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Are You Ready For A Home Loan? 5 Factors To Think About

Finally acquiring your own home seems closer with the many seemingly generous home loans that appear left and right. However, getting this type of loan entails more responsibility than it lets on. Here are some things you must look at before you think of finally applying and saying yes to long-term debt.

The Downpayment

You do not have to give up on owning a home just because you do not have a lot in savings. There is this circulating myth that says that you need 20 percent of the value of the property on hand. According to Frank Codel, head of Wells Fargo’s national consumer lending, this is not true at all. He says that a significant percentage of Wells Fargo mortgages would go for down payments of 5 to 10 percent. Another option would be to apply for loans from the Federal Housing Authority, which requires a 3.5 percent downpayment.

The drawback, however, is that mortgage insurance is required when payments go below 20 percent. The exact cost varies depending on the situation.

Interest Rate

“Some people look for a beautiful place. Others make a place beautiful.” Hazrat Inayat Khan

An integral part of any loan is how the lender earns from it and the most common form of earning from a loan is interest rates. These are commonly what make or break a deal, but there are many other equally important factors to consider.

Interest rates do not determine whether or not you will get a home loan. However, they will determine how much you will have to pay each month. The review period and processing in general can take a while before your loan gets approved by the lender and the interest rate can change. So if you think that the interest rates could rise, you might want to consider paying a lock in fee so that you will be offered a competitive rate.

Job History

Banks are concerned if their borrowers are able to pay their loans and how likely they are to actually meet deadlines. They will do what they can to look into the background of each and every borrower. They can go as far back as looking into your job history. This might seem too intrusive, but, of course, they want to recover what they lent you in full with interest.

Sanjiv Das, CEO of CitiMortgage, says that banks actually look at not only the ability to buy a home, but the ability of a borrower to actually stay in such home. This looks like a basic requirement or condition, but this has not always been handled this way in the past. If you have been unemployed for some time, you are not necessarily disqualified since lenders do know that the job market has not always been favorable.

Debt Load

A home loan could be one of the biggest debts that you will get into in your life and this means that your currents debts have to be at point. You should make sure that you are earning enough to handle all of your bill and debts on top of your mortgage payments.

Lenders want to make sure that their borrowers are not overextended. Previously, people bought cars, boats and houses with more debt than they could handle. This means that you will have to weigh all your debts against your household income. Banks consider different criteria, but in Citi, an applicant’s household debt cannot exceed 41 percent of income and this already includes the mortgage payments.


Credit Score

Considering the interest that your lender has for you in fulfilling your monthly payments, they consider your credit score very seriously. Generally, borrowers need a credit score of at least 640 before they can qualify for a typical mortgage. Credit scores range from 300 to 850, so you should keep in mind that 640 is not really a high score. In fact, around two thirds of all borrowers are above that level.

A home could be the biggest investment that you would make in your life. This also means that you have to be responsible and financially mature enough before you consider getting into this investment. Before you sign anything, make sure to consult a legal professional first to ensure that you are not missing or misunderstanding anything in the fine print.

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