Getting a home of your own is one of the most critical steps in your adulthood phase. Most of the time, people find themselves with insufficient funds or cannot use their savings when they want to buy a home. Now, applying for a home loan is the way to make your dream a reality. These loans come with manageable monthly installments and the option to select the repayment structure you want.
However, the process of getting a home loan differs from the one you go through when processing a personal or a car loan. Banks reject most home loan applications because the applicants often don’t recognize the key differences that set home loans apart from personal loans. To avoid the common pitfalls related to securing a home loan, here is a guide for you to follow;
- Keep a Good Credit Score: As an impending homeowner planning to take a home loan. You must review your credit history and scores before submitting a home loan application to the bank. A credit score is a numerical value that shows the analysis of your debt and payment history. It is verified by the credit bureaus and exists as a three-digit number.
- Secure Your Down Payment: As counterintuitive as it may seem, generally, you are required to pay about 15% of the total home loan as a down payment. This is one factor differentiating a home loan from a personal loan. Down payment minimums vary depending on many factors, including the type of loan and the lender. However, aiming for a higher down payment is advisable if you have the means. A twenty percent down payment not only knocks down your mortgage balance but also alleviates private mortgage insurance (PMI). Make sure you save your cash to secure the down payment needed to get a home loan from the bank.
- Stay Away from New Debt: The less money you owe the bank, the better your chances of securing a home loan. Like personal loan lenders, banks offering home loans will evaluate your debt-to-income ratio before approving the mortgage. Your application will likely be turned down if your monthly debt payment exceeds 36% of your gross monthly income. However, you might be lucky to secure a mortgage while in debt. Avoid new debt because lenders often re-check credits before closing the mortgage.
- Cut Your Coat According to Your Clothes: Lenders may be willing to approve a mortgage higher than you demanded. At this point, don’t be too excited and jump at any amount they offer you. Remember, you will still repay the loan — the lower the mortgage, the lower your monthly installments (EMI). Always factor in how much you spend on bills and other necessities before accepting the figures pushed to you by the lenders. Keep your mortgage within your budget.
- Opt for a Short Repayment Structure: A Payment structure is a term given to you by the lender to repay the loan in full with interest. It’s tempting to negotiate a longer repayment term to have time on your side and a reduced monthly installment. The aftermath of this is not so good as it will increase the interest rate. And you might end up paying thrice the amount you borrowed in the first place. Always remember to keep your repayment term short and straightforward.
Even though home loans have made buying a home more accessible for intending owners, it isn’t as easy and straightforward as getting a personal loan. Securing a home loan has to be mastered to avoid the pitfalls associated with it. With the previously mentioned tips and good negotiating skills, you will surely get a loan with excellent terms and conditions.
