Home loans are one of the easiest ways to finally get that property you’ve long been eyeing off. While it’s nice to pay in cash and in full for the property you want, this opportunity isn’t available for everybody. Typically, the money you’ve saved up can cover the necessary down payment. Anything leftover will be divided into monthly mortgage payments. Depending on how much you can afford to put in per month, home loans can run from a few years to as long as thirty years.
If this will be your first time applying for home loans, it shouldn’t come as a surprise that it’s confusing to navigate through the experience. There are requirements to meet simply to apply, documents to fill out, inspections to be done, and financial terms to be met. If you’re not well versed with it, you may end up signing a document you don’t fully understand.
Because home loans are a contract that can span up to thirty years, it’s all the more pressing to iron out whatever confusing steps in the process you may come across. To help you in this regard, here are six tips to help you navigate through the world of home loans.
Disclosure: This is a partnered post
#1: Avoid Racking Up More Debt Than You Already Have
As you prepare for a home loan pre-approval, if you have any existing debt, it’s imperative that you don’t accrue any more. Instead, strive to work your hardest so you can pay off that existing debt. The only costs you should incur in addition to what you already have is your home loan.
The rationale is simple. The more debt you have, the lower your ability to pay these debts off quickly. Paying for old charges versus the inflow of income and potential new obligations is a difficult process to tackle. Unless your salary increases, you may have to divide your current pay across all debt payables, expenses, and other outgoings. With all this in mind, not incurring new debt on top of a new home loan would be the best outcome.
Think of these approaches the next time you go to reach for your credit card:
- Pay with cash whenever possible
- Stay within your spending limits, even on instances when you want to reward yourself
- Resist impulse purchases
- Avoid having two or more credit cards at a time, and
- If feasible, pay more than the minimum payment on your credit card.
#2: Evaluate Your Financial Capacity
There are many home loans to choose from, so be sure to do your research to figure out which is the best fit for you and your lifestyle. You can narrow down your home loan options by choosing one you have the financial capacity to pay for.
Hence, this also means you’re going to have to be realistic about the amount you’ll borrow on your home loan. Your house options should only be ones you can afford to run, maintain, and pay for. Otherwise, all these added expenses could hurt your monthly budget, and in effect, hurt your ability to pay for your loan if an emergency arises. Remember that home loans are on fixed payments, so you have to protect your finances by staying within the limits of what you can only afford.
Looking to evaluate your financial capacity? Remember to:
- Assess your net worth, meaning, what’s left of your money after deducting all the liabilities
- Review how much you’re putting into your savings monthly. Despite your loan payments, it’s crucial that you prioritize having savings for emergencies, and
- Calculate whether you’re on track with your retirement planning. The goal is for your home to be paid in full before you no longer have a working salary.
#3: Improve Your Credit Score
A good credit score is necessary for more attractive conditions for home loans. This is why it’s important to work closely with your credit card provider, whether that be SoFi or another company, to make sure that your credit card gives you a good score. Banks and other institutions are more generous to assist you with your purchase if your score is good. The score doesn’t just determine your monthly payment per se, but also the terms and interest rates attached to home loans.
Your credit score could say a lot about your spending and payment habits, so don’t forget to check it. Lenders will use this number to compare the risk of the money to the collateral of your potential home. Lenders want to see that you’re responsible with your finances for them to entrust you with a substantial amount and approve you for a mortgage. Consistent and on-time payments lead lenders to believe you’ll be able to pay off your home loan debt in the future.
If you want to earn a better credit score:
- Analyze what could be helping and hurting your score by running a credit report
- Aim to utilize 30% of your credit limit or less
- Consider consolidating your debts so you have one payment to one institution
- Don’t miss any payments on your debts and bills, and
- Catch up on charges that are past due.
#4: Avoid Credit Scams
Credit programs may sound appealing if you’re a customer who might have a poor credit history. There are programs where you could pay a fee in exchange for cleaning up your credit reports. These schemes should make you more eligible for home loans. However, it would be better to avoid applying to these credit scams.
The truth is that in the long run, these companies may do nothing to improve your credit records. After all, there’s still nothing better than actually making the conscious effort to regularly pay your debt on time so that eventually, you’ll clear all debts owed.
Don’t fall victim to these credit scams. Be sure to:
- Confirm charges or payments with reputable creditors
- Beware of promises that sound too good to be true
- Be leery about excessive fees or additional penalties, such as a high service charge, and
- Forgo paying fees upfront if you don’t know the reputation of a company.
#5: Uphold Strong Financial Stability
Once you have a home loan, you’ve got to be ready for the financial consequences this could have on your budget. Remember that your mortgage payment is a fixed payable you’ll have to cover over many years. Thus, it wouldn’t be the best time for you to subject yourself to any financial instability.
For example, if you have a stable job with a good company, it would be best to stick with that employer and do your best to work hard for that company, rather than risk applying for a higher salary elsewhere with an unstable company. Financial stability is important and should be a major priority when it comes to home loans.
Achieving financial stability can be a breeze if you:
- Prioritize having monthly savings, no matter how small the amount
- Live frugally, which means living within your means
- Keep your family secure by applying for family health and life insurance
- Pay bills either immediately or on time so you can avoid additional charges for late or missed payments, and
- Look for ways to grow your net worth – without letting go of your stable job.
#6: Avoid Falling Behind On Bills
Another factor that can affect receiving approval for home loans and better interest rates is your history of consistently paying or falling behind with your bills. This should include all your accounts like phone bills, utilities, insurance, and even your kids’ tuition fees if this applies to your family.
As previously mentioned, before you’re approved for a home loan, the credit institution considering your application will do its own investigating to see if you’ve paid all your bills on time. This snapshot gives them an idea if you’ll have the ability to pay your debt on time over the life of the loan.
One creative way to stay on track with your bills and payments is to create a monthly budget. Physically seeing how much money comes in against where your money is spent will help establish a healthy relationship with each of your deadlines. Write down each payment date and highlight them if necessary. Settle outstanding balances before your mortgage payment so that you get an idea of how much money will be left at the end of the month which you could put into savings. With a solid system in place, all of your payments could be paid on time.
You’re now one step closer to becoming a homeowner. You’ve made it this far so don’t jeopardize your chance of getting approved for home loans by falling off the wagon. Navigate your way through each obstacle with patience and precision. Give yourself ample time to shop around and do your research. Don’t be afraid to ask questions if you’re unsure of any part of the process. A home loan is a long-term investment, so knowing what you’re getting yourself into is essential. Use the tips above to your advantage so that every doubt or question you may have about home loans can be properly ironed out.