As you are preparing to get a mortgage, you may be asking what the best type of mortgage is and what fits your financial situation best. There is no one size fits all “best” option when it comes to a mortgage because each borrower has their own unique financial dynamic. Because of this, it’s essential to work with a mortgage loan officer that can offer many different types of mortgages, like we do.
If you’re trying to decide what type of mortgage is best for you based on your financial situation, this post is a must-read.
Assess Your Financial Situation
Before you start exploring mortgage options, it’s crucial to have a clear understanding of your financial situation. Start by considering these factors that will influence your mortgage application process:
- Income: self-employed or your income fluctuatesYour income plays a significant role in determining how much you can afford to borrow. If you have stable, consistent monthly income you will likely be able to easily determine the mortgage payment you are comfortable with, and you will probably be a good fit for traditional QM loans. If you are significantly, other non-QM loan options might end up begin the better fit.
- Expenses: Take a close look at your monthly expenses, including any existing debts such as credit card payments, student loans, or car loans. Our underwriters use your debt-to-income (DTI) ratio to evaluate how much of your income goes toward debt payments. Ideally, your DTI ratio should be below 43% (meaning less than 43% of your monthly income goes to debt payments) to qualify for most mortgage programs.
- Savings: Consider how much you have saved for a down payment. The size of your down payment will impact your loan options, interest rate, and whether you’ll need to pay for private mortgage insurance (PMI). A larger down payment often leads to more favorable loan terms, but even if you’re only prepared with 3%-5% of your expected purchase price we may be able to find a good fit for you. A 20% down payment is rarely necessary.
- Credit score: Your credit score is one of the most important factors in determining your mortgage eligibility and the interest rate you’ll receive. A higher credit score can help you qualify for a lower interest rate, which can save you thousands of dollars over the life of the loan. Know your credit score, and focus on raising it quickly if needed through things like paying down balances, disputing reporting errors, and setting up automatic payments.
Determine Your Goals
One of the reasons there are so many different types of mortgages is the wide range of goals there are for people buying real estate. Your mortgage choice should align with your long-term financial goals and homeownership plans. Consider the following questions:
- How long do you plan to stay in the home? If you plan to stay in the home for a long time, a fixed-rate mortgage might be a better choice, as it offers stable payments over the life of the loan. If you expect to move within a few years, an adjustable-rate mortgage (ARM) might save you money with lower initial payments.
- Do you prefer predictable payments? If stability and predictability are important to you, a fixed-rate mortgage is likely the best option. With a fixed-rate loan, your interest rate and monthly payments will remain the same throughout the term of the loan.
- How quickly do you want to build equity? If building equity quickly is a priority, consider a shorter loan term, such as a 15-year fixed-rate mortgage. While the monthly payments will be higher, you’ll pay less interest over the life of the loan and build equity faster.
- Are you comfortable with some risk? If you’re willing to take on some risk for the potential of lower initial payments, an ARM could be an option. ARMs typically start with a lower interest rate that can adjust after an initial fixed period. However, rates can rise significantly after the initial period, leading to higher payments.
- What is the intended use of the property? cash flow mortgageIf you’re buying an investment property, there are options like a that are specifically designed for your scenario. You don’t have to use a conventional loan.
Get Pre-Approved for Your Financial Situation with the Right Lender
Before you start house hunting, it’s essential to get pre-approved for a mortgage. Pre-approval gives you a clear understanding of how much you can afford to borrow and shows sellers that you’re a serious buyer. During the pre-approval process, any lender will evaluate your financial situation and credit history to determine the loan amount and interest rate you qualify for.
The key is to work with a lender who has a wide range of mortgage options available. We are able to work with our clients, finding creative financing solutions where necessary and showing them all of the options to find financing that is the right fit.
Ready to learn more about applying for a mortgage or finding a loan that is right for you and your financial situation? Contact us any time.
