How to Apply for A Home Loan
Applying for a home loan is much different than applying for any other kind of loan. It requires proper counselling and thorough preparation. Educating yourself is the key to success, and there are a number of ways to avoid heartache and disappointment when applying for a home loan.
The Steps Required in Applying for a Home Loan:
- Understand the Mortgage Market:
You don’t need to be an expert at reading and understanding the market, but you should have an idea of how it works. This includes knowing the top players, the pros and cons, and as much other information as possible. Following the trends of the market, including the highs and lows, is a very good way to start the process.
- Calculate Your Credit Score and Monthly Obligation:
It is important to accurately document your monthly income and payments so that you can determine your budget. Also, you’ll need to provide pay stubs and tax forms to your lender, so it is a good idea to start gathering them ahead of time. If you’re self-employed or have variable income, expect the underwriting process to be a bit more complicated. Getting approved for the mortgage you want is all about staying within the ratios lenders use to determine who much you can afford for your mortgage payment. Large debts will limit the size of the mortgage you can get approved for. If possible, pay off any debts and avoid taking on any new loans.
- Determine your Mortgage Budget:
Lenders determine pre-approval amounts based on your income and credit report, but they don’t factor in how much you spend on expenses. Rather than purchasing the most expensive house you can based on your approval; it is smart to keep your housing expenses within your means. Know exactly how much you can afford and make sure that you take into account miscelaneous expenses.
- Figure Out How Much You Can Pay as Down Payment:
In today’s market, you can expect your mortgage lender to require at least 10% for a down payment. There are exceptions such as an FHA loan and other special program loans, but that is a good rule of thumb to start. If you can, 20% down will help you avoid private mortgage insurance (PMI). PMI is a costly insurance that protects your mortgage lender should you foreclose prior to building sufficient equity in the property. Commit to the maximum you can spend before beginning the mortgage approval process.
In conclusion, it is best to know what you’re getting into before applying for a home loan. If you haven’t applied or your loan was denied, don’t feel disappointed. Rather, use this list to strategize so when you apply you are ready.
