Buying a home is a complex financial decision for a significant number of people in their life. While most people prefer to purchase a home over renting, getting a home loan is not that simple. Many factors in play will determine your mortgage loan’s interest rate, the total amount you can receive, and what documentation you will need to provide.
Unfortunately, most people lack information regarding the formalities that they need to get their home loan approved. Buying a house is an important decision that many people will only make once in their lifetime. As such, you must select the right home AND the right loan product. You need to know what to do pre-loan application and what to look for in the best mortgage loan products.
Here are some of the tips you need to consider before taking a home loan:
- Credit score
Almost all banks consider credit score one of the most important factors to consider before giving a loan to customers. Before you begin home shopping and applying for loans, you will need to make sure your credit is healthy and in order. Credit scores affect interest rates, and a good credit score will get you a lower rate. Take the time to run your own credit report. If you have any bills in collections, pay them. Lower the balances on existing credit cards and make sure to make those payments on time every month. Don’t open any new lines of credit or purchase a vehicle either; these will lower your credit score and make your Debt to Income ratio higher. These positive changes can take months to show up on your credit report, so planning is critical.
2. Interest rate
It is always important to check the interest rates that banks or financial institutions charge on home loan in Tennessee. When looking for a home loan, compare different lenders to see what interest rates they offer. Different loan products will give you different rates, and sometimes a product with a slightly higher interest rate will make sense for your financial situation. You must consider the relationship with your lender, how long the loan term is, and if the interest rates are floating fixed. Some loan products require certain downpayment amounts to receive better interest rates.
Loan products to consider are:
Conventional mortgage loans
Nonconforming mortgage loans
3. Home Loan Tenure – Amortization
The amount of years it takes to pay off your mortgage loan is its tenure. The rate you pay off your home will determine how high your monthly payments are and how much total interest you will pay over the course of the loan. Paying your house off as quickly as your financial situation allows will save you money. Most banks offer home loan products to applicants who would like a shorter repayment period than the standard 30-year mortgage. When you make monthly payments, the payment mainly applies to the principal and some to the interest accumulated each month.
In essence, a short repayment period is favorable for you because it minimizes the home loan interest burden. While shorter tenure increases your monthly payment amount, it eventually helps to lessen the cost of your home loan.
4. Processing Fees or Origination Fees
When you apply for a mortgage, it is important to be aware of all the costs involved. While some third-party fees are not optional (credit reports and appraisals), there may be one that can vary: The Loan Origination Fee. As a borrower, processing fees are charges that you are expected to pay the lender once your home loan application is approved.
Generally, different financial institutions or lenders often charge a loan processing fee approximated at around 1% of the total loan cost. The origination fee may also be referred to as an origination “point.” A point is simply mortgage jargon for a percent of your loan amount. For example, one point equals 1% of the total loan; half points are 0.50%; and so on.
Take time to look for the right bank or financial institution that charges fair and competitive origination fees.
5. Home Loan Documents
Ask your underwriter what documents you will need to show to qualify for your loan. Every bank has a different qualification requirement, and each product may have varying needs, too. The quicker you can gather paperwork on your end, the faster an underwriter will get your loan approved. It is common for an underwriter to request additional paperwork than what was initially stated during your loan application. Do your best to retrieve what is needed, although it can seem daunting at times.
Before signing on a home loan, go through the lender’s terms and conditions. Make sure you understand your payment terms, so there are no surprises with fees, PMI, escrow, interest rates, payoff terms, and so much more. A closing disclosure will sum up the final terms of your loan; please don’t sign it until you have reviewed it!
In the end, buying a house is a huge financial decision, and you should always shop the market, get informed, and make a decision that feels right for you. The more information you can gather on loans before making a final decision will help ensure that you find an option that is best suited to your needs. We hope the tips mentioned above have helped provide some valuable insight into what it takes to take out a home loan successfully.