The process of applying for a home loan is uncharted territory if you’ve never done it before. If you’re going to be applying for a mortgage soon, you’ll want to educate yourself as much as possible. Here are a few things you should know before applying for a home loan.
Your credit score is one of the most critical factors in determining if you qualify for a mortgage. A good rating shows that you’re reliable and pay your financial obligations on time. Your goal is to get the lowest interest rate for the loan, especially if you’re going for a long-term mortgage. A single interest point can save or cost you thousands of dollars over the life of the loan.
Take home pay determines whether you’ll be able to pay the loan balance, so banks will want to see proof of income. You can use your W-2 forms, pay stubs, or income tax return. Lenders tend to want to see two years of employment history to verify stability. Avoid changing jobs if you plan on applying for a mortgage shortly.
Know how much you can afford to pay before starting your search. The last thing you want to do is find your dream home, fall in love with it, and discover that it’s way out of your price range. A general rule of thumb is that you shouldn’t pay more than 28 percent of your take-home income for your mortgage, taxes, and home insurance. Only you know how your budget works, but don’t end up with a payment that you’re struggling to make every month.
A down payment is necessary when you buy a home. Experts recommend putting down at least 20 percent to avoid paying private mortgage insurance or PMI. You’ll also need to pay for other closing costs such as lawyer fees, a year of property taxes, inspection, and additional fees. Some programs, such as Veteran Association Loans, can help you get more favorable loan terms by guaranteeing a portion of the loan to the lender. You can also look into programs that offer low down payment options to assist with your purchase.
Buying a home is a long and complicated process that you should be prepared for. Learn as much as you can about buying a home to lessen the stress and find programs that can help with some of the costs. Not everyone can afford a home right away. Check out these money saving tips to help you save smarter so someday you can own a home.