Every human needs a roof over their head. While some have the financial capacity to purchase a home outrightly, others don’t. Those who aren’t blessed with enough finances to buy a home outright often consider looking for home loans.
Home loans are an ideal lifesaver for those who harbour a dream of owning a house but lack the money to do so. With this loan, purchasing a home becomes less complicated. But does that mean you should rush to take this loan? No!
Before taking a home loan, there are some essential things you need to consider. Lucky for you, we have taken our time to highlight these things. But before we present them to you, we think it is appropriate for you to understand what a home loan is.
What is a home loan?
As the name implies, a home loan (also known as a home mortgage) is money borrowed by an individual (borrower) to buy a house, apartment, condo, or other livable property. The individual must pay back the loan amount plus interest in Equated Monthly Installments over a period that can stretch between 10-30 years, depending on the nature of the loan.
While taking out a home loan is a great move, there are some essential things you need to ponder before you decide to apply for one. And what are these things?
Here are 7 of them.
Carry out in-depth research
One major mistake individuals make when taking out a home loan is failing to research available options. Some individuals go for the first loan option recommended to them without even doing simple background research or looking at another alternative.
Who knows, that loan option you seem too eager to apply for may end up ruining your finances. So rather than rush, why don’t you leverage the internet and carry out extensive research on options available in the market before applying for a home loan?
Your research shouldn’t be basic. Instead, it should cover major areas like down payment, EMIs, and repayment tenure. Researching these essential factors before applying for a home loan helps you select a suitable home loan from a better lender at a reasonable interest rate.
Before applying for a home loan, the first thing you want to look at is your credit score. A credit score is a number between 300-850 that represents an individual’s creditworthiness. The higher your credit score, the better your chances of getting a loan with favourable rates. Thankfully, there are still loan options for those with a poor credit score. For instance, you could consider looking for loans in Canada or similar in your location, that specialise in providing funds to people with poor credit history.
That said, if you have a terrible credit score, you may have to prepare yourself for a home loan with unfavourable rates (that is if the lender approves your request). However, if you have a good credit score, say in the region of 750 or 900, lenders will rush to borrow your money to fund your home purchase.
Before applying for a home loan, it is essential that you research the interest rate. What interest rate does the lender offer? What type of interest rate are you expecting? Is it a fixed interest rate or a floating interest rate? If it is a fixed interest rate, the rate will remain constant from when the loan was approved, irrespective of any changes in the financial market. On the flip side, if it is a floating interest rate, the interest rate at which the loan was approved will vary according to market conditions.
Mind you, in today’s financial realm, most borrowers fancy a floating rate of interest as it boasts of more long-term benefits, unlike its counterpart.
Before you decide on applying for a loan, ensure you check whether the bank or lender will allow you to opt for shorter repayment tenure. You should go for a shorter term because the more time you take to settle the loan, the more interest you are required to pay.
However, if you feel you wouldn’t meet up with the shorter repayment tenure, you can opt for the longer tenure.
Read the documents well
Before filling in your details for any loan, be it a home loan, auto loan, car loan, loan for a veteran, or even personal loan to cover major home repairs, it is essential that you go through the agreement documentation well to understand the loan application better. If you don’t understand specific terms, you can easily beckon on a bank official to provide an adequate explanation. Don’t sign or fill in your details for a loan without understanding the requirements, including the terms and conditions. You could end up regretting it if you mistakenly do so.
Employment stability and number of dependents
Before approving home loan requests, banks often do background checks. They carefully consider applicants with a huge number of dependents. If you have a huge number of dependents, the possibility of getting your loan request approved with a lesser interest rate will definitely reduce.
The lenders often assume that if there are excess dependents, the borrower might find it hard to repay the loan in time as their monthly salary will be spent on the dependents. Stable employment is also another factor lenders consider before offering individuals loans. Thus, before applying for a loan, ensure you have a stable job to raise your chances of getting your request approved.
If you loathe hidden charges, this is one factor you need to keep your eyes peeled out for. You see, apart from the typical EMIs, there might be additional charges (administrative, processing, or service charges) that banks levy on individuals seeking home loans during the application process.
Check whether they are one-time charges—that is, those charges you pay once—or monthly. If they are monthly charges, then they need to be considered coupled with your EMIs, including your monthly finances planned accordingly.
On the outside, some home loans may look attractive. But, on the inside, they are the worst thing you can ever imagine. The best way to detect such loans is to do your homework. Don’t embrace a loan because it appears attractive. First off, sit down and consider the things we highlighted above. Doing so should help you spot major pitfalls ( if present) and save you from any potential catastrophe.