All You Need to Know Before Applying for a Home Loan

Especially if you're over 40, shortening the term of your loan to pay it off sooner could make you mortgage-free in retirement.
-Barbara Corcoran

Applying for a home loan when the market is not favorable can also land you in financial trouble. There are many such factors related to home loans, which you should be completely aware of. Here, we will tell you about a few things that you should know before applying for a home loan.

Before availing a home loan, understand how it will affect your income. Know about your points and PMI. Understand what kind of loan are you availing, whether it is an interest-only loan, fixed-rate mortgage, or adjustable-rate mortgage.

Know if you can avail a FHA loan. Once you know which type of home loan you can apply for, you will be able to plan your finances accordingly.

Unless you take a calculated risk, home loans can really affect your financial planning. Every month you will be expected to pay an EMI, which will take away a huge chunk from your monthly income.

To avoid making a financial mistake of availing a loan that will leave you with very less income, use a mortgage calculator to calculate if you can actually afford to avail and pay off the loan. Don't forget to add the amount of taxes, down payment, and insurance.

There are many fraudulent companies which are floated by individuals who plan to benefit at the cost of your money. Many people become easy victims of mortgage fraud scams, identity thefts, fraud for profit, appraisal fraud, etc.

Hence, it becomes all the more important that you avail the home loan from a trusted lender with proven credentials. Only get loans from reputable companies, and do not fall prey to the false advertising of fraudulent firms.

Your credit report speaks a lot about your competency to avail the loan and pay it back. Hence, if you have a credit report that will not impress the lender, your application stands the threat of getting rejected.

Not only this, if you do not have a good debt-to-income-ratio, then you may even be charged higher rates of interest. To avoid this, ensure that you make regular payments and clear all your debts at least for a year before you apply for a loan.

If you are planning to apply for a mortgage, ensure that you have submitted your tax returns for at least two complete years. This is essential because your mortgage lender is going to derive your tax transcripts from the IRS, and is going to compare and verify your income.

It is advisable that you submit your tax returns as early as possible. This will speed up the process when the underwriters scrutinize your tax transcripts and mortgage application.

It is important that if you are availing a loan, you are stable and settled in one job for at least 2 to 3 years. This will help you to qualify for the loan. It may also strengthen your position in case of a lay off during recession. This will help you to earn an income and make regular payments for the loan, thus avoiding defaulting on it.

As you know, your old accounts help establish your credit history. Hence, it is advisable that you retain them by keeping a minimal balance. Try to be consistent with your debt payment, if any. A long and clean record of credit and payment history will help you qualify for the type of loan you want, and also help you get lower interest rates.

Many people make the mistake of opening a new credit account or getting new credit cards, during the mortgage process. This will reflect in their account statements. It may also put their debt-to-income-ratio off-balance. They think that once they have applied for mortgage, the scrutiny of their account is over.

However, remember that your lender will constantly review your creditworthiness and your ability to pay throughout the process of the loan. It will affect your credit and the type of loan you will qualify for. Hence, it is advisable that you refrain from opening a new credit account.

Try to maintain a good credit score by being consistent in paying your bills. Avoid late payment or defaulting on a bill. A bad credit history may not qualify you for a loan, or even make you pay higher rates of interest. Delayed or defaulted payments lower your credit score, causing the lender to be apprehensive while sanctioning a loan or mortgage to you.

If you are a first-time home loan borrower, it is advisable that you go for a FHA loan, which will offer you low down payment and interest rates. You can get a lower interest rate by increasing your credit score.

This can be done by paying your bills on time, clearing all your debts and not taking new credit. Making down payment of a higher amount can also help you to get lower interest rates.

Debt-income-ratio signifies the ratio of your debt as compared to your income. Ideally, it should be less than 40%, including the proposed mortgage payment. It tells the moneylender about your debt-paying capacity. Having a higher debt-income-ratio will not work in the favor of your application.

For example, if you have a debt of $2,000 and your income per month is $4,000, then your income-to-debt ratio is 50%, which will not impress the mortgage lender. He may reject your application right away.

Finance for home loans are subject to verification and scrutiny. Hence, you will have to keep all the related documentation like assets, income and credit profile ready at least for the first 72 hours of your discussion with your mortgage officer. You'll need bank statements, IRA statements, 401(k) statements and all the other investment account statements.

Ensure that it has a record of all large deposits. Ideally, you should have funds in your account 60 days before you apply for the mortgage. The mortgage lender will source the funds that will be used as down payment. Cash deposits which do not have a proper source will be tagged as unacceptable assets.

Apart from this, you should be completely aware about the various types of home loans and choose one wisely for yourself. You should also know about the hidden costs, like property taxes, closing costs, loan paperwork processing cost, scrutinizing credit report cost, etc., involved in availing the home loan.

Now that you are aware about the various things to consider before applying for a home loan, you will be in a better position to understand the formalities involved in the same.