What Should I Consider When I Apply for a Home Loan?

Malcolm Tatum

Many people apply for a home loan without any preparation whatsoever. While this may work well if you are so well off that you really don’t need the loan, people who do not have an abundance of financial resources need to plan well in advance. It is essential that prospective homeowners make sure their finances are in order before applying for a mortgage and making a long-term commitment to a home loan. If you are considering buying a home and looking into your home finance options, here are a few steps you should take in advance to maximize your chances of getting the best terms.

Potential home buyers should be aware of their personal credit before applying for a home loan.
Potential home buyers should be aware of their personal credit before applying for a home loan.

Unfortunately, too many people decide they want a new home and do not take a long hard look at their current financial circumstances. Potential lenders will want to know that you have enough income to meet all your current obligations, take on a mortgage, and still have a little extra to put into savings. If you can simply prepare your household budget and demonstrate that you are able to manage your income effectively and will still be able to do so with a monthly mortgage payment that is up to a certain amount, your chances of obtaining a better interest rate are improved.

Anyone applying for a home loan should go over their credit report carefully.
Anyone applying for a home loan should go over their credit report carefully.

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However, creating and sticking to your budget is not all you should do before you apply for a home loan. At least six months before you begin your search for the right finance options, it is important that you go over your credit report with a fine tooth comb. Rather than simply checking one of the three major credit reporting agencies, make sure you obtain reports from all three. It is not unusual for items that appear on one report to be absent from the other two, and vice versa. Before you apply for a home loan, allow yourself enough time to identify any potential issues with your reports and resolve them. The cleaner your overall credit report and the higher your FICO score, the better chances you have of getting a decent interest rate.

If you plan on borrowing money from family members as a way to finance your down payment, make sure the money is already residing in your bank account before beginning to apply for a home loan. Lenders will want to know you have resources in hand for the down payment before they will consider approving your loan application. The promise of money to cover the down payment from your parents or other relatives is not good enough. Place the money for the down payment in an interest bearing account and make sure it resides in the account for at least a few weeks before you begin to apply for a home loan from anyone.

Above all, it is your responsibility to use wisdom when you apply for a home loan and do not allow yourself to be talked into taking on a loan any larger than you can reasonably afford. You may qualify for a line of credit that is much higher than you need. While that is great, there is no rule that says you must use the maximum amount the lender is willing to provide. In the event that you lose your job or undergo some type of financial reversal, that lower payment will be easier to maintain or even refinance if the situation requires it. Live within your means and you will find that life is a lot less stressful.

Down payment and credit worthiness often determine the terms of a home loan.
Down payment and credit worthiness often determine the terms of a home loan.

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