A home is one of the most expensive things you will ever buy. As of January 2020, the median sales price for buying a home in the US is $306,000.
Getting a home loan and mortgage is one of the best resources for making your homeowner's dreams come true. But many of us have the wrong idea that getting a home loan is difficult. This is why many give up on their dream of buying a home without even checking if they can qualify for a loan.
Obtaining a mortgage is straightforward for those who know the steps to follow. If you are eager to buy a home but don’t know how to finance it, keep reading for 7 great tips on getting a home loan.
The first tip you should follow for how to get a home loan is to do a lot of research before settling on a mortgage for your dream home. Even reading this article is a great start as finding out all you can on property financing could save you a lot of money.
Don’t limit your research to the generally available information. Check the local real estate information where your property is located as there may be financial incentives for homebuyers. You should also compare different mortgages before settling on one.
Some lenders may give you a higher interest rate than others. Others may ask you to buy costly insurance. Shop around for the best prices and terms and don’t be afraid to negotiate with the lenders to get the best deal.
The first thing lenders will look at when deciding whether to lend you money is your credit rating. For a conventional mortgage, lenders look for a good credit rating, which is anything between 670 to 739.
In case you decide to apply for an FHA loan, you would need a FICO score of at least 500. You can check your current FICO score for free by contacting any of the major credit check companies. If you get a bad credit score, see where you fall short and improve those areas.
For instance, you can improve your score by paying down debt and paying all your bills and monthly payments on time. In case you don’t have a credit history, you could take out a credit card and ensure you pay it in full each month.
The second thing lenders will check before approving a home loan is the loan-to-value ratio (LTV). This is the figure you get when you divide the loan amount by the purchase price of the home.
The lower the LTV, the easier it will be to get a loan. This is because the lender will recover their money if you default. They would sell the property and the proceeds would cover the amount owed.
To keep your LTV down you will need to make a down payment on the house. FHA loans require a down payment of at least 3%. For conventional loans, you may need to pay anywhere between a 5 to 20% down payment.
Other than FHA and VA loans, many state and local governments have special financing programs to increase investment and homeownership. If you are a first-time home buyer, you may also be eligible for discounted homes requiring a very small or zero down payment.
Research the local property laws of the area you intend to buy a home and see if you qualify for any homeownership programs. You can also ask your local real estate agent if they know of any homeownership programs you could enjoy.
You want to buy a house so you know that at some point you will need to apply for a home loan. You can reduce last-minute stress by organizing your financial documents in preparation for the loan application process. Some of the documents you will need include:
You may also need your current and previous employment contracts to prove your employment history. Keep all these documents in a special file that you can easily access when needed. Organizing your financial documents will come in handy not just when applying for a mortgage but for other financial processes like filing tax returns.
There are different types of home loans you can take out based on your financial circumstances. If you have a great credit score and a lot of savings, shop around for a conventional fixed-rate mortgage from a financial institution. These loans are less costly than other types, but they are very hard to qualify for.
If you have a low credit score and insufficient savings for a down payment, you may qualify for a Federal Housing Administration (FHA) Loan. FHA loans are great for first-time home buyers as the upfront cost is lower than that of conventional loans. But their interest rates are higher, and you will have to pay for mortgage insurance to protect your lender in case you default.
If you are a Veteran, you can qualify for a Veterans Affairs (VA) guaranteed loan. This program allows veterans to get mortgages under favorable terms even without a down payment and with low credit scores.
Mortgages can also have fixed interest rates or adjustable ones. If you take out a fixed-rate mortgage, the interest will remain the same throughout the mortgage term. This type of mortgage is great if you want the security of paying the same amount each month until you pay off the mortgage.
The interest rates on an adjustable mortgage change depending on market conditions or the loan agreement. Initially, the interest is quite low and you may not need to pay off the loan principal. This makes adjustable mortgages easy to afford in the first year or two until you organize your finances to pay higher amounts in the future.
Getting a home loan doesn’t have to be complicated. Following the above tips will make it easy for you to apply for and get a home loan. But mortgage rates and terms keep changing and new property laws are passed often, so do your research before choosing a mortgage.
If you need more information on mortgages as well as home loan advice, we can help. Get started with a secure loan process by applying online for a mortgage today.