Everyone dreams of finding and owning a perfect home where they can spend their lives with their loved ones. You have to deal with so many realtors, visit unlimited open houses and select the one that closely matches your vision and needs. Believe it or not, that’s the easy part of the house-buying process.
The challenging part is the one that comes after. Imagine finding the perfect home with everything you always wanted and not being able to pay for it. Sounds painful. Right?
If you are searching for a perfect home, then you have to arm yourself to sustain the financial hurdles. Before we get into the financial prerequisites you need to qualify for a home loan, let’s get one thing straight- banks need to make sure that the home loan amount is in safe hands.
Think about it, financial institutions are not going to lend thousands of dollars until they are confident enough about your ability to pay them back on time.
So, how do you make the lenders believe in you? Or how do you show them that they can trust you? Consider these financial prerequisites before signing the deal.
Plan For A Sufficient Down Payment In Advance
Before you even go out and look for your housing options, you need to make sure that you have enough finances to make a downpayment. Yes, that’s right. According to industry experts, many buyers have to give up on their dream home just because they fail to make the down payment. You wouldn’t want that. Right?
See, most loan programs require a minimum down payment of 3.5% of the purchase price. This is because banks are trying really hard to avoid and limit the risk of borrowers defaulting.
That’s why you need to plan for your down payment beforehand. It’ll help you narrow down the affordable options and won’t let you fall into a financial crunch. Obviously, that’s the last thing you would want to deal with after signing your real estate contract.
So, before you even visit any open house, make sure you have the means to make a downpayment for your would-be home.
Try To Settle For An Affordable Interest Rate
It goes without saying that you’ll have to pay a certain amount of interest on your mortgage. In fact, many homeowners even end up paying tens of thousands of dollars as interest. That’s definitely an added expense you would give anything to avoid.
That’s why you need to look for loan options with low interest rates. It might require some time and vigorous research but will save you thousands of dollars in the long run.
Try to check with different financial institutions, online lenders, and small community banks to get a competitive rate. The more loan options you check, the better are your chances of landing on a good interest rate.
Also, there’s a good chance that you might get confused about the loan options. They all might seem the same and right to you.
So, you can totally avoid the hassle by associating with a mortgage broker. The professionals will negotiate with the lenders and banks on your behalf and land you on a perfect mortgage rate. They’ll also scan through the different loan options and might even succeed in finding the ideal lender to simplify the home buying process.
Start Working On Your Credit Score As Soon As Possible
Your loan application approval depends on your FICO score. It reflects your ability to pay the mortgage and interest rate on time. In a nutshell, FICO scores are used by banks to check whether you’ve been paying your monthly bills on time or not. They need to know if you are credible enough to repay the loan amount.
And if you are out there looking for a new home to live in, you need to start working on strengthening your credit score. For starters, stop maxing out credit cards. Paying your bills after the due date might cause another stumbling block in your loan approval.
Banks don’t want to send their money to someone to whom they have to remind again and again about monthly installments. Also, having no credit history will affect your qualification for loan application.
Now the question is, what’s the acceptable credit score?
Well, that depends on what lender you choose.
Many lenders accept a credit score as low as 500. Everyone has their own requirements. So, once you’ve finalized the loan option for you, ask your lender what credit score they require. If it matches your financial situation, apply for it. If not, then start working on building your credit score as soon as possible to improve your chances of getting approved for the loan.
Keep Financial Documents Handy
Undoubtedly, your documentation plays a crucial role in your loan application. Even if you have a remarkable credit score, your loan application might still get rejected due to insufficient documentation.
According to a recent survey, many homebuyers’ loan applications were denied just because they didn’t have enough documentation. And you wouldn’t want to face rejection after coming this close.
That’s precisely why you need to know that having all your documents ready before applying for a home loan will help the process go much faster and smoother.
Ask your lender for a complete document checklist from your lender to find out what to bring to the table way in advance. It will give you enough time to collect the necessary documents. So, your best bet is to provide your lender everything they ask for as soon as possible to speed up your application process.
Note: You would also need to know if your seller or realtor considers an offer without pre-approval. Many real estate professionals need pre-approved clients to close the deal. So, you would have to look into that too.
Once you are ready with all the financial prerequisites mentioned above, you won’t have to worry about qualifying for your home loan.
Strengthen your financial position, and buying your dream home wouldn’t have to be a dream anymore.
Thanks for reading! Let me know your comments below.
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.