You’ve heard it before: your home is the biggest investment you will make. That being the case, you should choose not only your home carefully but your financing. Getting the right loan will help make purchasing a home easier. It is not always clear what you need to know about a home loan in order to get a good one– or even to get a loan at all. Here are a few things you ought to know before taking out a home loan.
- Your Credit History is a Factor
One of the things that a lender will look at before giving you a home loan is your credit history. This means you must first have a history of credit use. You might build a credit history with loans for smaller items like a car. You might also use a credit card to build your credit history. The important part of a credit history, however, is just to show lenders that you can repay your debts and make your payments on time. If your payments are often late or in default, no matter your income, you will be considered a risk.
- Your Work History Is Important
Your work history will help lenders determine whether or not you are reliable. Staying with the same employer for at least two years gives a lender confidence that you will remain employed and thus be able to honor your debts. A work history that includes several employers will make a lender question whether or not you will be able to keep your job. Constantly moving from job to job may also make it difficult to predict future income. If chances are good that you will not be with the same employer next year, then there is no telling what your income will be later.
- How Much Debt You Have Counts
While it is good to have a history of credit used to show that you can be responsible with debt, having too much debt can impact your ability to get a home loan. Ideally, your monthly home payments should be approximately a quarter of your monthly earnings. If your current debt takes up too much of your monthly earnings, then a lender may not feel comfortable taking the risk by adding to your financial burdens. Your best bet when using credit cards is to pay them off every month. It shows that you can pay your bills, but you will not carry a heavy debt load.
- Yes, You Can Shop Around
Do not be afraid to check in with multiple lenders when looking for a home loan. As with any purchase, you may find a better deal if you shop around. Look for the best type of loan with the best rate. For most homeowners, the best mortgage loan is a fixed rate. The fixed-rate loan keeps the same interest rate for the life of the loan. An adjustable rate mortgage, on the other hand, may change interest rates during its lifetime. It may start at an appealingly low rate, but go up to a higher rate later on.
- Lenders Will Also Consider the House
A lender will not agree to help you finance a house that they do not believe is worth the investment. If you want to purchase an expensive home in a nice neighborhood, but the plumbing in the house is bad and needs to be replaced, a lender may turn you down. Your lender is going to be less likely to look at the potential for the home’s value to increase and more likely to think about what they know they can sell it for if you default and they have to foreclose. Choose your potential home wisely before getting your lender’s approval.
When you want to buy a home, it is important to make sure you have all of your ducks in a row. You should have a history of credit use that shows you are a responsible borrower who makes payments on time. You should not have a heavy debt load when you visit your lender for a home loan. You should also have a steady work history. Check out your options before taking out a loan so that you get the best deal. Finally, make sure to choose a solid home worthy of the lender’s investment. Knowing these tips will help you to purchase your dream home.