The mortgage industry is constantly changing, and it can be hard to keep up. But one thing remains the same: owning a home is still a great investment for most people. When you are ready to purchase your first home or move into another house, you will need to apply for a mortgage loan from an institution like a bank.
Before that happens, there are seven things that you should consider before applying for a home loan so that you know what to expect when going through this process. Check on the list below.
The first thing you need to do before applying for a home loan is research the different types of loans available. Each type has its own requirements and interest rates, so make sure you know what’s going into your decision. You should also look at any other fees that will be charged such as origination or closing costs, appraisal fee, and title insurance.
When you research your options, don’t just look at the interest rates because there are other factors to consider such as fees and loan terms. You may find that a shorter-term 30-year mortgage with lower monthly payments is more cost-effective than a 20-year loan with higher payments each month.
One of the biggest factors in determining whether you qualify for a home loan is your credit score. The higher your credit scores, the more likely it will be that lenders approve you for financing and give you better interest rates.
Your lender may let you know what their minimum requirements are when it comes to qualifying for a home loan but if they don’t, you can check your credit score with any of the three major bureaus to find out your score.
Rate of Interest
One of the most important factors to consider when applying for a home loan is the rate of interest. Interested individuals can do their repayment calculations with this calculator and compare different rates from various lenders. The difference between one percent may not seem like much, but over time this can have an impact on your monthly payments and the total amount of money you owe.
For example, on a $250,000 home loan at five percent for 30 years with monthly payments of $887.50, your final payment would be about $53,784 whereas if you went with a six percent interest rate that the same loan would have an ending balance after 120 months worth over $117,000.
You should also calculate how much you would need to go up in the rate of interest for it to make sense not to buy a home or if your monthly payments are going down below what you can afford. If this is true then think about getting other loans like credit cards instead as they will have lower rates and fixed terms.
Another thing to consider when applying for a home loan is the repayment tenure. The longer you plan on staying in your new home, the shorter period of time you will need to repay your mortgage, and this can be an important factor if you are going from renting to owning as it may affect how much money goes towards principal or interest each month, which can impact how much you owe at the end.
If your home is an investment property and you plan on selling it in five to seven years, then a shorter-term mortgage with lower monthly payments might be more beneficial because interest rates are higher for short-term loans than long-term mortgages.
For example, if you take out a mortgage for $250,000 at four percent and plan to repay it in 30 years, your monthly payments would be about $952. If you were to take out a mortgage with the same principal amount but set on a 20-year repayment term instead of 30 years then you can expect your monthly payment will go up significantly due to higher interest rates.
Employment Stability and dependents
Another thing to consider when applying for a home loan is how stable your job and dependants are. If you have an unstable employment history or financial situation, then this may impact the type of loan that lenders offer you as well as what rates they can give you. Your lender may also be able to tell if there would need to be any additional lenders on the mortgage such as your employer.
You have a lot of responsibilities when it comes to paying back your home loan, so make sure you take into account everything, including the news going on before signing any contracts or documents.
Changing Lender or Balance Transferring
If you are not happy with the level of service or rates offered by your current lender, then it may be worth switching to a new one. This is especially true if you have found that another lender is offering a better interest rate for a home loan in similar terms as yours, such as repayment tenure and down payment requirements.
The process can take up to six weeks and will involve a lot of paperwork so make sure you start the process at least two months before your mortgage is due for renewal. If you are thinking about transferring or refinancing your loan with another lender, then it’s important to take note of key terms such as any prepayment penalties that may apply when paying off your mortgage early.
Apply for a preapproval
An approval will give you peace of mind and let the lender know that you’re serious about buying a property soon. This also means you will have more bargaining power when it comes to negotiating prices.
You may need a preapproval letter if your credit score is not high enough or the lender does not feel that you are likely to be approved for a mortgage due to your financial history. Your bank should give you information about what they require in order to issue a preapproval letter, but they will typically ask for your most recent pay stub or a form W-14.
Thanks for reading this blog post. We hope that you found it informative and helpful in making a decision about your next steps in the home buying process. It’s important to note that any of these decisions can be made at any point during the housing search, but we recommend doing so as soon as possible to avoid missing out on opportunities or being rushed by deadlines.