health can help you manage and make the most of your mortgage. 

If you're a prospective first-time homebuyer and your credit score is in good standing, reach out to one of our local loan officers to discuss which mortgage would be best for you. 

Or, if you're ready to get started, apply online today!