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6 Questions to Ask Yourself Before Applying for a Home Loan

6 Questions to Ask Yourself Before Applying for a Home Loan

If you are about to set off on a hunt for your dream home, you know that the process of applying for a home loan isn’t far behind you.

2022/04/21
6 Questions to Ask Yourself Before Applying for a Home Loan

If you are about to set off on a hunt for your dream home, you know that the process of applying for a home loan isn’t far behind you. While there’s a lot that goes into finding the perfect mortgage, much will depend on you and your current financial situation.

So, before booking an appointment at a lender’s office, it is important to take a hard look at your finances and set your expectations right. Unsure about what’s ahead? Answer the questions below and see where you stand.

How Much Do I Really Need To Borrow?

Just because you have met a generous mortgage lender or broker who is willing to lend a large amount of money, it doesn’t mean that you should accept the offer.

Remember that the more you borrow, the more other parties earn, and, often, it’s in their interest to offer the largest amount of loan available.

But the reality might be different from what the numbers say. For example, on paper, your salary might vouch for far larger monthly payments than you can realistically afford.

So, before meeting a lender, make sure to review your other assets, such as the equity from selling your existing home, and borrow only what you need to afford a suitable home.

Don’t forget that your finances can fluctuate over time, and you’ll need to be able to keep up with your mortgage repayments even when facing financial setbacks!

Am I Financially Stable?

Your current financial situation will impact the terms of your loan. If you are not in your ideal financial situation, consider spending a few months building up your credit score, employment history, and monthly income before applying.

Nonetheless, you should look for the lender offering the lowest interest rates, APR, and fees. For example, options like SoFi loan rates allow you to keep your APR below 5% throughout the lifespan of your loan.

Can I Comfortably Manage My Debt?

While your mortgage repayments will be your largest monthly expense, don’t forget about other types of outstanding debt you might already have. Ideally, your monthly payments should not be more than 28% of your monthly income – and your total debt should not be more than 36% of your salary.

This strategy is known as the 36/28 rule and can help you manage your debt comfortably, even during temporary financial setbacks.

How Large Should My Down Payment Be?

Most homebuyers today spend an average of 6½ years saving for their first house. However, with more mortgage options available, you no longer need a 20% deposit to step up the property ladder.

At the same time, settling for a loan accessible with just a 3% deposit is not the best option for all buyers. Firstly, owning less than 20% of your home equity will require you to pay for Private Mortgage Insurance.

Additionally, lenders consider borrowers with a low down payment risky, which means that you won’t have access to the best rates and terms.

No matter how much down payment you can commit now, make sure to understand the implications of your choice throughout the life of a loan.

What Type of Loan Is Right for Me?

The choice of the right mortgage is not an easy one to make. Conventional loans are certainly the most popular type of mortgage. However, depending on your circumstances, you might also be eligible for guaranteed loans like VA, USDA, and FHA loans.

Additionally, if you are looking to invest in a rental property, there is a whole other range of financial products worth considering, which you will need to discuss with your lender.

Should I Opt for a Fixed-Rate or Adjustable-Rate Mortgage?

When it comes down to choosing between fixed and adjustable-rate mortgages, the real question to ask is “how high is my risk tolerance?”. Most first-time buyers prefer the certainty and reliability of fixed rates. These are interest rates that are higher, but constant throughout the life of a loan.

Oppositely, adjustable-rate mortgages allow you to take advantage of low-interest rate environments (such as today’s) but they don’t offer any guarantee about how much your future monthly payments will be.

The Takeaway: Be Clear About Your Expectations

Setting your expectations correctly is the best way to prepare yourself and your finances for a home loan application.

The process might force you to find answers to questions like “how long am I planning to live in this house?”, “what can I do to boost my credit score?”, and “what type of property represents my dream home?”.

But nothing can benefit your long-term finances more than having a clear picture of what to expect.

Laura.Bartlett

Laura.Bartlett

Northern girl Laura is the epitome of a true entrepreneur. Laura’s spirit for adventure and passion for people blaze through House of Coco. She founded House of Coco in 2014 and has grown it in to an internationally recognised brand whilst having a lot of fun along the way. Travel is in her DNA and she is a true visionary and a global citizen.