How to Prepare for a Home Loan

Since taking out a mortgage to purchase a home will likely be one of the most significant—if not the most significant—financial investment of your life, it’s important to plan for a mortgage application accordingly. This means making sure that all of your finances are in order and that your credit score is strong before going through the pre-approval process or signing on to any mortgage deal with a lender. What follows are some basic tips to help you with these preparations.

Pay Down Debt

One of the best ways to ensure that you get the best mortgage rate available is by improving your credit score, and one of the best ways to improve your credit score is by paying down credit card debt. By reducing your debt to income ratio, you can increase your credit score by as much as a hundred points, while simultaneously demonstrating to lenders that you are a responsible borrower and a sound investment for the bank. Paying off credit cards may sound like an intimidating task, and for those with a large amount of debt, it can take a while—all the more reason to start planning for a hone loan as far in advance as possible.

Avoid Additional Debt 

Once you’ve paid down credit cards and credit lines, it’s also important to avoid accruing any new debt. This may seem like a no-brainer, but it can be very easy to slip back into new debt once old debt is paid off. Individuals feel a newfound sense of wealth and stability once credit cards are paid off, and occasionally use that as an excuse to take out an auto loan or open a store credit card account. This, however, can simply send your debt to income ratio skyward again, which in turn may threaten to lower your credit score and reduce your chances of getting the best loan rate out there.

Save, Save, Save

Of course, anyone who is looking to take out a mortgage should be sure they have enough money saved for a down payment. Yet it’s always a good idea to set aside more than you think you’ll need, as there will inevitably be some unexpected expenses incurred along the way to purchasing your home. For example, you may find your “dream home,” only to discover that the sellers are requesting a few thousand dollars more in a down payment, and will not budge in negotiations. Or you might find a house that seems right for you, but which will require a number of home repairs right away.

Finally, it’s important to keep apprised of the information on your official credit reports. Occasionally, these reports include erroneous information that may be driving down your credit score—and you don’t want to discover this problem when you’re sitting in the mortgage lender’s office. Make sure to request your official FICO scores prior to filling out a mortgage application, and be sure to comb through the documents to ensure that all of the information is correct.

Mistakes to Avoid During the Mortgage Application Process

Buying a home can be an exciting experience, especially once you think you’ve finally found the house of your dreams. At times, the relief felt in finally locating such a home can be so overwhelming that it’s tempting to rush into the purchase process—a tendency that can lead to a number of missteps. When applying for a mortgage, it’s important to be cautious, so you can avoid some of the following most common mortgage mistakes made by novice homebuyers.

Spending Too Much

The desire to complete a purchase as quickly as possible can often lead prospective buyers to borrow too much money from a lender. Typically, buyers will not even realize this is happening. This is because lenders calculate mortgages based on an applicant’s income and level of debt, so when they explain these calculations to buyers, the numbers make sense. However, lenders often fail to consider the numerous other expenses in an applicant’s life, which may ultimately make it quite difficult to make the mortgage payments.

Neglecting Credit Scores and Prequalification

Another one of the major mortgage mistakes that homebuyers make is applying for a loan before they’ve been able to repair a bad credit score.  Ideally, individuals should have scores of 720 or higher, in order to receive the best interest rates.  In fact, a score below 680 can end up costing homeowners thousands of dollars in added interest costs. Thus, before diving into the mortgage application process with a lower credit score, consider whether it would be worth the added cost to buy so soon.  To get the best sense of what your interest rates will be with your current score, be sure to go through an official prequalification.

Choosing the Wrong Loan Term

Those who rush into the mortgage application process also tend to take the first loan term suggested, which is typically a 30 year mortgage. Though these are the most popular options available, they are not necessarily the best for everyone. If there is a chance that you might relocate before 30 years are up, consider a 5-1 ARM loan, which is an adjustable interest rate loan in which you pay the lowest interest rates for the first 5 years, at which point rates typically go up. This way, you can end up saving some money if you need to sell. On the other hand, those who are closer to retirement should consider a shorter loan term (either 10-15 years), so they can get the most out of their investment.

The best ways to avoid making these mortgage mistakes is to plan your budget carefully prior to house hunting or meeting with a lender. Set limits for how much you’ll be able to spend on a mortgage so you don’t get roped into borrowing too much, make sure your credit is in order before applying, and take the time to go through the prequalification process. All of these steps will help ensure that you make a sound decision about a serious investment.
 

The Pros and Cons of Seller Financing

While many potential homebuyers choose to obtain their mortgage through a bank or other lending institution, it is also possible to receive a home loan from an independent seller. This option, referred to as seller financing, keeps all financial transactions between the buyer and the seller, removing the participation of a third party lender. While this can be a risky enterprise with a few drawbacks, there are a number of benefits to selecting this route for your mortgage.

Expedited Sale

One of the benefits of obtaining seller financing as opposed to a bank loan is that it can speed up the sale process. The process of applying for a loan through a bank can be quite time consuming, particularly if a loan applicant goes through a pre-approval and pre-qualification process before finally signing into the loan. When a seller manages the mortgage financing, the application is simplified, with fewer steps required to obtain their approval.

Simpler Qualifications

Another reason that seller financing can expedite the process of closing on a home is because the qualifications for the loan are much more relaxed. Part of the reason that applying for a bank mortgage can take so long is because of the stringent standards and restrictions for approval. An independent seller will most likely run a credit check to ensure that the buyer’s history isn’t a disaster, but that is typically the extent of financial background checks. Moreover, an seller will also grant loans to those with lower credit scores, which can be a saving grace to those with a spotty credit history.

Reduced Costs

Opting to go with seller financing can also reduce or entirely eliminate the fees associated with closing on a home. When a homebuyer receives a loan from a bank, he or she will have to pay closing costs to the lender and broker who have helped finance the loan and drawn up the mortgage papers. These costs are eliminated in a seller-financed mortgage. An independent seller who is anxious to sell will also be more likely to cut applicants a deal in other areas as well, and thus may accept lower down payments.

Drawbacks

There are specific reasons why seller financing is not more popular, however. First of all, though a legal and binding contract is still drawn up and signed by both parties, entering into business with a seller as opposed to a bank can be risky, since the transaction does not have the backing of a large and reputable institution. Moreover, while some sellers will grant home loans to those with a less than stellar credit history, in return they may significantly increase the asking price or the interest rates.

Homebuyers who need to purchase a home quickly without the hassle of working with a bank or those who fear their applications may be rejected due to a poor credit history may find seller financing to be a viable option. To reduce the risks involved with this kind of mortgage, applicants should be sure to have all papers reviewed by a lawyer or real estate professional, to ensure that the rates and loan terms are fair and reasonable.

The Facebook mortgage. Could social data be used for credit scores?

See on Scoop.it – Mortgage Knowledge and Technology

I’m about to move house. Which, as is usual, has involved a painful bank transfer and a lot of paperwork.

Jeff Chin‘s insight:

Credit scores are used by lenders, creditors, and yes, employers to help them on making decisions on you. Your social data is available for review.  Folding such information into a personal credit could the next big thing.

See on econsultancy.com