Home ownership is one of the biggest decisions you’ll make in your life, and it’s not an easy one to make. You’ll need to save up for it, hunt down a great mortgage, and prepare yourself for the responsibility of maintaining your new home. 10 Tips Before Applying for a Home Loan.
Before you take that huge step, take time to read through these 10 tips before applying for a home loan. You’ll be glad you did!
1) How much should I borrow?
It’s easy to fall into home loan sticker shock when shopping around for loans. With such low interest rates, homebuyers can qualify for hundreds of thousands of dollars in mortgage loans.
You don’t want to get caught up in thinking that you need to take on too much debt; that’s where tip #1 comes in.
If you put 20% down, only borrow 80% of your home’s value. This allows you plenty of room to grow (if your salary increases) and plenty of time before you have to refinance.
You might also want to consider how long you plan on staying in your home. The longer you stay, the more equity you’ll build up, and that can help you refinance into an even larger loan.
However, building up equity means putting more money into your mortgage each month, so keep that in mind when deciding how much to borrow.
In addition to debt-to-income ratios (the most important factor in qualifying for a loan), lenders may check things like your credit history and employment status before approving your loan application. Make sure to ask any questions at that time as well!
2) What type of mortgage should I get?
When deciding which type of mortgage is right for you, there are many factors to consider. The size of your down payment, term length, rate and property value all have an impact on which loan is best.
Fortunately, it’s easier than ever to compare rates from leading lenders like CitiMortgage and Wells Fargo using tools like MortgageWell.
That way you can find out what works for you in advance and better prepare to apply for a home loan before applying. So make sure to get educated with our free tips before applying.
3) Do I need a deposit?
First-home buyers often think they don’t need to save up, or put down, a deposit – but almost all home loans have mortgage insurance (which is paid as part of your regular loan repayments).
This means that in most cases you do need to put down at least 5% of your property’s purchase price upfront.
For example, if you buy an apartment worth $500,000 with no deposit and no finance costs (the cheapest way), you could pay around $2,000 to $3,000 each year in insurance.
That’s an extra couple of hundred dollars each month on top of your usual loan repayments!
4) Is there anything I can do to save more money?
There’s more you can do. Before applying for any type of loan, it’s critical to figure out how much money you want to spend on your home and then calculate just how much house you can afford.
A rule of thumb is that if your monthly mortgage payment is going to be larger than 30% of your total monthly income, you’re spending too much money on housing expenses.
Experts recommend keeping your housing expense at or below 25% of your gross income.
5) Are there any incentives available for first home buyers?
If you’re saving up to buy your first home, you might be entitled to some assistance. For example, there are government grants available in most states and territories that can assist first home buyers who meet certain requirements (like having an income under a certain amount).
Depending on where you live, these grants could cover anywhere from 10% to 50% of your new home’s value.
6) Can I get pre-approval from my bank now?
Pre-approval, in some ways, is an easier process than applying for a loan. With pre-approval, you apply and if approved your bank will send you an approval letter stating your maximum purchase price.
This makes it much easier to shop around and find exactly what you want without having to worry about getting approved first.
However, not all banks offer pre-approval programs so be sure to call around if interested in moving forward with one of these lenders.
In addition, be careful that your lender doesn’t try to pressure you into purchasing now instead of waiting on pre-approval – that’s because they might make money off of fees during every step of your home buying process (even after closing).
7) What type of property am I looking at and what should I be aware of?
If you’re planning to buy, you should be looking to purchase at least 20% more home than you actually think you need.
Why? Because your needs change with time and if you don’t have room to grow into, it could cause problems later on down the line. In other words, size up—but don’t go overboard.
Also, while real estate agents and salespeople will undoubtedly recommend homes, they think are desirable, there is only one set of requirements that really matter: your own.
The home needs to be affordable in relation to your financial situation and must fit within your lifestyle needs, too.
8) When’s the best time to apply for my home loan?
The general rule of thumb is to apply for your home loan two months before you plan on buying. That’s enough time to get approved and have an interest rate locked in.
However, depending on where you live and how long it takes to close, that might not be realistic. If you’re in a hurry or really want to know what kind of mortgage rates are available right now, don’t wait more than four weeks before applying.
In general, you should try to give yourself more time than not, especially if it’s your first time applying for a home loan.
9) Who’s helping me with my application and how does it all work?
When you’re ready to apply for a home loan, it’s very likely that you’ll work with an independent mortgage broker. This makes sense because most lenders will have their own in-house process and guidelines, and working with someone who works on behalf of multiple banks can help ensure you get a competitive rate.
Mortgage brokers may take some time to understand your situation—your goals, your credit score, and your monthly income—but once they know what you want, they can use their network of lenders to match you with appropriate options.
You might find that there are different products available depending on your down payment amount or what kind of property you’re interested in purchasing.
10) Once approved, how long will it take before I get my keys?
The time it takes to get your loan approved and receive your keys depends on how quickly you can provide documents and information needed for underwriting, which is when an institution reviews your financial information to determine whether or not you qualify.
Of course, more financial details will take longer than fewer; you’ll want to do everything in your power to speed up that process.
Your best bet is applying with a mortgage broker like Amigo Mortgages; they know exactly what’s required by lenders, how to pull together all of your financial documentation and how long each part of the process takes.