Investing in a home is not an easy decision to make considering the large investment you’ll make. Taking a home loan can impact your future financial standing, which is why you’ll want to weigh the pros and cons carefully before signing the loan application. It’s also advisable to get together all the relevant information that will give you a clear overview of your finances and current market conditions.
Here are some of the critical factors to keep in mind when working out whether or not to get a home loan.
Do You Have a Great Credit Score?
Having a high credit score can work to your advantage in more ways than one. Expressed in numerical form ranging from 300 to 900, the credit score gives valuable insight into your present financial health. When making the decision to get a home loan, one of the first steps is to check your credit rating online. Experts advise you to check your credit rating every three months or so. Spending a few minutes will help you detect any unexpected activity that could be a sign of errors, or worse, data breaches and identity thefts.
How does the credit score affect getting a home loan?
- Mortgage loan providers use the credit rating to assess your ability to repay the loan and overall financial stability.
- The higher the score, the lower will be the interest rates you’ll pay.
Keep in mind that each credit reporting agency has its own terminology for defining rating which can be poor, fair, good, very good, and excellent. Aside from the numerical value, credit scores give information about the number of accounts you have open, various debts you owe, length of the credit history, and how consistent you’ve been in making payments toward utilities and any other dues.
What is the Highest Down Payment You Can Afford?
When buying a home, you’ll pay a percentage of the value of the house as a down payment. This upfront amount can range from 5% to 20% depending on your affordability. The federal government has regulations regarding the minimum payment you can make. For instance:
- Houses of value $500,000 and below – 5% of the price
- Houses of value $500,000 to $999,999 – 5% of the initial $500,000 + 10% of the price over and above $500,000
- Houses of value $1,000,000 and above – 20% of the price
How does the down payment affect getting a home loan?
- Higher the down payment, lower will be the monthly mortgage payments you make.
- In case you’re paying less than 20% of the value of the house in down payment, you must also buy mortgage loan insurance. This additional cost will raise your monthly payments.
Did You Check the Mortgage Affordability Calculator?
Considering that most houses in the major cities of Toronto and Vancouver are priced at $1 million and more, collecting enough money for a high down payment is not easy. If you’re not quite sure about the down payment you can afford, use a mortgage payment calculator. This simple tool allows you to enter variables such as house prices, interest rates, and amortization period. You’ll also add the down payment you intend to make and get an approximate value of the monthly payment.
What are the Regular Household Expenses You Have?
Before taking on the debt of a house loan, it is crucial that you take into account the monthly expenses you absolutely must pay for. Add this figure to the approximate loan payments and you’ll know if you can afford to take the debt just yet. These costs can include:
- Childcare costs
- Caring for elderly family members living with you
- Existing loan payments
- Any other financial commitments
Although you could get approved for a higher home loan than you expected, it is preferable to apply for only what you can comfortably pay back. Further, it also helps to factor in the additional costs of owning your home from a futuristic perspective. For instance:
- Higher utilities
- Property taxes
- Repairs and maintenance
What are the Existing Debts You Can Pay Off?
Before signing up for a home loan and taking on additional debt, you might want to reassess the existing commitments you have and think about paying them off. These obligations can include:
- Lines of credit
- Credit card balances
- Unpaid student loans
At the time of evaluating your loan application, mortgage providers are likely to compare the debt to income ratio you have. Accordingly, they’ll work out the loan amount and interest rates.
Can You Get a Mortgage Pre-Approval?
Getting a mortgage pre-approval is an excellent way of learning about your financial standing and creditworthiness in the loan market. You’ll also get an understanding of the price range within which you can afford a home. Most such approvals carry a validity for 90 to 120 days and are based on the mortgage amount, amortization period, and prevailing interest rates. Several variables go into the evaluation, and lenders take into consideration:
- Credit scores
- Total income of the household members
- Employment status
- Liabilities and debts
Once you have the pre-approval, you can go right ahead and put down an offer on the best house you can find within your affordable price range.
Did You Factor in the Overheads?
Many homebuyers overlook the additional expenses they’ll incur when finalizing the purchase of the new property. Here are some of the overheads you must take into account.
- Costs of home inspections
- Closing costs that can go to 3% to 4% of the value of the house
- Miscellaneous charges
- Moving costs
- Minor repairs and add-ons in the new house
Making the decision to buy a home involves various aspects that you should take into careful consideration. Use the above checklist as prudent first steps and ensure long-term financial health.