Making Sure Your First Mortgage is One You Can Live With

Given the sheer number and variety of mortgage choices on the market, finding the perfect home loan can feel almost as challenging as finding the perfect home. To help you decide which mortgage product you would feel most at-home with, the American Bankers Association recommends the following tips to home buyers: 

• Figure out if you can afford to buy. It may seem like everyone is buying a home, and so you should too, but first decide if you can afford the decades-long commitment you would be facing. Your bank and many online resources can provide a calculator to determine if and how much you can afford to borrow.
• Compare cost vs. salary, now and into the future. When considering adjustable rate or interest-only loans, it is important to look at both current and projected future income. The monthly payment on loans of this type will rise, but will your salary keep pace?
• Consider all the costs. A lender will review the associated costs of a mortgage (fees, closing costs, points, homeowner insurance, taxes, etc.). But in addition, consumers should also consider repairs and maintenance costs. As a homeowner, you are responsible for those additional costs – there won't be a landlord to call.

Organize your finances before you go to the bank. While each bank may require different documentation given your specific needs and circumstances, at a minimum you will need:pay stubs, tax returns, financial statements (one that is less than 60 days old), copies documenting additional monthly commitments (such as car loans, credit cards, student loans, etc.), and any additional information – like proof of additional income – that you think will help your banker to positively and accurately evaluate your credit request. 

One of the biggest favors you can do for yourself prior to applying for a mortgage is simply to pay-off or pay-down other loans and credit obligations. Credit cards, auto loans, or other small loans should be paid-off or paid-down as far as possible. This will help to increase your credit score, which can then qualify you for a larger mortgage or lower interest rates. Even the slightest interest rate drop on a loan of this size and term often represents thousands of dollars.

A home is a long-term investment, so if you plan on being in an area only a short time, renting may be a smarter financial option. Typically, if you plan on staying in an area less than five years, buying a home may not be worth the cost of the investment. Instead, focus on paying down debt and building up savings.