Buying a home is a dream come true for many. However, given the exorbitant prices in the real estate industry, most people have to save up for a long time or take out loans to achieve this goal.
Taking out a home loan to buy your dream house can be an excellent option, as saving up the amount could take a very long time. Furthermore, a home loan allows you to realise your dream without sacrificing other immediate goals.
However, before you opt for a home loan, you need to consider some factors. Otherwise, you may not qualify for the loans, be penalised for not adhering to the loan agreement, or get scammed.
This post will discuss five considerations when applying for a home loan.
1. The Interest Rate
The interest rate on a home loan will determine the amount you pay monthly toward equity in your property and the amount that goes to the bank. You should also examine whatever type of interest suits you best: fixed-rate or floating-rate.
A fixed-rate is, as the name implies, fixed. In some respects, this can be favourable. For example, if you spot an appealing interest rate, you may apply for a loan with confidence that you will not be disappointed.
Moreover, a fixed interest rate makes it easier to estimate the amount of equity you accumulate on a home since you know the interest rate precisely. However, fixed-rate loans come with significant downsides, such as expensive arrangement fees and early repayment penalties.
On the other hand, floating rates can vary within some parameters. The parameters that define those include the cost of funds index and the monthly treasury average.
Rates will fluctuate based on predetermined margins related to these rates, and they will climb on a marginal plus index. As a result, most floating interest rates may be favourable.
Fortunately, some online home marketplaces, such as Joust, connect Australians with perfect lenders and brokers who allow them to operate their loans in floating-rate and fixed-rate components.
2. Your Credit Score
Most home loan lenders use credit scores to evaluate borrowers’ loan applications, especially if the requested loan is substantial. And with reliable credit bureaus such as Equifax, Experian, and TransUnion, lenders can retrieve your credit history online in no time.
Typically, a credit score has three digits ranging from 300 to 900. Below are five determinants of your credit score:
- Your payment history accounts for 35%
- Your total debt accounts for 30%
- Your credit history accounts for 15%
- Credit types (loans or credit cards) account for 10%
- The requested amount accounts for 10%
Most home loan lenders require credit scores ranging from 620 to 640.
3. Eligibility Criteria
While the eligibility criteria for house loans vary depending on the lender, there are standard requirements all prospective purchasers must meet.
Lenders require the buyer to make a down payment on their dream house. Typically, they expect you to make a minimal down payment ranging from 3% to 3.5% of the home’s total value. It’s also worth noting that most lenders will not focus on your credit score if you’re willing to pay a more considerable amount as a down payment.
For instance, if you’re willing to pay 10% of the home price, some lenders will give you a home loan even if your credit score falls between 500 and 590.
Debt to income ratio is another standard qualification criteria for home loans. Many conventional home loan providers can accept a debt-to-income ratio of about 50%.
You may also be required to present your employment record to demonstrate that you’ve worked in the past and satisfy various residency conditions. A lender will require you to get a mortgage insurance cover irrespective of the amount of down payment you’ve made.
4. Affordability
Most people assume that mortgage payments are the only aspect to consider when analysing the affordability of their home loans. This misconception has lured many borrowers into opting for loans of significant amounts—to purchase high-end properties—which they find hard to pay back.
However, besides mortgage payments, affordability also entails the cost of utilities, insurance, and maintenance, among other expenses related to owning a house.
So, before taking out a home loan, consider your expected monthly mortgage payments and all the expenses that come with having a house. Moreover, it would be best to consider your existing financial obligations such as other loan repayments, car payments, credit cards, utility expenses, etc.
5. Loan Length
Most people have trouble imagining themselves 20–35 years into the future. Besides, who can tell what they’ll be doing or how their lives will turn out then? Still, this is something to think about while deciding on the correct home loan term for you.
Typically, longer-term loans come with lower monthly payments, most of which account for the higher interest rates. As a result, it’ll take you longer to build significant equity in your property if you seek a long-term loan.
On the other hand, short-term loans offer more significant monthly payments with lower interest rates, allowing you to accumulate more equity quickly.
Final Thoughts
Once you’re ready to buy your dream home, ensure you do your homework to identify the best loan lenders. There’s a lot to think about when selecting and requesting home loans.
Consultation with a knowledgeable mortgage lender or broker will help you make the best decision. This decision will probably affect you for the rest of your life. Would you want to make it on the spur of the moment?
