Over the years, the delinquency rate for home loans has seen a significant drop. But while this is a good indicator of economic health and provides relief to creditors, home loans remain a sophisticated product with multifaceted parts for most consumers. Shopping for the right home loan isn’t a simple purchase where you go in, pick one that you fancy, pay for it, and then leave with the receipt. Although these steps are present when purchasing a home loan, there are other things you need to consider to make the best possible decision. To help guide you through this intricate process, here are six steps to follow:
Know Your Credit Score
Credit scores have quickly become the financial belt standard for gauging consumer creditworthiness. In fact, nowadays, people can’t even buy a car or home without a credit score, even if you are paying cash for the purchase. Fortunately, credit scores aren’t locked up in a vault somewhere top secret. You can easily access them by requesting a copy of your credit report through any one of the three major bureaus charged with handling them namely Equifax, TransUnion, and Experian.
The simplest way to get approved for a home loan is to save up enough cash. Having sound personal finances can instill a sense of security in your creditors that your loan doesn’t default later on and they are left to deal with the aftermath. Save up enough cash by reducing expenses and increasing your income streams. Aim to get a promotion or raise from your current full-time job or pursue part-time work and sidelines to supplement your main income source. Saving up cash gives you an emergency fund from which to draw money from to make future home loan repayments.
Secure a Job
If you don’t already have one, secure a job before applying for a home loan. Again, creditors want to see that they can trust you with their money. And nothing is more effective at raising red flags than someone who is unemployed shopping around for loans. Make sure you can pay your outstanding balances by holding onto a job for at least six months before you start applying for loans. Having a job isn’t just proof that you can pay your debt on time; it also gives you a clear idea of how much you should be applying for. Someone making minimum wage obviously shouldn’t be asking for a half a million dollar loan with a 20-year repayment plan.
Get Pre Approved
Pre-approval and pre-qualified aren’t the same things, unfortunately. You might have received mail from your bank about getting pre-qualified for a loan, but that just doesn’t mean anything. What you should aim for is to get pre-approved by a bank. This entails completing an official application form and typically paying an application fee.
Pay Off Your Balances
Any debt from your credit cards, student loan, utilities, and/or rent should be paid off as soon as the finances become available. Any existing debt can lower your credit score, which consequently increases the interest rate on your loans as creditors want to be compensated for the added risk they are taking.
Know What You Can Afford
Knowing how much you can afford is key to avoiding loan defaults and possibly even bankruptcy. Before you start shopping for properties and loans to finance those properties, you need to know your monthly income, expenses, savings, and any assets you can liquidate, such as your IRA.
People spend months looking for the perfect home to start a family or retire in, but only a few aspiring homeowners pay attention to choosing the right home loan. Make sure you get the dream house without any repercussions on your future finances by following the six steps above.
by Bob Gorman