Getting out a home loan is usually one of the biggest purchases a person makes. If you’re considering taking out a loan soon, you’ll want to ensure that you know as much as possible about it. That way, you can get the best loan and pay less over the years.
There are five important tips to consider before taking out a home loan. We included everything you need to know, so let’s get started!
1. There’s a Difference Between Prequalification and Preapproval
First, you’ll need to understand that there’s a difference between prequalification and preapproval regarding a mortgage. While both are important and sound very similar, these two terms mean something completely different.
If you have a prequalification for the mortgage, you’ll receive an estimate on how much you can borrow. You haven’t looked at any specific home loan yet at this stage. The lender will also want to conduct a credit check and ask questions about your finances. Overall, this is one of the first things you do when looking for a home loan.
Preapproval is a more thorough check of your finances and credit. You file a home loan application; then, the lender verifies the financial information you provide on the form. If you receive preapproval, the lender sends you an offer for a set amount. You’ll need to use the preapproval letter within 90 days if you want to go with that lender’s offer.
In short, prequalification is a rough estimate of how much a lender can offer you in a loan. A preapproval is a letter offering you a certain amount of money after the lender has checked the information you give them. You’ll likely need to go through both steps before getting a home loan.
2. Credit Score Matters
Next, your credit score can greatly impact how much you receive in the loan. If you have a lower credit score, you’ll get an offer with a higher interest rate, meaning you’ll need to pay much more throughout the mortgage.
Scores that are under 620 might not even receive consideration for a traditional home loan! You’ll want to ensure that you spend some time bringing up scores under that amount. Still, other loans, like the FHA loan, can accept lower than average credit scores- so you’ll want to know your options first.
It’s best to have a high credit score when applying for mortgages. The higher it is, the better loan terms you receive. It’s worth giving your credit score a boost by using the following techniques:
- Pay down debts as much as possible
- Pay all bills on time
- Don’t open accounts that can lower your credit score
Raising your credit score can benefit you in many ways, so don’t forget about it.
3. Down Payments are Crucial
You’ve probably heard people talk about down payments before when going through the process of getting a home. You pay the down payment before paying the rest of the mortgage using your home loan.
The more money you put down on the initial payment, the better. You won’t owe as much on the rest of the loan, so it doesn’t accrue as much interest.
However, you’ll need to consider what type of home loan you have first. Some don’t require down payments from you. For example, VA cash-out loans can be no down payment loans. If you need to secure housing but don’t have enough saved for a down payment, these loans can greatly help you.
Overall, you’ll want to make sure you understand what down payments are before starting a home loan search. They can greatly impact how much you need to pay for the loan and make it very difficult to apply for homes when you don’t have enough.
In those cases, consider a no-down payment loan as your first choice!
4. There are More Fees Than You Think
Taking out a mortgage comes with many fees, which people forget about. While saving for a down payment, you must also ensure enough to cover closing costs, application fees, insurance, and more. It can become very expensive, very fast- especially if you’re not prepared to pay.
Some of these fees are avoidable, but not all of them. Make sure to research your home loan options and always ask the lender about what fees they charge. That way, you know you’ll have enough to pay for everything.
According to Investopedia, closing cost fees usually range between 3% and 6% of the home’s purchase price. You’ll want more than that to cover all the other fees. Although many lenders can combine them with your mortgage, make sure you know your options for paying these fees.
5. Don’t Splurge Until You Finalize the Mortgage
Lastly, you mustn’t splurge on anything before you finalize the mortgage. The lenders continue watching your bank account until you finalize everything. They monitor all the choices you make with your money very closely.
You want to keep your credit and your bank account stable until then. If the lender sees that you took out a large sum of money, they might not be as willing to finalize the mortgage with you. So, you’ll want to wait until you have the loan locked down before splurging on furniture and other items for the home.
The lender doesn’t want to see any irregular activities, undocumented deposits, and bouncing checks. As long as you can keep these aspects under control, you shouldn’t have issues with the lender giving you an offer.
While this aspect can be annoying, it ensures you can easily get the loan. Wait to spend until you have signed all the paperwork and received the keys to your home. Then, you can get to decorating!
Consider All of Your Options
While searching for the best home loan, you’ll want to make sure that you consider all of your options. Prequalification processes let you know how much you can get with a certain lender.
Using the above tips ensures you’ll have no issues finding the perfect mortgage to suit your needs.
