Financing
Without option of financing many people would not be able to afford to own a home. Most homes cost upwards of $200,000 and there are very few people who have this sort of money available.
Financing was made available by many banks and financial institutions because most people can barely scrape together enough money to make a down payment on a home.
Financing is often used to make up the difference between the purchase price of a home and the down payment and usually this financing comes in the form of a loan or mortgage.
Mortgages and home loans are legal documents that pledge a property to the lender, usually a bank or other financial institution, as a security for payment of a debt. The payments for these methods of financing are made up of two parts: the principle, which is the amount that was initially borrowed, and the interest, which is calculated by the lender according to current mortgage rates.
The amount you end up paying for a home loan or mortgage is entirely dependant on how quickly you pay it off, the type of payment plan you choose, mortgage rates and, of course, the type of property you purchase.
Before applying to any lender for financing it is important to prepare yourself so that you look like an attractive borrower.
Preparing Yourself to Apply for Home Financing:
- Pay off all utility and credit card bills entirely and on time
- Save as much money as possible
- Try to hold down a steady job for a few years
- Be aware of how much you can afford to borrow
- Shop around for lenders to get the best plan with the best rate
Something as simple as not paying your hydro bill on time each month can drastically affect whether or not you are offered home financing. Failure to handle monthly bills may send warning signs to lenders because if you can't handle paying a fifty dollar hydro or cable bill each month, chances are that you won't be able to handle paying hundreds or thousands of dollars each month in mortgage or home loan payments.
Saving money is always a good idea when it comes time to make a major investment, but it is a necessity when you are attempting to purchase a home. The most obvious benefit of having some money saved up is that you can make a larger down payment. A larger down payment means you will need less financing and ultimately you will pay less to lenders in principle and interest over the years. Having a substantial amount of money saved up in your bank account will also make a difference when potential lenders evaluate your credit. The more money you are able to save, the more attractive you become to lenders, and the better chance you have of being approved for financing.
Holding down a steady job is also quite important when it comes to home financing and whether or not you will be approved. Most lenders feel that if you are irresponsible in terms of your career, you might also be financially irresponsible. Remember, lenders will look at how long you have been at your current job, and whether or not you have a cosigner who will agree to make payments when you can't.
What Can You Afford
Knowing how much money you can afford to borrow is essential because borrowing too much can mean making payments to your lender for the rest of your life. Before applying for financing it is a good idea to plan out a budget and assess how much you can afford to pay towards a home loan or mortgage each month.
Generally when you apply for financing the lender will ask you how much you want to borrow and determine how much to give you based on the value of the house or property you're investing in (this will be determined by a real estate appraiser) and your finances. Typically a lender will give you 80-90 percent of the appraised value of your house and they will expect the rest as a down payment on your home loan or mortgage.
Home financing payments to a lender should not add up to more than 28 percent of your gross income, so make sure the house or property you are looking at is actually within your price range and that your payments won't be through the roof.
Compare Lenders
When it comes to home financing it's always a good idea shop around for lenders so you can compare rates and terms and make sure you are getting the plan that suits you best.
The interest rate is the most important figure to get from a potential lender. It is also essential to ask potential lenders when you can lock in your interest rate because these rates can change during the course of time you take to pay off your mortgage.
Most lenders offer both fixed-rate and adjustable-rate mortgages so it is important to look into the benefits and downfalls of each option.
If interest rates are high you are usually better off with an adjustable-rate mortgage. Adjustable-rate mortgages offer lower initial rates and the prospect of being able to take advantage of falling rates in the future. If rates happen to be low you will want to consider looking into a fixed-rate mortgage because by choosing this option you will be assured a low rate for the duration of your mortgage.
You will also want to inquire about the minimum down payment needed by each lender. Interest rates and terms will differ depending on the size of the down payment you make and how it relates to the price of your home.
When you are trying to decide on a lender, especially if you are a first time homebuyer, you will want to ask about special programs available. Some financial institutions offer programs for first-time homeowners and people with low incomes so be sure to explore all available options.
After you have decided on the a lender and you have been approved for the plan that best suits your budget it will likely take a week or two to complete the financing transaction. The closing is the final step involved in applying for home financing. This procedure involves the buyer signing all mortgage documents and paying closing costs so that the property can be transferred into their name.
Home financing can be a complicated process so it's important to explore every available lender and financing option before signing anything. The type of financing you choose to accept will greatly affect your budget for at least 15 years of your life so it's imperative that you make sure you are getting a plan that you can handle with an institution you can trust.
Though acquiring home financing in the form of loans and mortgages has become the norm among homeowners it should still be viewed as a privilege not to be abused. Financing can be the key that opens the door to your new home, but it can also leave you locked out in the cold if you are unable to deal with it responsibly.
