Whether you are looking to finance a new home or refinance an existing one, it can be a daunting task to navigate the world of lenders, interest rates, and repayment terms. However, with some research and guidance, you can make the process a bit easier on yourself.
Four Components of The Average Home Loan
A typical loan for financing a real estate purchase consists of four main factors: downpayment, principal loan amount, interest rate, and terms. The downpayment is the money you invest in the home upfront; the more you pay upfront, the less you will need to borrow. The principal loan amount is how much money you are borrowing and the interest rate is how much interest you will pay on that borrowed sum. Finally, the terms designate how much you will pay back over a period of time.
Factors Lenders Consider to Assess Your Financial Responsibility
When lending money for a home, lenders will consider several factors from your personal finances: your credit score, your debt-to-income ratio, and your downpayment or equity. The higher your credit score and the lower your debt-to-income ratio, the more financially responsible you appear to lenders. The higher your downpayment or home equity, the lower the risk is for lenders because you’ve put more on the line.
Top 5 Tips for Financing or Refinancing Your Home:
Lenders want to see that you are a trustworthy and responsible home buyer. The more responsible you are, the lower the risk for the bank when loaning you money. There are a few major factors for how they calculate your financial responsibility:
- Improve your credit score. Paying down debt, making on-time and consistent credit card payments, and paying more than the minimum due can all improve the health of your credit score. You can also seek to resolve errors or flags in your credit history.
- Reduce your debt-to-income ratio (DTI.) Your DTI represents how much debt you have vs. how much income you have. An ideal rate is 36% or lower, meaning you should be bringing in about 3x as much as you have in debt.
- Increase your down payment. The more you can pay for your home upfront (or the more equity you have in your home, if refinancing) the better your loan options will be. A great goal is paying at least 20% of the home’s value as a downpayment.
- Shop around! You can (and should) consider multiple loan options from multiple lenders. There are online tools for comparing loans on your own, and there are also mortgage brokers whose whole job is finding you the best option!
- Search for government programs. There are many programs available for first-time homebuyers, low-income homebuyers, buyers in rural areas, buyers of energy-efficient homes, veteran homebuyers, and more. Do some research, talk to a mortgage broker, and be sure you’re taking advantage of any programs you might apply for!
Financing or refinancing a home is a complex process, but with these tips in mind, you can find the best options for your needs. Remember to do your research, shop around for rates, and always read the fine print before signing on the dotted line. Once you’ve secured your financing, contact Bill Hansen Realty to find your dream property!