Are you thinking of buying a house? For
most people, buying a home is the single largest investment and purchase they
will make in their lifetime, and part of the home-buying process is obtaining a
home loan approval.
However, preparing your home loan
application can be a daunting task, especially since a minor error at the onset
can cost you a significant amount of time, money, and even a rejection of your
application. Although the rules and procedures for creditors are similar, it is
critical to understand the specific conditions of the lender you select.
There are several steps to take, and
while many of them can be easily corrected without affecting your chances of
loan approval /or the credit conditions granted by your lender, some will.
So, what are the most common blunders
made by borrowers when applying for a home loan, and how can you avoid them?
1. Accepting the first offer
Borrowers tend to concentrate their efforts on a single lender. Because it feels easy and straightforward, they may default to applying for a home loan with their existing bank. However, doing so may result in you not receiving the best terms on your home loan.
Nowadays, numerous websites allow you to compare the home loan products offered by various banks based on the interest rate, charges, penalties, and so on. Home loan applicants should take advantage of this to avoid selecting the wrong loan product that could put them in financial trouble.
2. Irregularities in income and expenses
The key to obtaining any loan is demonstrating your ability to repay it. Lenders will request information and evidence like proof of your income and expenses.
Lenders approve or reject your loan based on the documents you provide, so if you overestimate your household income or underestimate your expenses, your application may be denied in the best-case scenario. In the worst-case scenario, a lender may file a lawsuit against you, resulting in significant penalties.
3. Making multiple applications with different lenders
Sending multiple credit loan applications all at once can be counterproductive. Every time you apply to a lender, it is recorded on your credit report.
Even if you don't get a home loan, a lender will see these applications on your credit history. This may raise a red flag; lenders may wonder or assume why other financial institutions are rejecting your application or denying you credit.
They will delve deeper and look for reasons why they, too, should not be lending you money. Depending on what they discover, they may offer you unfavorable loan terms to tip the scales in their favor or simply reject the application entirely.
4. Applying for a home loan based solely on the interest rate
The interest rate is an essential aspect of a loan, but focusing solely on the lowest rate causes the borrower to lose sight of the bigger picture. The right property comes along so infrequently that overemphasizing rates can be costly, especially when home prices are rising across the country.
To entice potential borrowers, lenders advertise the lowest possible interest rate but tack on fees that increase the true cost of the loan. They may also limit the rate to people with a low loan-to-value ratio (LVR) or to specific home loan products.
Therefore, it is important not to be influenced by interest rates. A lower principal balance with fewer fees comes with lower payment in many cases. It is better to assess the home loan using the annual percentage rate, which includes points, origination fee, and closing costs.
5. Not having enough for the down payment
Banks typically offer home loans of up to 80% of the property's value. Therefore, the less money you put down, the more interest you'll have to pay. Low down payment home loans are also frequently subject to private home insurance, so if you can put more down, the less likely you will have to pay monthly home insurance.
Furthermore, the lower your down payment, the higher your monthly payment will be. So, carefully consider your financial situation and seek an advisor or home loan consultant.
Pro Tip: Knowing your risk profile when investing is essential because it will aid you in the asset allocation process.
6. Not checking your credit history
When evaluating your application, a lender will look at your credit history to determine your ability to repay the loan. They assess your attitude toward money and loans, as well as your commitment to repay your debts.
A poor credit history, such as overdue balances, deferring or defaulting on a loan, or missing repayments, indicates that you are a high risk in the eyes of the lender. Your lender may limit the amount you can borrow or reject your application entirely.
7. Taking a loan for a short tenure or amortization
Banks typically offer home loans with terms of up to 30 years, depending on the borrower's eligibility. A home loan has no prepayment penalty, so if you take out a 30-year home loan and pay it off in 10 years, you won't have to pay a fine.
However, some loans are longer than the standard 30-year term. These have higher interest rates, and borrowers frequently end up with less equity in their homes as a result.
8. Obtaining a home loan during probation or significant life changes
The ideal borrower is financially stable. It is imperative to demonstrate to potential lenders that you have stable employment whose salary has a Debt-to-Income ratio of no more than 28% and a back-end ratio of 36% or less, including all expenses.
It is recommended that a borrower is already a regular employee in their company, with documentation to prove it, such as a Certificate of Employment that includes details such as length of employment and gross income. This proves that the borrower is at no sudden risk of unemployment, which can happen to employees under probation.
If you are still on probation or have
changed careers, a lender may be less likely to approve your loan application
or approve it for a lower amount.
Key Takeaways
Lenders require copious amounts of
paperwork; therefore, it is recommended to research before making a real estate investment. Keep in mind that you have
choices—when you're ready to embark on the journey to homeownership, work with
a specialist who prioritizes your time and has your best interests in mind.