It doesn’t matter who you are: When you finally get ready to make that big leap to owning your first home, the sentiment can be invigorating! Your home is your castle, and there is nothing like coming home from work to a piece of land that you own. But within all that excitement the process of how to apply for a home loan can also have its own set of challenges. There are lots of rules to getting a mortgage and at many times it may feel confusing or frustrating.
Fortunately if you are prepared ahead of time before you apply for a mortgage, much of this burden can be mitigated and the application process can go a lot more smoothly. Here is how to prepare for a home loan in a few simple steps:
How To Prepare to Apply For A Home Loan in 4 Easy Steps:
1) Figure out how much you can really afford – really!
Notice the emphasis on “really”. Mortgage lenders were notorious throughout the early 2000’s for offering borrowers way more money than they could rightfully afford. Even though that was one of the big factors that lead to the infamous subprime mortgage crisis of 2008 which devastated the entire economy, some people never learn their lesson and will likely still offer you a monthly home loan that is more than you can afford.
Don’t let them. Do your homework ahead of time and figure out what you can comfortably afford to pay every month. Most financial planners will recommend that you don’t exceed 25% of your gross monthly income. But if you have a lot of student loans or other monthly expenses, your actual amount could vary.
Be sure to include the taxes, insurance, and possibly PMI in addition to the principal and interest as part of your calculations for the overall home loan amount. You will definitely have to pay for these as well!
2) What kind of home loan do I want?
Traditionally there were always two types of mortgages:
- Fixed – the interest rate of your mortgage amount is set and your payment never changes.
- ARM (adjustable rate mortgage) – the interest rate is set for a short amount of time (usually at a lower amount) and then adjusts to the current market rate (generally higher). Therefore your overall mortgage payment will change.
Again, during the early 2000’s mortgage lenders were getting overly creative with their options and started promoting interest only mortgages and other variations.
No matter what a mortgage lender tells you, make sure you again do your homework and research the different types thoroughly. Some types seem good at first, but could easily double your payment within a few years. Some of them might make more sense if you plan to move within 5 years. There is a lot of good information out there on the Internet about them and you could easily learn about any type of home loan product you want. Just make sure you understand what you’re getting yourself into before you sign the dotted line.
3) Will my credit rating allow me to get the mortgage I want?
How is your credit score lately? When was the last time you checked it or your records?
Thankfully if you haven’t, you can check it for free on the Internet. But as an adult this is something that you have to be very conscious of because it can make or break if you will be able to successfully apply for a home loan. Lenders don’t like to take chances on borrowers who have a risky credit history or no established credit history at all.
Even if you do have semi-decent credit, another smart thing to do is NOT apply for anything else during the home loan application process. That means no auto loans, new furniture sets, etc.
Remember that your credit score is a number that can haunt you. Make sure you’re doing everything you can to make it work for you.
4) Get to know the lender.
You don’t want to apply for loan with just anyone. Since this is possibly one of the biggest investments you will ever make, you will want to do business with a financial institution you can trust.
Fortunately there are lots of good options for cheap home loans that are offered by the industry. You could go with a reputable bank, credit union, online institution, mortgage specialty service, and so on.
No matter who you end up using, make sure you research who they are first. Read Internet reviews, check their standing with the Better Business Bureau, etc. Again: Make sure you are comfortable doing business with them since you will be sharing all of your financial information.
Featured image courtesy of Flickr