At the end of 2020, 65.8% of households owned their own homes. If you’re in the minority, then you might be dreaming about the day you’re handed the keys to a house to call your own!
However, for most people, this dream can’t become a reality with some major financial backing. This is why most people take out a mortgage, which can literally get your foot through the door.
But when is the right time to take on a mortgage? And how do you do it?
If you need help making a plan for your future, then you’re in the right place. We’ll help you decide when to take on your first mortgage and how to go about it.
What Is a Mortgage?
First, do you even know what a mortgage is? Understanding what it is is crucial, as it involves a huge sum of money!
A mortgage is a loan you take out to buy a house. You can also use it to refinance, which is revising your original loan terms, usually in your favor.
The lender makes a profit off mortgage loans because you pay them interest. Most people choose between fixed and variable rates, which have their own pros and cons.
With a fixed rate, you’ll know exactly how much you’re paying every time. With a variable rate, the rate you’re paying is more random, but you’ll get chances to pay less than before, as well as more.
Either way, you must make your payments on time. If you fail to make payments for long enough, the lender has the right to take your property.
So as you can see, it’s very important that you only take on a mortgage if you’re financially ready.
Who to Get a Mortgage From
In addition to knowing what a mortgage is, knowing who to get it through is important as well. The best mortgage lenders will have the lowest interest rates and terms, so make sure you shop around.
Here are your choices of who to ask for a mortgage:
- Credit unions
- Mortgage brokers
- Mortgage marketplaces
Again, each option has its own pros and cons, so make sure you explore their details before committing to a mortgage lender.
When to Get a Mortgage
Now that you know a little more about mortgages, you’re probably wondering when the right time is to apply for one. While everyone’s personal situation is different, here are some things to think about to see if you’re ready to be a homeowner!
Is Your Credit Score Good?
Your credit score shows how trustworthy you are with money, so it’s extremely important that yours is as good as it can be.
In the worst-case scenario, you won’t be able to get any lender to approve you for a mortgage. But even if you do manage to qualify, that’s not necessarily a good thing.
If your credit score isn’t great, then your mortgage terms won’t be great either. Considering most people pay off their mortgages in 30 years, you’ll want to get a super-low interest rate to keep more money in your pocket. And this is only doable if you have a good or excellent credit score.
Do You Have Stable Income?
Not only do you need a good credit score for a mortgage, but you also need stable income. Generally, lenders want to see that you’ve been employed at the same place for at least 2 years. If you’re self-employed, then lenders want to see that you’ve generated stable income in the last 2 years as well.
Even without lenders wanting to see stable income, it’s still important for you to have it. Otherwise, it might be tough to pay a mortgage steadily.
Do You Have a Small Amount of Debt?
When you apply for a mortgage, lenders will look at your debt-to-income ratio. As a rule of thumb, if your ratio is over 43%, it’s not likely that you’ll get approved for a mortgage.
To lower your debt-to-income ratio, there are 2 things you can do. Firstly, you can focus on paying off your debt as quickly as possible. Secondly, you can either ask for a raise or look for a better paying job.
Doing both simultaneously can lower your ratio tremendously.
Do You Have Decent Savings?
Most houses will cost you 6 digits. Even if you’re lucking and you only need to pay 5 digits, that’s still a hefty amount of money. Not to mention, you’ll need to pay a down payment to secure the property of your dreams.
The bigger the down payment, the better. In general, you’ll want to aim for 20% down. Not only will you have a little less to pay off, but it’ll also qualify you for better rates and negate the need for private mortgage insurance.
You’ll want to have a decent amount of money saved up so that paying a 20% down payment won’t clear out your bank account. The responsible thing is to have enough left to get you through a rainy day.
Good Luck Making a Plan for Your Future
Making a plan is always a good idea, especially if it involves a significant part of your future. Now that you know what a mortgage is, who you can get one from, and what the right times in life are for a mortgage, you’ll have a better picture of what to expect and when you should pursue buying a property.
So if the timing is right, don’t be afraid to take the plunge. Being a homeowner is a huge achievement and it’ll feel great to live in a home you can call your own!
If you need more financial tips, then make sure you take a look at our other blog articles!