“Our house in the middle of our street
Our house it has a crowd, there is always something happening,
And it is usually quite loud”- Our House by Madness
I just love the simplicity of this song, it describes how important a house is where you got to do all your activities with freedom and how a house is looked after. You might think what a house is to do in CFD master; well this is what I am into these days searching for a good house to buy. But buying a house is not an easy task especially if you are not that rich and want to take a loan or want to finance it. Financier can be a bank offering home loan, private lenders or any other mortgage insurers. Here are the 7 things to consider before you get involved and satisfy the lenders.
1. Calculate your own worth
This is very important and the real fact on which your loan may be sanctioned or declined. So you need to calculate how much you can spend on your new home and that depends on your worthiness. For that you need to have a stable income in the form of stable job or employment; your credit score with your savings account; the size of down payment you can pay initially when financing the new house, your debt to income ratio and your monthly maintenance expenses. You need to have all this in mind and budget yourself accordingly to know your worth.
All of these factors will impact the interest rate you can obtain from your financer and the size of your monthly payment, which should correspond with your overall cash flow so that you can continue to live without feeling like you are chained to your new home.
2. Know how much down payment you will need
Your down payment is the amount of money you already have saved to buy your new house, typically between 5-20% of the purchase price of the home. If you are obtaining a conforming loan and putting less than 20% down, you may be required to obtain private mortgage insurance (PMI) which protects the lender in case of default. On average you will also need an additional 2-5% of the purchase price to cover closing costs and other expenses such as attorney’s fees, appraisal fees, mortgage recording fees, transfer taxes, title insurance premiums, etc.
3. Review your credit score
Your credit score, is derived from the information found on your credit report as reported by the three major credit bureaus like TransUnion, Equifax and Experian. Each bureau generates a separate credit score ranging from 350 to 850, and you should review each one before applying for a mortgage. Your credit report will include
- Your Payment history and its consistency
- Debt utilization percentage of your latest available credit
- Length of credit history that shows your previous loans
- Types of credit which shows types of loans you have had
- Applications for new credit
- Your recent bankruptcies
You can expect to obtain competitive mortgage interest rates if your score is 720 or above, which may allow you to borrow more than you otherwise would have.
4. Know the rules of mortgage interest deduction
It is better to know the rules governing the deduction of mortgage interest on your federal income taxes. For a qualified home, the IRS allows an individual to deduct the interest charged on up to $1 million of home acquisition debt used to buy, build or improve a home, and up to $100,000 of home equity debt used for anything other than to buy build or improve a home.
5. Be prepared for worst case scenario
This is what most lenders or banks take into account when allowing a finance on your new home. The property that you purchase is used as the security for the mortgage. This means that the financer holds the title documents until you have repaid the loan. Also known as security in legal terms the financer keeps check on what type of house you wish to buy, is it built or just land and the location of it
It is because the lenders look into the worst case scenario of you becoming unemployed, injured or on long-term benefits and that they can sell your property quickly for a sufficient amount to recover their loan.
6. Choose the location of your new house wisely
As said above for the worst scenario you should also act wisely and always go to buy a house at such location where the cost is going to raise and where easily it can be sold off. Suppose a buyer in Australia buys a house in Melbourne and wants to sell it which will be immediately done within few weeks but if a house is in Bourke it may take many years to do so. For this reason on normal residential the base limit is 80% of the property value (known as a loan-to-value ratio or LVR). Where as in other locations where property might not be so easily sold the base LVR may drop to 60% or lower. It is only possible to go beyond the base LVR when lender can obtain lenders mortgage insurance .
7. Know the types of interest rates on home loans
You should know the types of interest rates on your loan. Like the Principal amount and interest where your loan payment covers the interest charge plus some of the original loan amount. Thus reducing the loan balance over the life of the loan Or maybe interest only where you agree to pay only the interest charge for a specified period, typically 5 years. Then there are variable home loans whereby the interest rate charged moves up and down in line with certain indicators, typically the Reserve Bank Cash Rate. So if the Cash Rate increases then you can expect your home loan rate to increase by approximately the same amount. Also there are fixed interest rate loans which lock you into a given rate for a specified period, typically between 1 and 5 years and can even go for 15 years
So even if the variable rate increases by 5% you are protected and pay the rate you agreed at the outset until the end of the fixed rate period. However you are locked in, if the variable rate decreases by 2% and in these situations it can be very expensive to ‘break’ your fixed loan. So you need to know the rate of interest applicable and the type of it on your home loan.
Once your lender or financier is satisfied with your above 7 things your loan will be sanctioned. But if you fail to meet the criteria of the lender your loan application might get declined. Therefore a good track record of your credit worthiness, your stable income and transparent disclosure of your financial status can give you a green flag for financing your home. But still if your loan application is rejected due to any of the reasons do not worry. There are brokers who may do the right job for you though they can have their commission and you can explore other means of proceeding towards obtaining a home loan. It is important to note that if your loan is declined by the mortgage insurer that decline applies to all lenders using that insurer.
Also you can make co applicant involved to meet the criteria of the lender such as a parent or any family member that can assist you with the loan.
You age too is a very important factor when applying for home loan. The perfect age to apply for loan is between 25- 45 at the max but as you grow old your criteria to meet the lender’s demand decreases. The financier or the lender wants that you to show a steady financial record of yours with sound income, good tax returns and your permanent residency with no late payments or any dues.
You can also wait for some period of time until your lender gets satisfied like building up some savings or having employment stability which may surely make your home dream come true. Your home, sweet home.