Before You Get a Mortgage

Buying a home is a big deal. The bank will risk a lot of money, and they have been increasingly cautious since the subprime mortgage debacle that began in 2007. To qualify for a loan, good credit is essential.

Make sure that your dream home does not become a nightmare. It’s important to understand how much you can reasonably pay for a home. Lenders use their own methods to determine how much you can borrow. They’ll look at your debt burdens compared to your monthly income. Before you go shopping, get an idea of the size of loan you’ll qualify for.

If you're a first-time home buyer, pay attention. You may qualify for some special perks. Sometimes these are extremely valuable, and sometimes they're not. Just make sure you are familiar with the programs and terminology out there.

A 30-year fixed rate mortgage is generally the safest and best bet, especially if you know you are going to live in your house for more than 5 years or so (adjustable rate mortgages typically adjust after that time).

There are a wide variety of mortgage options out there. You may find that some of the more creative ones (like interest only, negative amortization, and adjustable rate mortgages) work best for you. These programs might work for self-employed individuals with unpredictable (but sufficient) income, real estate investors, and buyers with a specific plan regarding their use of the loan. However, you can also find yourself in trouble if you don’t know the risks. Find out what to watch out for.

Second mortgages allow you to borrow against the value of your home. You can get access to a large line of credit with an attractive rate. Find out how some people use second mortgages, and what the pitfalls are.

It used to be that mortgages required a 10%-20% down payment. Today, people (often unwisely) take on mortgages with no money down. But there are programs that help you get into a house with less money down. Get acquainted with some of the safer options out there.