Buying a home can be a very exciting milestone, but it comes with the responsibility of choosing a method of funding the purchase that you can afford over the long term. Many buyers will get a home loan from a bank or other financial institution, but it is important to do your homework before you sign on the dotted line and know all the information before applying for a home loan.
What To Know Before Applying For A Home Loan
Here is a look at what you should know before you apply for a home loan.
What Exactly Is A Mortgage?
A mortgage is a type of home loan in which a lender covers the cost of the home and you pay the money back to the lender. In many cases, the borrower will be required to pay down a portion of the home’s price in the form of a down payment, with the remainder being paid back in monthly installments over the course of many years. This process enables those who do not have enough money saved to purchase a home outright get onto the property ladder.
A mortgage is essentially a form of trust between the borrower and the lender as the lender trusts the borrower to repay the money. However, there is a safeguard: until the borrower has paid back the loan in full, the home technically belongs to the lending institution as a form of collateral that the lender can take away from the borrower should they stop making their loan payments for any reason.
What Different Types Of Loans There Are
It is helpful to be acquainted with the different types of mortgages available before you apply for a home loan. There are two main types of mortgages: fixed-rate and adjustable-rate mortgages.
With a fixed-rate mortgage, the interest rate remains the same throughout the life of the loan. These loans are generally offered with repayment terms spanning 15 or 30 years, and the rate will not change throughout that time regardless of how the economy fares in the intervening years.
With an adjustable-rate mortgage, the interest rate fluctuates over time depending on market changes. This means that the rate may go up or down at various points throughout the life of the loan.
Know What Your Finances Look Like
It is important to have a good idea of your overall financial status before you consider taking out a home loan. One of the biggest factors that will determine your success in securing a mortgage as well as the interest rate you are offered is your credit score. This numerical calculation indicates your creditworthiness and can be obtained from one of the three major credit reporting agencies: TransUnion, Equifax and Experian. A score that is closer to 850 will make you look better from the lender’s point of view.
Be sure to obtain your credit report before applying for a mortgage and review it for any potential errors. Incorrect information could adversely impact your score, so take any necessary steps to correct mistakes or information that is out-of-date on the report.
Know What You Can Afford
You will also need to know how much home you can afford. If you plan to make a 20% down payment and do not have excessive debt, lenders generally suggest that borrowers consider home homes that do not cost more than roughly three times their annual household income. Another way of looking at it is by considering your monthly mortgage payment; it should not exceed 28% of your pretax monthly income.
Understand How Lenders And Brokers Work
When you get a mortgage loan, you can go directly through the bank or seek the services of a broker. An experienced mortgage broker may be able to find you a better deal than you could get on your own thanks to their relationship with lending institutions, and they can save you some of the legwork involved in comparing rates across lenders.
You Can Get Preapproved
Although you may believe that you can afford to pay a specific loan amount, it is important to ensure that a lender agrees. To get an idea of how much money a lender will be willing to lend to you, you can get prequalified.
Prequalification is an early step in the home buying process that only requires basic information that may even be self-reported. Think of it as a ballpark estimate, not to be confused with preapproval.
After being prequalified, you can obtain preapproval. Obtaining a mortgage preapproval places you in a stronger position when you are negotiating or even looking at homes with a real estate agent. In this process, a prospective lender will take a close look at your financial background and credit report to verify the type of loan you may be eligible to receive and the interest rate for which you would qualify.
Work With A Qualified Mortgage Broker At MyLendingPal When Applying For A Home Loan
If you are considering buying a home, get in touch with the qualified mortgage brokers at MyLendingPal for guidance on the right loan for you. Feel free to reach out and contact us by phone or through our website by requesting an online consultation today.