Finding the Right Mortgage

A home is one of the largest purchases you will ever make. Owning a home is an American dream, but many people are unsure whether or not it is an option for them. The journey can sometimes be difficult but if you are able to afford a home you will be happy that you made the leap. The first step is finding the right mortgage for you and one that you can afford.

Homeowners typically enjoy many benefits. The home builds equity over time. As their homes value rises, the mortgage balance shrinks. They don't have to worry about housing costs or rising rents because they are a homeowner. The not so bright side to homeownership is that when there is a problem you have to fix. No more sending a note to the apartment manager or calling the landlord. You also need to remember that there are home-buying fees, closing costs and the commission to the real estate agent.

The main concern for a mortgage lender is whether or not you will be able to repay the mortgage. They need to know that they will be able to depend on you to make your monthly payments. To determine if you qualify for a loan, the mortgage lender will use your credit history, your monthly gross income and how much money you will be able to save for a down payment.

The standard debt to income ratios will come into play here. There are two debt to income ratios that are used. The housing expense is called the front-end ratio and the total debt to income is called the back end ratio. The front-end ratio shows how much of your monthly income would go to the mortgage payment. Your mortgage payment, including the principal, interest, taxes and insurance should not be more than twenty-eight percent of your gross monthly income. The back end ratio shows how much of your income would go to your other debt obligations such as the mortgage, car loan, credit card bills, student loans, child support, etc.

After you have determined what you can afford to spend you can begin to look at different mortgage options. A fixed rate mortgage is the most common. They feature fixed interest rates, fixed monthly payments and generally 15 to 30 year notes. When the interest rates are low these mortgages are very affordable.

Adjustable rate mortgages have an initial fixed rate period that can be short or long. These attract many homebuyers because the interest rates are typically lower than in fixed rate mortgages. The downside is that many buyers find themselves in a bind in the long run when their mortgage begins to fluxuate with the changing market rates. More adjustable rate mortgage holders end up in foreclosure than fixed rate mortgage holders.

Borrowers with credit scores under 620 will generally be required to get a subprime mortgage. These mortgages are essentially intended to help people with poor credit get a mortgage and a home. Credit scores range from 300 to 900. Most consumers land in the 600s and 700s. People who have a poor payment history, especially those individuals who fall behind for 30 to 90 days will have a low credit score. These people will be candidates for subprime mortgages. A subprime loan may have a prepayment penalty and/or a balloon payment. If the borrower is unable to make the balloon payment when it is due, they will need to refinance the loan or sell their house. These aspects of the loan have been associated with high foreclosure rates.