If you’re applying for a loan for your first home, then your head is probably spinning with questions. What’s your credit score? How much will the lender approve you for? What kind of interest rate will you get? Will they hold that late credit card payment last year against you? What do you need to get a loan? These are all valid questions. However, there are a few details you may not have thought of. In fact, many people don’t consider the following points until it’s too late.
1. Figure Out What You Can Afford on a Monthly Basis
Wait, isn’t that the bank’s job? How am I supposed to know what size of a loan I should get?
We’re not saying that you need to decide for yourself what your loan should be, we’re saying that you need to decide how much money per month you can reasonably spend on a mortgage. Banks work hard to make accurate estimates on your behalf and they’ll base how much you can get approved for on those figures. However, they aren’t you. They don’t know the standard of living that you’re comfortable with.
They will likely approve you for somewhat more than you could comfortably afford. For example, they might think you can afford the monthly payments on a $400,000 home. If they think you can, then you probably can. But you might need to scrimp, save, and make some sacrifices. Do the math. If you’re more comfortable in the $360,000 range, then stick with that. It's all about saving your money and creating a budget that lets you do it effectively.
2. Make Your Big Purchases Now or Wait Until After You Close
Let’s say, for example, you’re aiming to buy a car alongside that new home. Whether you’re paying for the car in full or planning to get it financed, you might want to hold off. If you desperately need that vehicle and can’t wait until after you’ve closed on your new home, then do it now before you get started.
Basically, what you don’t want to do is make any large purchases or other major financial changes while you’re getting assessed for a loan. Even after your loan is approved, you could still be subject to adjustments up until the moment you sign the closing paperwork. You’re also legally obliged to disclose any purchases made after the approval and before the close.
3. Don’t Open or Close Any Accounts Until After Your Close
Of course, if you can wait on financing that new car, you should. You should also wait before signing up for that credit card you’ve been wanting. Every time you do anything that takes an interest in your credit (i.e. getting loans or credit cards), a credit report will be pulled. While there is nothing inherently wrong with that, it will affect your credit.
Having “too many” reports pulled on your credit within a certain time frame will lower your credit score. And we’re not talking about dozens of report pulls either. Sometimes having as little as two or three credit report pulls in a six-month period can make a difference.
Great, you’ll hold off on new cards, but you might as well close that old credit card that’s collecting dust with a zero balance. That’s got to be good for your credit, right? Wrong. Part of your credit score involves calculating your total available credit and measuring that against how much credit you use.
If you close that card, you’ll suddenly have significantly less available credit, but you’ll be using the same amount. You know there’s nothing wrong, but the credit company algorithms think you’re suddenly using a greater percentage of your available credit and that’s a red flag.
4. Don’t Borrow Money for Your Down Payment
Let’s be clear. If Mom and Dad want to send you $10,000 to put toward your down payment as a gift, then you’re fine. The bank doesn’t care if other people help you with the process; they only care if you owe someone money.
When they calculate your loan, they factor in the down payment with the understanding that the money is paid. However, if you pay that money to the seller but still owe it to someone else (who loaned you the money), then it’s not really paid and, from the bank’s prospective, you might as well have not put that money toward the down payment at all.
This can also hurt your legitimacy in the bank’s eyes. They are the ones helping you buy this home, making it partly theirs until the home is paid off. They don’t want to know that anyone else has a stake in the home.
5. Don’t Expect Your Pre-Approval Rates to Be the Same as Your Actual Ones
You got pre-approved for a $400,000 loan at 4% interest. Fantastic! There’s only one problem. When you actually get your offer accepted on the house and get the loan finalized, your interest rate has crept up to 4.125% in your personal loan document. This can happen. Even if you’re getting a fixed interest loan, your initial interest rate is only an estimate based on current trends. It only locks in once you finalize the loan and close on the home.
Feeling the financial stress yet? Don’t worry. All you need to do when applying for a loan is be honest with yourself about your financial limitations and not touch anything until after the process is complete. And we mean anything. No credit cards, no paying off debt, no nothing. So, what do you need to take out a loan? You need to relax; you’re just a few smart choices away from the home of your dreams.