Although most banks may seem eager to lend money for your home purchase, getting your home loan application approved may still be a long, tedious task. So whether you are a first time or experienced home buyer, you will need to put a lot of effort and focus into it. Here are some of the things you need to do before and during the application process.
Build your credit
The bank is risking money when they are lending to you and they have become increasingly cautious every since the subprime mortgage crisis. If you have a good credit score, the bank will be more certain that you can pay them back and your chances to qualify for a mortgage will increase.
An effective way of building up your credit history is by consistently paying all your bills on time. You should also be more attentive of employment changes because you need to show that you have a stable source of income to repay the loan.
Postpone opening new accounts and closing existing ones
Taking on more debt by opening a new credit account before your loan is closed could have a negative impact on the loan you receive or change what is already in process. So, if you are planning to open new credit accounts or lines of credit, you might want to wait until your loan is closed.
Also, having a long credit history with a good payment record is ideal for your credit score. You can maintain this by not closing your existing accounts even if they have a very low balance.
Establish your budget
Lenders would want to make sure that you do not borrow too much from them. To ensure that you could pay them, they may look at how much of your income goes to your mortgage payments. Running your own calculations for your mortgage allows you to establish a budget.
Ideally, your maximum mortgage payment should be 25% of your monthly take-home income. Factor in the taxes and insurance you would have to pay for your home, and your overall homeownership costs, such as utilities, furnishings, and ongoing maintenance and repairs. If you are not confident in making the computation yourself, you can find mortgage calculators on the Internet.
Understand your loan type
There are two kinds of home loans based on the interest rate, which are called fixed rate and floating rate. In a fixed rate loan, the interest rate does not change as the market fluctuates and is typically higher than the floating rate. Meanwhile, the floating interest loan would vary according to market conditions.
A fixed rate may seem to be the better and more stable option, but there are arguments against it. In a long-tenure loan like a home loan, rates are bound to eventually come down even if they are currently high. You, the borrower, must then pay the same amount every time even when the rates reduce. Fixed rate loans also typically come with a “reset clause” that could revise your loan rates particularly after an abrupt rise in interest rates.
A home loan agreement may be incomprehensible to a layman, so you should watch out for what could be hidden in the details. Also, do not hesitate to discuss your loan with the lender and negotiate the rates. Make sure to research about the loan you are getting and your lender, so you can settle for what is best for you.