Securing a home loan is an important financial decision and borrowers should consider a few factors before applying.
Finding that dream home is just the first step. What comes next is even more important, because it will help you decide if you can afford that home or not.
The real estate market is filled with lending institutions that are ready to grant you a home loan at low interest rates or smaller monthly payments, but there’s a lot more to understand before you agree to a loan.
Home loans have considerably longer terms than other types of loans and securing one is a huge financial decision. Before applying, a borrower should consider a number of factors that help avoid future complications with their lender.
Here are five factors that are important in your efforts to get a home loan.
1. Check your credit score
Not everyone is aware of his credit history or score, but the credit bureaus (Transunion, Experian, and Equifax) keep detailed records on your financial activities.
Based on his creditworthiness, each individual is scored on a scale of 301 to 850 points. The higher your credit score, the higher your chances of getting a loan.
Since these scores are based on your credit history, it helps banks know whether you will pay off your debts on time. So, it is necessary that you make payments on time and clear your debts as soon as possible.
You should also maintain a low debt:income ratio. Limit the amount of credit accounts you open.
Apart from this, a common mistake made by borrowers is approaching three or four banks to find out the maximum amount they can get. This could potentially lower chances of securing a loan.
2. Your loan amount depends on eligibility
Every lender has a set of parameters they use to determine the loan amount that will be approved for you. Your income and your credit score are a few factors to consider.
Even if you meet all the criteria, the maximum amount that lenders will provide is usually 80% of the total cost of the property.
Your bank will lend you more, if your spouse is a co-applicant on the loan, with a regular source of income.
3. Your lender matters
The lender you choose is as crucial as the home loan you apply for. For a hassle-free home loan, apply to a lender who provides excellent customer service, charges minimal fees, and flexible terms.
Dave Ramsey recommends paying extra on your mortgage so that each additional payment is applied to your principal balance. Some options for paying extra include making an extra payment each quarter, making bi-weekly payments, rounding up your payments, or applying raises/bonuses to your payment.
4. Interest rates and loan term
Both fixed rate or adjustable rate mortgage (ARM) home loans are available.
Adjustable rate mortgages are an awful product. Stay with what you’ve got. Love the stability that you have, and don’t put your home at risk for a point. (Source: Dave Ramsey)
To make it easier for you to choose, use a home loan interest calculator, to determine the amount of interest you will pay is essential for you to plan out your future finances.
Your loan term is inversely proportional to the monthly payment you will make (i.e. 15 yr vs. 30 yr). However, the longer the loan takes to repay, the more interest you end up paying. So, make an informed decision after considering your current and future financial liabilities.
5. Do your research
Read all legal documents carefully because home loan agreements are long term. You must read through all the terms and conditions to ensure that you understand all the clauses to avoid complications in the future. Don’t be afraid to ask questions.
The terms and clauses will also list out any additional fees that need to be paid, so you can estimate how much you’ll end up spending in the long run.
Buying a home is usually a one-time investment and you want to make sure you get it right. So, don’t be hasty. Understand what you’re getting into, assess your finances, and only then approach a lender.
You may also want to check out this resource guide that discusses whether you should pay down your mortgage sooner or choose to invest your money instead. For many homeowners, this is an important, yet situational decision to make. The article explores why you should choose one path over the other and how it impacts your finances.
What tips do you have for applying for a mortgage?