7 Key Things to Know Before Applying for a Home Loan
The start of 2018 welcomed over 1.33 million new housing units. With these new developments — despite fears of recession — it’s apparent that there are more people applying for a home loan than ever before.
But when it comes to buying a home and finding your lending options, what do you need to know?
Whether you’re just browsing the market, are ready to make moves, or are an experienced buyer, here are seven things you need to keep in mind to make your home buying process smoother.
1. Start by Doing Your Own Research
There are so many different home options out there. At first, it might seem overwhelming to find the right fit, but with a little research, you can find what makes sense. The first things to understand are the basics of fixed-rate, adjustable-rate, VA, and FHA home loans.
It’s also smart to research any possible fees that may be associated with your loans.
A fixed-rate loan means that you’ll pay a set amount of interest on that loan. This percent is set unless the lender changes it.
A variable-rate loan means that the interest fluxes based on changes as the market changes. Your payments will then shift — as an increase or decrease — based on these changes.
A VA mortgage loan is guaranteed by the U.S. Department of Veterans Affairs. It creates financing options for eligible veterans by helping them purchase homes without a down payment.
This is a government-backed loan insured by the Federal Housing Administration (FHA). This is ultimately designed for low or moderate-income borrowers and requires a lower down payment and credit score than most loans.
2. Pay Your Bills and Boost Your Credit
Before you apply for a home loan, you need to have a good credit history. This means paying your bills every time, on time. If you have a late payment, this might hurt your credit score and can even increase your interest amount.
Or worse, it can hurt your chances of even being approved in the first place!
Your credit score will be a large factor in being approved for a mortgage. Depending on your score and other factors, you will either be a low or high-risk borrower. The higher your score is, the better you’ll look and the better your chances for approval.
A perfect credit score is 850. Generally speaking, a score above 760 is considered excellent and will definitely help you get approved — and for a good loan.
3. Ensure Your Financial Stability
Before you apply for a loan, be sure your income is stable (as this will be what helps you repay the loan). Depending on your work situation, you may be asked to prove your income, work history, etc. to lenders in order to prove your ability to repay the loan.
When you’re applying, it’s also a good idea to hold off closing any accounts or opening new accounts. Remember, the longer your credit history, the stronger your report. If you close an old account, it could potentially hurt your credit. On the flip-side, opening new accounts could impact the loan amount you receive.
4. Determine What You Can Actually Afford
Although this might seem like a no-brainer, determining what you can actually afford is a crucial step in the process.
When it comes to taking out a loan, you have to think about your yearly income and what you can afford to take from that income to pay the mortgage.
On average, house payments can cost around 28% of your income. To determine what you can afford, take 28% of your annual income (after taxes) and see what that would equal. Then divide that by 12 to figure out your per-month costs. This can give you a better estimate of what works in your budget.
5. Find Out What Down Payment You Need
If this sounds discouraging, don't worry! There are ways to purchase a home even if you have a lower budget. One way is through a lower down payment.
Although 20% sounds like the "magic number" it’s not realistic for all home buyers. Some loans are much lower; others even offer as little as 3.5% down, which can really open housing options.
Determining what you can afford will be a great first step for understanding your loan options. There are also programs that help with down payment assistance which helps reduce your initial costs and gives you access to more loans.
6. Understand Your DTI Ratio
To be approved for a mortgage, you need a solid DTI (debt-to-income ratio). This ratio looks at both your outstanding debts (on thinks like cars, credit cards, student loans, etc.) and compares it to your income. If you have a lot of outstanding debt, you’ll be a higher risk.
For example, if you make $5,000 per month but pay $500 in debt each month, you’ll simply divide $500 by $5,000 to get a DTI ratio of 0.1 or 10%. (That’s without the monthly mortgage.) If you add the mortgage (of $1,000, for example) your DTI will increase to 30%.
7. Understand Your Market
One final thing to consider in applying for a home loan is the market. Sometimes loans can be affected by the area and whether it’s successful or not. It can also vary from state to state, so it’s best to research the market to know where bad areas/properties are so you can avoid them.
The Final Step in Applying for a Home Loan: Choose Carefully
Now that you’ve learned more about the loan process, read through the information to keep in mind as you search, and have taken the steps to prepare yourself, you’re ready to choose a home loan that’s right for you.
Whether this is your first experience or you’ve done this many times before, hopefully, this guide will help you choose a loan that makes the most sense for you and your family.
To learn more about applying for a home loan, to ask questions about the process, or to view a list of Justin's recent testimonials, click here.