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Investing in Your Shelter: Home Loans for Beginners

What do you need to do before applying for a loan? Don’t know how to choose a loan? We’ll help you out. If terms like subprime, principal, and interest rates confuse you, this is the guide that will clear up the muddle.

Build Up Your Credit Score

Before you even think about applying for a loan, you need to make sure your credit is in order. The type of deal you can get with a decent credit score compared to the one that’s a little on the low end is huge. This is where we get into the prime vs. subprime loan territory; the latter is one you’d rather avoid, as it’s packaged for risky borrowers with lower credit scores.


If your credit has taken a hit, here’s how you can give it a boost:

  • Fix those mistakes. The first thing you need to do is fix any errors on your credit score. Incorrect addresses or accounts that don’t actually belong to you can drag down your score.
  • Get an adjustment. If you’ve made just a single late payment, the harm it does to your score can justifiably be just a tad frustrating. However, it doesn’t have to stick to you forever. The lender may be willing to adjust it for you.
  • Pay on time. An obvious one, but make yourself a promise: never make a late payment again. Lenders like consistent payments, and if you pay late, you’re risky. And that leads to a bad score.
  • Fight revolving debts. Lenders don’t mind if you have debt. Revolving debt, however, is bad. If you’ve only been making minimum payments, try and add just a little bit more to clear your debt more quickly (i.e. work on your principal, not just the interest).
  • Be patient. Building up your credit isn’t a quick fix affair. You’re going to have to play the long game. Be patient.

 

Loan Types

The Average Joe thinks that a home loan is a home loan, it’s just one product. Right? Not so. There are several types you can choose from:

  • VA loans. As the name suggests, you need to be a veteran to qualify. If you are one, it’s definitely a solid option. It’s guaranteed by the Department of Veteran Affairs, and the product itself requires a very modest down payment.
  • FHA loans. FHA loans come with the backing of the Federal Housing Association. Expect to pay just 3.5% down if you qualify. If you’re low on cash, an FHA loan is worth considering.
  • Conventional loans. This is the kind most people end up getting. You’ll need to save up at least 20% for your down payment. The higher the down payment, the better, as it means you won’t have to pay private mortgage insurance (PMI) and your overall debt amount will be lower.
  • Jumbo mortgages. They know how to name them, don’t they? This is for the big hitters only. If you’re financing more than the run-of-the-mill conventional loan, this is the one for you. These loans exceed the Fannie Mae and Freddie Mac limits.

 

No matter the type you end up choosing, always do your research first. Use third-party resources that are impartial, use comparison tools, and do your math correctly to figure out how much you’ll be paying per month (this useful and insightful home loan guide also includes a couple of good calculators, for example).

Fixed Rate or ARM (adjustable rate mortgage)

The interest rate you’ll pay on your mortgage depends on whether you have chosen a fixed or adjustable rate mortgage. In the USA, most home loans are fixed. This means the interest rate does not change through the entire term. It’s great for those looking to stay in the same home for a long time, or if you’re a little risk averse and would like to know exactly how much you’ll be paying each month.

Adjustable-rate mortgages usually have a fixed rate to begin with, which then changes based on a number of factors (essentially it’s based on the interest rate market as a whole). Adjustable mortgages are usually cheaper, but it comes with more risk. The rate can also go up significantly. This type of product is best if you’re planning on moving in a couple of years, or if you’re a savvy investor looking for a quick flip. Proceed with caution.

 

 

Our last bit of take-home advice? Be patient. This is going to be one of the most important financial decisions you’re going to make. We get you’re excited about moving into your very own place, but don’t be afraid to move on if the deal isn’t quite right for you and your family.

 

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