5 Ways to Reduce Mortgage Risk Exposure

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Reaching the point where you can purchase a new home is an exciting time in your life. But don’t let your judgement become clouded by focusing just on the house itself. Before you allow your imagination to get away from you, dreaming up all the lavish luxuries your new home could hold, keep in mind that buying a home is a large investment. And as with all large investments, there is a lot of risk. 

When you commit to buying a home, you also commit to paying off the mortgage. Missing mortgage payments and having your house foreclosed can have major financial implications that can make it very difficult to move forward with your life, from being able to qualify for an apartment to getting approved for a car loan you desperately need. 

So, how can you avoid putting yourself at risk? Here are some essential tips to follow that can help put you on the right track: 

Compare Loan Types

Not all home loans are created equal. So, before you speak with a lender, research the different types of home loans and compile a list of which ones you believe you may be able to qualify for based on your circumstances. For example, if you’re a first-time buyer, you should be researching FHA and loans specifically designed for first-time homeowners. By putting in the time to figure out which type of loan will help you secure the best terms, you can reduce your risk of getting tied to an unfavorable loan that costs you much more than you should be paying.

Educate Yourself & Use the Resources Available to You

You don’t have to walk blindly into the home-buying or mortgage process anymore. In the digital age, there are virtually endless resources (that are often free) that can help you understand the different aspects of your rights and responsibilities as a homeowner and mortgage holder. 

For example, you can find blogs and valuation tools that will help you garner a better understanding of MSR mortgage servicing rights, the requirements of a VA loan, how you can improve your finances to qualify for better mortgage terms, and so much more. Knowledge is power, so take the time to research any aspects you don’t understand so you can put yourself in the most informed position when making decisions about your home loan. 

Get Pre-Approved Before Even Looking at Houses

Once you start looking at the housing market, it’s easy to fall in love with homes that are way outside of your price range. To get yourself in a realistic mindset, get mortgage pre-approval before you even consider looking at homes. 

A mortgage pre-approval is when a lender evaluates your credit and determines how much of a mortgage loan they can approve you for. Essentially, the pre-approval gives you a guideline for what price you can afford to pay for a house. Once you have a pre-approval, you can start looking for homes in that price range. Having it on paper will help prevent you from falling victim to the allure of houses that you can’t afford. Plus, having your pre-approval helps you cut down the timeline on the home-buying process once you move forward.

Find a House Slightly Below What You Can Technically Afford

Most people’s instinct is to purchase a home at the higher end of their price range. However, that only means that your mortgage will be higher. While even just a few thousand dollars or even $20,000 might not seem like a major difference in the long-run, it can actually have a major effect on your mortgage loan. 

First of all, you will have to borrow a larger amount. Not only that, but you will have higher mortgage payments and pay more over the course of the loan due to accumulated interest. 

Make a Higher Down Payment

Making a higher down payment upfront when you secure your home loan can significantly reduce the burden your home loan places on your financial health. As such, it also reduces the risk that you might not be able to make your payments. While many home loans nowadays allow you to qualify with as little as 10% or 3% down, or sometimes even no down payment at all, it is in your best interest to at least put 20% down if possible. While this might mean that you have to wait a little longer to purchase a home, it can make a significant difference in your mortgage terms and your financial stability over the next 15 to 30 years. 

If you struggle with saving, consider using a goal-oriented budgeting or savings app to help you reach your down payment goals.

While it might seem like a lot of effort going into an already complex process, your future self will be thankful you took precautions with these extra steps to reduce your mortgage risk exposure.

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