There are a huge number of factors that influence a decision as big as buying a home. Therefore, the best time to apply for a mortgage in the United States depends entirely on your current financial situation, your life plans and other external factors such as market interest rates.
To find out if it is the right time for you to apply for a mortgage loan, we recommend that you answer the following questions honestly as a first step:
- Do I have enough job and financial stability to commit to paying a mortgage for a decade or more?
- Do I want to live in the same house for the long term?
- Can I afford the extra costs of home ownership?
- Is the mortgage plan offered by the bank competitive?
- Do I have other debts to pay off or future projects to finance that could interfere with my mortgage payments?
If after answering these questions you are thinking about buying a home, but you still don’t know if it is the right time to apply for a mortgage, you have come to the right place: at Onlyscholarship we have prepared this guide to help you make this important decision.
What is a mortgage loan?
Buying a property is one of the most important steps in many people’s financial lives. However, making a purchase of this size with a cash payment is very rare, so the vast majority resort to the use of a mortgage loan to cover this important expense.
A mortgage loan is a type of loan in which the collateral is real estate (i.e., a property such as land, a flat or a house).
These loans are granted by an institution, which is called the lender and is usually a bank, to a person or corporation who is called the borrower.
There are various reasons for which a mortgage loan may be taken out, but the most common use is to acquire the same property that is registered as collateral for the loan. In this article we will focus on mortgage loans to purchase a home.
Types of mortgage loans in the United States
In order to determine with certainty when is the best time to apply for a mortgage, we must first note that there are two main types of mortgages in the U.S.
There are two main types of mortgages. Here’s what they are and the advantages and disadvantages of each:
As the name implies, fixed-rate mortgage loans guarantee that your payments will remain stable for the entire term of the loan.
The bank will offer you an interest rate when you take out the loan and this rate will remain the same until you finish paying it off.
- You will know from the start what your monthly payment will be and it will not change.
- You will be protected against market movements that can drive up interest rates in the future.
- The initial interest rates are usually higher than those you will find with variable interest loans.
- In the event of a downturn in the real estate market, you will not be able to take advantage of lower interest rates in the future.
Adjustable-rate mortgages (ARMs) are loans in which the amount of interest you will be charged each month depends on some external indicator that can go up or down during the repayment period.
It is common for these loans to lock in an interest rate for an initial period, but after this predetermined time, the amount of interest charged (and therefore your monthly payment) will change to reflect the market index.
- The initial interest rate you will be offered on ARM loans is usually lower than those offered on fixed-rate loans.
- By starting with a lower interest rate, your first payments will contribute more to the principal, so the amount of your debt will decrease faster.
- If the indicators to which your loan is tied go down in the future, the interest rate on your loan may go down as well.
- Your monthly payments may increase in the future.
- Your long-term financial planning will become more complicated as you will have to take into account the uncertainty of the amount of your monthly payments.
What should you consider when applying for a mortgage?
Taking out a mortgage loan is one of the most important decisions you will make in your financial life.
To assess whether it is the right time in your life to make this long-term commitment, we recommend that you consider the following factors:
Your credit score
To be eligible for a mortgage loan you must have a good credit score. You can check this score for free once a year on this site (available in English only).
If your score is not sufficient, we recommend that you read our guide to building a good credit history.
Your financial situation
Because mortgages are long-term loans (typically ranging from 10 to 30 years), it is highly recommended that you assess how stable your financial situation is before making this commitment.
To do this, you should consider your savings, your monthly income, your regular outgoings and your outstanding debts.
With these data, you will be able to make a budget and calculate the monthly amount you will be able to pay for the mortgage.
Insurance and extra commissions
When acquiring a mortgage, you will have to pay a monthly amount that will cover the interest earned during the period and a portion of the principal you borrowed.
However, it is important that you also take into account the additional payments that may arise when purchasing a property. Some of these charges that you should be aware of are:
- Mortgage insurance,
- Property tax,
- Homeowner’s insurance,
- Appraisal costs (also known as valuation costs).
Financial assistance for which you are eligible
The U.S. government has a number of financial assistance programmes to help its citizens buy a home. We recommend that you check if you are eligible for any of these programmes and, if so, that you apply for support.
The amount you can borrow
You can go to your bank to ask how much money you can borrow on a mortgage loan. The bank will evaluate your income, your debts, your credit score, the term you require and even the area where you plan to buy the property to give you a figure.
Keep in mind that this will be the maximum amount of your loan, but it is always advisable to ask for a lower amount to avoid future problems.
What you should know: While mortgage loans are an excellent tool for purchasing a home, we should be aware that they also carry risk.
For example, be aware that when a borrower defaults on his or her mortgage for any reason, the lender has the right to seize the property and any payments that have been made so far will be forfeited. This is known as a foreclosure.
Requirements to be fulfilled
The requirements for obtaining a mortgage vary depending on the lender, the amount of the loan and your financial situation, among others. However, the following are the most common requirements for obtaining a conventional mortgage:
. Payment of a deposit. To obtain a mortgage, you must cover a portion of the total value of the home as a down payment. With conventional mortgages, the minimum down payment is 3%.
. Mortgage insurance. If you make a down payment of less than 20% of the value of your home, you must purchase mortgage insurance (PMI).This insurance usually costs between 0.15% and 1.95% of the total loan amount each year.
. Have a good credit score. To obtain a conventional mortgage, you must have a minimum credit score of 620. If you have a higher score, you will be able to access better interest rates and PMI premiums.
. Show proof of income. Most mortgage lenders require a review of your employment history for at least the last two years. This applies both to people employed by a company and to self-employed workers.
. Have a good debt-to-income ratio. Debt-to-income ratio (DTI) is calculated by dividing your total debts by your gross monthly income. Generally, lenders require this figure to be below 45%.
. Having cash reserves. In addition to paying the down payment on your new home, most lenders require you to show that you have enough savings to cover your monthly payments in case there is an eventuality and you lose your income. This amount is variable and can be up to 6 times your monthly mortgage payment.
. Use of the property. Conventional mortgage loans can only be applied for if the property will be used as the borrower’s primary residence, as a second home (summer home) or as a rental property.
. Property types. Conventional mortgages allow you to finance properties of one to four dwelling units in regular subdivisions, condominiums, cooperatives, planned unit developments (PUDs).
Some loans can also be used to purchase manufactured homes, but these must be fixed to the land and cannot be mobile.
. Have an appraisal of the property. A property appraisal is a written document issued by a third party giving an opinion of the property’s value.
Most mortgage loans require you to hire a real estate appraisal agency to obtain this document, although you may be able to avoid this if you put more than 20% down.
What is the current (2022) situation of mortgage interest rates?
Mortgage interest rates have been rising since last year. At the time of this writing (Oct 2022), rates are more than two percentage points above the numbers recorded at the beginning of the year, after experiencing the largest first-quarter rise seen in 28 years.
One of the main reasons for this rise is the ravages of the global COVID-19 pandemic. During 2020, new housing construction decreased significantly due to social distancing measures.
As a result, there are now fewer properties for sale than planned. In addition, many people who kept their jobs and were able to continue working from home were able to save because they could not leave and also received monetary stimulus from the government as pandemic support.
With these unexpected savings, many of these people have been motivated to take the step of buying a house, which completed the perfect recipe of “low supply and high demand” that drives up prices in any market.
Forecasts for mortgage loans
Some experts expect this upward trend to slow down next year, but as you know, the real estate market is difficult to predict, so it may also be the case that rates will continue to rise after 2022.
Also read: How to build a good credit history
So when is the best time to apply for a mortgage in the United States?
As you can see, there are a huge number of factors that influence the decision to apply for a mortgage.
Therefore, the ideal time to take this big step will depend entirely on your current financial situation, your life plans and other external factors such as market interest rates.
We recommend that you supplement this information by learning about the requirements for buying a home in the United States.
To find out if it is the right time for you to apply for a mortgage loan, we recommend that you answer the following questions honestly:
- Do I have the job and financial stability to commit to paying a mortgage for a decade or more?
- Do I want to live in the same house for the long term?
- Can I cover the extra costs involved in owning a home?
- Is the mortgage plan offered by the bank competitive?
- Do I have other debts to pay off or future projects to finance that might interfere with my mortgage payments?
Take care of your finances!
We hope that the information we have just presented will be useful for you to know when is the best time to apply for a mortgage depending on your personal conditions.
This big step is extremely important, so we suggest that you do not take it lightly and that you consider all your options before making a decision.
If you have any remaining questions about this or any of the other topics we cover on this site, please do not hesitate to contact our team of experts who will be happy to assist you.