Obtaining a Mortgage For Someone In Their 20s.

imgresThere is no better time to be considering obtaining a mortgage than early in your life.  At this point in your life, you are probably either living at home with your parents or living in a rental property.  Renting a house or apartment is a great way to throw a lot of money away and never see it again.  In some cases, renting can be even more expensive than owning a home, eating away at such a substantial proportion of your paycheck that you feel you have little to show for all of your hard work.  This doesn’t necessarily mean that purchasing a home is ‘cheap’.  Home buying is a serious commitment, and requires a lot of money saved.  More likely than not, you will have to take on some debt in order to pay for the home.  That debt is a mortgage, which is likely to be the biggest debt you will carry in your life, and it ties up a lot of your money in one investment.  If relocating is something out of the question for you, than homeownership might just be knocking on your door (see what I did there?).  A mortgage will build equity in your home, provide tax deductions, and look better for your credit report and score (given that you make all of your payments in full and on time).  There are plenty of things to think about before embarking on such a significant responsibility, so stay tuned.

The first thing to know about obtaining a mortgage loan is what it actually is.  A mortgage is the home loan that is used to purchase the home, and the property itself serves as collateral to the bank that provides you the loan, in the case that you do not meet your promise payments.  Not making payments on time and as promised can lead to the infamous foreclosure, and also result in a poor reflection of your payment habits on your credit history.  This may all seem overwhelming and scary, and it can be, but bear in mind that mortgages are the most common method for Americans to purchase homes.  The total outstanding mortgage debt of the United States is in the trillions.  To best assess the situation, do months of planning and work with a loan officer and financial adviser whom you trust, so that you can be sure that you are getting the best, most suitable deal for your personal financial situation.  Even if you didn’t want to take your time, you would have to because obtaining a mortgage is no walk in the park.  It is not like opening up a credit card or obtaining an auto-loan for your new car.  This application process is thorough and lengthy.  Documentation will be required for every aspect of your financial life: pay stubs, savings, proof of all assets, documentation on your debts.  The lender wants to know exactly what your obligations are in order to make sure that providing you a home loan will not overload you financially.  For anyone who has ever done a financial analysis on a business, the mortgage lender essentially wants to take a look at your balance sheet to make sure that a mortgage will not lead you to bankruptcy.  No one wins in the case—not the borrower or the lender.

The process is also not as simple as finding a home that you love and suddenly saying, “it’s mine”.  First you must be preapproved to afford a certain amount of house.  What I mean when I say that is after you provide the lender with all of your financial documentation, the lender will then come back and pre-approve you for a certain loan amount, and you cannot exceed the amount that you are able to put down combined with the pre-approval amount.  After that, you put in an offer on the home, and you either have an offer accepted, or you have to keep looking because someone else put in a better offer.  The offer can be higher or lower than the asking price, but the current homeowner will ultimately take the best offer.  Getting pre-approved before making the offer is absolutely crucial, especially if you are the youngest person bidding on the house.

Lenders are going to look very closely at your credit score and history, so it is important to find out this information on yourself prior to getting wrapped up in the process of homeownership.  If you have a lower credit score, you will want to work on fixing that up.  If your credit score is low, you are more likely to get a worse interest rate on the home loan than if you had a higher score.  On the other hand, if you have a good credit score, the lower your interest rates will be.  This reason alone is why you need to take a look at your credit profile before even stepping into a loan offer’s office.    If you have no credit history, consider taking out a credit card or obtaining a car loan.  For those out there with student debt, as long as you are making your payments on time, you will most likely have a good credit history.  This information will help lenders make an informed decision about how much risk you carry.

One of the biggest obstacles in the home purchasing process is the down payment.  20% down is preferable by lenders.  Even on a $100,000 home, this is $20,000.  Make sure that you have saved as much as you can for a home.  Any home purchased with less than 20% down will require mortgage insurance, which can be expensive and will add to your monthly overhead.

In order to get the most out of homeownership, it is imperative to consider a few questions.  The first question is where do you think you will be 5 or 10 years down the road?  If you see yourself across the country, than homeownership most likely is not the best choice for you.  To make a home worth the investment, and cheaper than renting, you typically have to spend 5 years at the very least in the home.  If you think you’ll move around the country frequently for work or want to relocate for other reasons, a mortgage might not be the best of choices.  There are fees associated with owning a home, and it is ideal to only have to pay them once or twice in your life time…not every few years, because that quickly becomes a lot of money wasted.  A mortgage is not only a financial commitment, but also a long-term location commitment.

Make sure that the real estate you purchase is within your means.  During the home buying process it is very easy to get wrapped up in finding the dream home or finding the biggest home possible, but you must resist the urge to do so and have a true understanding of what this payment is going to look like, and how much of you and your family’s time and energy it requires.  For example, if you and your spouse are both working at the time of obtaining a mortgage, work out a scenario if one spouse lost their job, or if one decided to stay home and raise a child, or if one had an unexpected medical emergency that took them out of work for weeks or even months.  Would the mortgage payment be too difficult to make in your single-income household?  Is making a mortgage payment realistic in this situation on top of other bills and student loans?  Always have a back up plan in case something goes wrong.  It never hurts to live within (and even below) your means.

Think about your long-term goals and let it sink in that you are there for the long haul.  30 years is a substantial portion of your life, so it is crucial to make sure that you have done your research on the area which you choose to reside.  Look up the school districts, crime rates, and recreational areas.  Also, and very importantly, does the area seem like it is growing?  If so, this is a good sign for the growth of your home value over time, and thus, more equity gained over time.

Mortgage interest rates are shockingly low at the moment, making now one of the most opportune moments to buy in the past 30 years.  The low rates are bound to change at any moment, making no other time better than the present.  At the moments rates are in the 4% -4.5% range.  Years ago, homebuyers had to pay over 18%.  If that was the case today, it would be extremely tough for the market to survive.

There are programs out there to help you save money on a mortgage.  Federal Housing Administration (FHA) mortgages don’t require high down payments like other loan programs do.  Also, the Department of Veteran’s Affairs offers a great opportunity for those returning from military service as it makes the vet eligible for exclusive savings.

I hope this has given you plenty to think about in your consideration of purchasing a home at this time of your life.  Remember that a mortgage is a very serious commitment, and it will be around until the property is sold, or paid off in 30 years.  If you have any questions, contact a loan consultant.

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