When it comes to applying for a home loan, it’s complicated to know where to begin. You will often have a range of options to choose from, tons of considerations to keep in mind, and a series of questions to answer. What do you need to start the application? Do you need a good credit score to get the loan? Where do you get such loans, to begin with? These are all valid concerns, so we’ll do our best to explain everything you need to know about applying for a home loan.
What is a Home Loan?
The term home loan may appear self-explanatory. But there is more to it than merely borrowing money to finance the purchase of your dream home. A home loan, also known as a housing loan or a mortgage, can be used to construct a new house, renovate a worn-out one, extend your house, or buy a piece of land.
Usually, you will have to pay back the loan with interest in Easy Monthly Instalments (EMIs). The time you have to repay the loan could range from 10 to 30 years, depending on the amount you borrow and the terms and conditions that come with the loan.
How to Apply for a Home Loan
After visiting several listed properties, you’ve finally settled on one that you like. Great! Now it’s time to apply for a mortgage product. So how do you go about it?
First, you need to fill out the mortgage application form. Start by going online and shopping around for at least three lenders. Ring up the lenders you’ve identified, or visit their offices to get more information about the housing loans they offer. When you feel satisfied with the response you get, request their physical or electronic mortgage application forms and fill in the details. Alternatively, you can supply one of the lender’s representatives with your details and have them fill the form for you.
These forms will most likely have a similar format irrespective of the lender. They will ask for details about your employment, finances, assets, debts, and the property you want to purchase. Also, make a point of submitting all the forms to your potential lenders within 45 days to avoid affecting your credit score.
Once you’ve filled in the forms, use your loan estimate forms to compare terms and offers.
The loan estimate forms may come with an overwhelming number of details and a lot of jargon, so you might find it hard to know what to look for. Here are the basics to keep in mind and pay particular attention to. First, the annual percentage rate (APR). Then look at the percent paid in interest, which is different from the interest rate. Finally, analyze the principal you have to pay, and the total loan cost in five years. The lender that offers you the best deal on that total loan cost is usually the one you should choose.
Can I get a Home Loan with Bad Credit?
Often, a poor credit score will make getting a home loan almost impossible. According to Experian, poor credit is anything from 580 to 669 FICO, and a bad score ranges from 300 to 579. Besides your credit, lenders will also look at how much money you have for the down payment, your overall amount of debt, and how much income you make.
However, to answer the question, yes, you can get a home loan despite having bad credit. But, you will need one of two things. Firstly, you have enough cash to pay a considerable amount in downpayment. This reduces the amount you have to borrow, thus making it easier to get a home loan. Alternatively, you can apply for Federal Housing Administration (FHA) or a Veteran Affairs (VA) loan. Both of these require just a 500 credit score.
What Do I Need to Apply for a Home Loan?
There are several documents that you need when applying for a home loan. You will need a copy of your tax returns. For this, your lender will require you to sign a Form 4506-T, which allows them to request the IRS for a copy of your tax returns.
You will also need pay stubs from the past month or two, and if you’re self-employed, you have to prove your self-employment status with 1099 or direct deposit forms. You will also have to provide your bank statements and detail your investment assets and insurance coverage.
If you are a first-time homeowner, then lenders may ask for your rent history. They do this by asking your landlord to provide documentation proving that you paid rent on time.
Lastly, if your friend(s) family or any other individual or organization gives you money to buy your house, you will need a gift letter. This document is a written confirmation that the money received is a gift and not a loan.
Applying as a Couple vs. an Individual
You can also choose to apply for a home loan as a couple, married or otherwise. The benefit of applying for a home loan as a couple is that both your credit scores will be used to determine your ability to get the loan. Combined credit scores are more advantageous because they can increase your borrowing capacity and slightly lower your interest rates.
Should you consider taking the loan as a couple, ensure you agree on the type of ownership. One option is joint tenancy. This means both you and your partner have an equal stake over the entire property. The second alternative is to go for a tenancy-in-common agreement. With this, each person on the title deed is entitled to a certain percentage of the house. This percentage depends on the amount each one of you puts in towards purchasing the house.
Questions to Ask When Applying for a Home Loan
It’s important to reflect on the choices you are making when applying for a home loan. After all, there are several questions that you may need answers to. One of these questions could be; How much can you afford to pay each month for the loan? Or how many years do you want to pay for the mortgage?
You may also want to ask your lender to clarify whether the loan’s interest rate is fixed or adjustable. Also, if you have less than 20% of the required down-payment, ask what percentage of Private Mortgage Insurance (PMI) you have to pay.
Where to Apply for a Home Loan
When you search online, you will likely come across multiple banks and investment companies offering you a home loan. The best place to apply for one is a legally registered organization that has favorable interest rates. It should also require a lower percentage of down payment and accept your credit score.