Selecting the Right Home Loan

A home is typically the largest purchase you will make during your lifetime. Even when buying a small home, you may be unable to pay for the house outright.

Most homeowners who are buying their first home need a loan to help with the purchase.

A home loan is commonly referred to as a mortgage loan. With a mortgage, the loan provider gives you the funds upfront to buy your home. In exchange, you pay back the loan over a select time period, with interest. If you fail to pay the loan back in the allotted time, the loan provider may take possession of the home. You only become the owner of the home once you pay off your mortgage. The finer details of a home loan, such as how much you owe, when you make payments and your interest rates, are determined by several different factors. Selecting a home loan is not a process you want to rush. Otherwise, you risk selecting a less-than-favorable loan. When you are searching for a home loan, there are a few tips to keep in mind.

Deciding on Your Down Payment

An easy mistake to make regarding home loans is relying too much on the loan. Many homebuyers want to use the loan for the majority of their purchase, so they can keep as much money in their savings as possible. This gives home buyers sizeable savings to use on other costs, like fixing up the house or purchasing furniture. Before using a home loan, however, buyers must make a down payment on their houses. The down payment is a small percentage of the total cost of the home that buyers pay upfront, while the mortgage loan covers the remaining cost. Typically, your minimum down payment is decided by the loan provider or condo association.

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It may be tempting to only put down the bare minimum for your down payment, but doing this means you owe more on the loan. Your loan takes longer to repay in these instances, and some loan providers may increase how much you owe each month to reflect the larger size of the loan. In some situations, you have no choice but to pay the minimum down payment, especially if your loan provider sets a higher minimum percentage.

Unfortunately, there is no right answer to how much you spend on your down payment. Everyone has a different financial situation, and there are many influencing factors. Carefully budget how much you are willing to spend on a down payment before seeking out a loan. If your provider offers a reasonable down payment range, consider whether you are financially comfortable spending more to ultimately reduce how much you owe in the future. If you know off the bat you cannot afford a large down payment, consider a Federal Housing Administration (FHA) loan, which is specifically designed for home buyers who can only afford minimal down payments.

Your Credit Score Matters

If you want to take out a loan, lenders will need to check your credit score. Your credit score has one of the largest impacts on what interest rates and payment plans are available. In some situations, your credit score may be the deciding factor on whether or not you are eligible for a home loan in the first place. Every year, you are eligible for a free credit report from each of the three major credit reporting agencies:

  • Equifax.
  • Experian.
  • TransUnion.

Looking at your credit report in advance gives you a better idea of your financial situation. If you know you have poor credit, it may be worthwhile to wait for your score to improve so you can get a better loan offer. Even if you are confident in your credit score, it is recommended to look at your credit report to ensure there are no errors on the report.

Compare Loans and Understand Your Options

For many house buyers, sorting through loans is a difficult process. To get the best rates possible, you need to compare loans, which means you are tracking multiple rates and possible payment plans for each type of loan. Home loans are more complex than other types of loans because they deal in such large numbers. With home loans, you need to look at both the fees set by the lender and fees set by third parties, such as the state or local government. Look for the following fees set by the lender when you receive a loan offer:

  • Your interest rate is typically the first fee included in the loan. The higher the interest rate, the more you pay every month.
  • Discount points are an up-front fee you can pay to reduce the overall interest rates on your loan. If you have a particularly lengthy payment plan, consider buying discount points. Not all home loan plans include discount points.
  • Origination charge is the fee for processing your loan application. Typically, an origination charge includes any processing, identity verification or fees for credit reports.
  • A rate-lock fee is an optional fee to set your interest rate for a set period of time. Some loans increase your interest rate if you miss payments or if you have not paid off your loan in a certain amount of time.

You can negotiate lender fees when you apply for a loan. Third party fees are set by an outside party, typically the state government, so you have few opportunities to negotiate the fees. Third-party fees are as follows:

  • Service charges cover the costs of home inspections and appraisals. Depending on the state and the required services, you or your lender may pick the inspector for your appraisal.
  • Title services refer to one of two fees. The first is the fee set by a titling agent to determine who has proper ownership of your home. The agent then transfers the necessary documents after a purchase is made. The second fee is issued by the title insurer. The second fee protects the lender if there are any unpaid liens on your home.
  • In some states, an attorney must be present for real estate transactions. In these states, an attorney fee is included in the general charges. Some states may have transfer taxes or government recording charges you must pay.

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