Buying your first home is a big life achievement, but it isn’t easy. Homes are expensive and the market prices seem to only be going upward, making it seem more and more impossible for future homeowners to find the home that they’re looking for.
With high market prices, it’s almost impossible to buy a home without taking out a loan. The prospect of taking out such a large loan, however, can be intimidating for some people and cause them to hesitate. If you’re looking at buying a home and you need a loan to do so, don’t be wary! Buying a home on loan isn’t as scary as it may seem.
Just like everything else, there are a few dos and don’ts for buying a home on a loan. To help you navigate a potentially confusing process, here are a few tips to keep in mind.
#1. Be Sure You Can Commit Before Applying
Home loans often last for 15-30 years. Even if you move out of your home within that time, you’ll still need to continue paying off the loan. If you don’t have a steady job or you aren’t sure you’ll have the means to pay for a loan that long, reconsider before you commit.
In most cases, the collateral for a home loan is your home. If you fail to continue making payments on your home loan, your lender may repossess your home to earn back their money. This leaves you without a home and can lead to any further problems.
Even if your home is not used as collateral (such is the case with unsecured loans), failure to pay will lead to large financial consequences. Before you decide to buy a home on a loan, take the time to calculate whether you can afford to pay for the loan during the next 15 or 30 years.
#2. Get Pre Approved
One step that many first-time buyers tend to skip is mortgage pre-approval. It’s tempting to just dive right in and start looking at your dream home before looking at home loans. Without a loan, though, you won’t be able to pay when it comes to time and you’ll have wasted your time.
Pre-approval may seem like just another hoop to jump through in the home buying process, but it can make things infinitely easier when it comes time to apply for a loan. With pre-approval, you’ll know how large of a loan you’re eligible for based on your financial information.
To get pre-approved, you’ll need to provide information about your credit score, income, and current debts. They won’t factor in additional costs you may have such as your children’s school tuition or your weekly groceries, so it’s up to you to further determine if you can afford the maximum loan you’ve been approved for.
#3. Save for a Down Payment
For just about every home loan, you’ll need to provide a down payment. This is usually around 20% of the home price, but lenders may have slightly different requirements depending on the loan you take out.
In some cases, it’s possible to buy a home without a down payment. If you’re a first-time buyer, the odds are more in your favor as there are loan programs available through the USDA and the VA that don’t require a down payment.
If you don’t qualify for a home loan with no down payment, it’s still possible to find home loans with a low down payment. FHA loans only require a 3.5% down payment which is considerably less than most conventional loans. Fannie Mae and Freddie Mac also provide a few loans that have a 3% down payment requirement.
If you are not a first-time buyer, your options for no or low down payment loans are fewer. Some conventional loans allow you to put down as little as a 5% down payment. Piggyback loans are also another option with a 10% down payment.
#4. Know Which Loans You Qualify For
You won’t qualify for every type of home loan there is, so don’t waste your time applying for a loan you don’t even qualify for. Before you put in the work of applying for a loan, make sure you qualify for it.
With so many different loan types, you’ll also want to be sure you chose the loan that is right for you. You may qualify for most loan types, but not all of them will be beneficial for your situation or affordable. Even if your options are more limited and you only qualify for one or two loan types, be sure you find a lender that works for you and can provide you with an affordable loan.
#5. Stick to Your Budget
When you get your pre-approval report back, you may be shocked to learn you can get a loan that’s much higher than you initially expected. Just because you’ve been pre-approved for a high loan, though, does not mean that the lender thinks you can afford it. They don’t know what other costs you may have, such as groceries, daycare, or daily commuting.
Even if you get pre-approved for a high loan, stick to your predetermined budget. If you budgeted for a home between $200,000 and $250,000, don’t take out a loan for $400,000 and buy something twice as big. Higher loans aren’t necessarily more affordable and if you default on payments, you’ll lose your house.
On the other hand, you may learn that you can only be approved for a loan of $200,000 and you’re forced to budget. Since home loans are so hard to predict, it’s important to set yourself a budget and get pre-approved before you start looking at homes and become invested in one.
Don’t Be Afraid!
Buying a home is an exciting and daunting process, but don’t be intimidated by all the paperwork or legal hoops you’ll have to jump through. With the above tips in mind, you’ll have a much easier time buying a home on a loan.