Six Tips To Follow When Applying for a Home Loan
Applying for a home loan can be a scary, daunting and even intimidating process. Fortunately, it is a process. With the right guidance, preparation and a few tips along the way this once dreadful endeavor can be straightforward and even fun!
- Be Debt free: Buying a house while still in debt is asking for trouble. Once you own, there is no longer a landlord to call when the heater breaks, the pipes burst or the roof leaks; that is all on you. Paying for these eventual visits from everyone’s favorite cousin Murphy (of Murphy’s law fame) will become much more difficult if you’re also paying everyone’s favorite aunt/uncle Sally or Fannie Mae.
- Have An Emergency Fund: In addition to looking good from a asset standpoint to the bank, this is a good exercise in risk mitigation. Most financial experts recommend somewhere between three and six months of expenses for a fully funded emergency fund. A rule of thumb for that range, if your income is stable (think W2) then three months may be ok. If you work on commission you want closer to six.
- Have a Healthy Down Payment: Personal Mortgage Insurance, or PMI kicks in when you don’t have enough skin in the game. The cutoff point is at least 20 percent of the purchase price. For example, if you buy a $500,000 home to avoid PMI you’d need to have at least $100,000 as a down payment. In our example, if you were to put down say only 10 percent on a 30-year loan your PMI payments would be $195 per month according to this free calculator.
- Only Take a Fixed Rate Loan: Variable or balloon loans fly against the primary tenant anyone entering a loan should abide by; mitigate risk. By agreeing to a variable rate loan you’re simply inviting catastrophe into your life. Keep your rate fixed and you know what to expect every month and keep your risk low.
- Begin Research Early: Prepping to buy a home is not a fly by night process, and should not be treated as one. Shop around for a realtor you trust early and pick their brain. You want to leave as much time as possible before you want to buy to clean up any unexpected issues with your credit or finances. A good realtor will help you do this.
- Avoid Self-Employment if Possible Self employed individuals face a much tougher hill to climb than those whose income is documented by W2s. After the financial meltdown of 2008, the requirements for lending became more stringent. If you’re considering starting a business, or leaving your full-time job to focus on your side project full time, you may consider holding off until after you’ve closed. If this is not an option, be prepared to fight.
By using these steps and continuing to research, obtaining a home loan can become an easier, more manageable process. If you do nothing else, ensure you have a good realtor; they will guide you and keep you on track to realize your dream of home ownership.