Buying a home is an exciting yet extensive process. Without research and planning, you can end up with a high-interest home loan that’ll slowly eat away your personal savings.
If you’re planning to take a home loan, here are some things you should consider for a stress-free process:
Credit Score is Important
One of the first things lenders check when you apply for a home loan is your credit score. It represents the likelihood that a borrower will repay debts based on their repayment history. In simple terms, the higher the credit score, the greater the creditworthiness.
The credit score is a three-digit number typically ranging from 300 to 850. A higher credit score, such as above 600, will make you look more trustworthy in the eyes of the lender, increasing your chances of getting better mortgage terms.
How to Get a Credit Report?
Under federal law, the three major credit reporting agencies (Experian, Equifax, and Illions) are required to give you a free credit report once every 12 months upon your request. Carefully review your report and fix any incorrect or outdated information. Remember that lenders analyse your credit history not only to approve or disapprove your loan request but to determine the interest rate.
Can I Increase My Credit Score?
Many home buyers think that credit history follows a one-and-done approach. Fortunately, there are numerous steps you can take to improve your credit score before taking out a home loan. Loan experts recommend:
- Paying bills on time
- Reducing credit card balances
- Avoid opening new accounts
- Paying down outstanding debts
For a conventional mortgage, you need a credit score of at least 680. However, other types of loans, such as Federal Housing Administration (FHA) loans and Veterans Affairs (VA) loans, might accept lower credit scores.
Being Realistic Helps
Inflation, rising property prices, and soaring living expenses are critical factors that impact your borrowing capacity. Therefore, stay realistic and opt for a mortgage that won’t leave you house-poor.
First things first, calculate your gross income. If you’re employed and earn a salary, divide your before-tax income by 12 to get a monthly amount. In comparison, if you’re self-employed or have varying incomes, take an average of the last 6 to 12 months. Don’t forget to factor in bonuses, passive income, or any rental income.
Next, consider your expenses and debts. Expenses include:
- Utilities
- Groceries
- Transportation
- Healthcare
- Internet bills
- Entertainment
Whereas debts include:
- Student loans
- Credit card bills
- Insurance payments
- Car loans
- Existing mortgage payments
Having a clear financial understanding will help you determine how much of a down payment you should make. Conventional loans typically require a 20% down payment to avoid private mortgage insurance (PMI). In comparison, government-backed loans can accept a down payment as low as 3.5%.
One of the easiest ways to stay realistic is to use a borrowing power calculator. You can enter your income, expenses, previous debts, and other costs to get a near-accurate estimate.
Lenders Operate Differently
Lastly, pay close attention to the terms and conditions of your lender. All lenders operate differently and offer varying loan terms and repayment frequencies.
Make sure your lender or bank is prepared to answer your questions and provide guidance throughout the process. This can ensure peace of mind and help you acquire favourable loan terms.
