It's an amazing moment - you've found your dream house. Now you need to get a home loan to pay for it. It takes some effort, but if you follow the steps below you can find the right home loan for you with a minimum of fuss. It may even be worth undertaking the first few steps before you even go shopping for a home.
Firstly, order your credit report from the three major credit reporting agencies in the US - TransUnion, Equifax and Experian. This is a very important part of your search for a home loan, because it is something your lender will also want to look at when determining your ability to pay off your home mortgage. The credit report gives them an idea of how punctual you are when it comes to paying your bills, and also how much you have already borrowed and still owe. A good credit report gives the lender confidence that taking a risk on you will pay off. They feel reassured that you will pay them back, and certainly will make them more comfortable with giving you a home loan.
It's worthwhile getting your credit report long before applying for a loan, so you can check them for errors or outdated entries. This is really important, because those errors may make it almost impossible for you to get a home loan. But once you know they're there, you can follow them up and have them removed, which will improve your chances with the lenders enormously. It may even mean that you can get a better interest rate.
Secondly, take a look at interest rates for home loans and what the general trend of those rates has been. Mortgage rates fluctuate, and having a feel for what the key economic indicators are doing can help you decide whether to apply for a home loan now, or maybe wait a little while. It will also help you to decide whether you want an adjustable (variable) rate mortgage, or whether you might be better of fixing the rate right away.
Thirdly, you need to start deciding what type of home loan is going to be best for you. Most people are going to be looking for a fairly standard loan, so I'll focus on those. Before you start looking, you need to know the answers to these questions:
- how much money do I have as a down payment?
- how much can I afford to pay in a home loan payment each month?
- how long do I plan to stay in the house?
- is it important to me to pay the loan off early?
- will I be able to occasionally make extra payments off the principal?
- how stable is my income long term?
- is my income likely to rise over time?
All of these questions are important, because they help you to understand what you're looking for. There's no point looking at loans that require a 20% down payment, for example, if you only have 10%. Buying a home is a big investment, and you need to make sure you get the best deal possible on your home loan. By only looking at those loans that truly fit all elements of your circumstances, you have a much better chance of finding the right loan.
Now that you know exactly what you need from your loan, you can start checking out what all the various lenders have to offer. Most will have a loan that fits your criteria, and then you can compare the interest rates, fees and other elements of the different loans. This will take some time, and is often something that a mortgage broker can do much quicker and with less hassle than doing it yourself.
It's very easy to get confused when comparing loans. It seems that every lender uses different names for things that are essentially the same. So do your best to compare apples with apples. It's also possible that a lender may offer special rates or waive certain fees to tempt you in the door, but over the period of the loan you actually end up paying more. Take your time, and ask as many questions as you need to.
Once you've narrowed it down a little, look at some of the other elements of the home loan package. Apart from interest rates and fees, you need to look at other factors such as frequency of payments, any prepayment penalties, requirements for mortgage insurance, any penalties for paying out the loan before a certain time period has passed, and so on. These sorts of features aren't always discussed in the basic literature about home loans, so you may need to dig a little deeper or ask questions at this stage.
Finally, once you've chosen the lender for your home loan, make sure you take a look at exactly which documents are required for your loan application. These usually include a fully filled in loan application and a credit report fee. Normally you have to pay any application, appraisal or credit report fees when you make your application, so make sure you have money set aside to pay those.
The good news is that most home loan applications are assessed fairly quickly nowadays, so hopefully you won't have to wait too long before being told whether or not you're ready to buy your dream home.
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