Three Tips for Getting Bank Loans
What most people do not understand is that getting a bank loan for the specific purpose of buying a home is a little different from getting one to say buy a car or start a small business. Ever since the crash of 2007, house prices have generally plummeted and banks tightened their lending parameters. But as time went by, the prices stabilised, although still lower, and banks lowered their lending rates to encourage borrowing again and to get that part of the economy going.
Most people hear about lower mortgage rates and lower house prices and figure it is about time they got into the all-important home buying business. Not knowing that securing a mortgage is not exactly the same as securing your typical bank loan.
These slight differences will actually determine whether or not your application gets approved. It pays to learn a few tips and tricks about getting a bank loan to buy a house before you actually apply. This way, you have a better chance of getting approved. Here are some tips for getting your mortgage approved:
Have something to show
It is no longer just a matter of having the right credit history. Lenders are more cautious now and if you want to stand a better chance of getting that home loan application approved, you need to have some money to show as down payment. There was a time when most banks were more than happy to loan out zero-down mortgages. That time, unfortunately, has passed. Today, unless you have a certain percentage to put down as your down payment, you may not get that loan.
The amount required varies from lender to lender but you should be prepared to have at least 3.5% of your asking price. You are advised to bump that up to about 20% if you can. This increases your chances of getting approved and lowers your monthly payments because it reduces the kind of mortgage insurance needed to secure your loan.
Additionally, it goes towards handling the common fees associated with actually getting the loan. These fees can be hefty. They include insurance, home inspection costs, closing costs, title searches, application fees, home appraisal fees, credit report fees and so on.
If 20% is too tough to reach, you may try negotiating with the seller if you can pay the 20% in increments (as opposed to a one-time lump sum). The bank doesn’t care how you pay the 20% to the seller, especially if the set up has already been agreed upon in writing. All it cares about is that it’s lending 80% and not more than that, which is deemed as lesser risk.
This type of flexible payment strategy where you slowly build on your deposit is something popularised by the likes of Rick Otton, Reena Malra and Simon Zutshi, and it may be something you may be interested in if reducing monthly payments and interest cost in your home loan is what you’d like to achieve.
Before you get all excited about buying a new home, you need to know that you can actually afford it. Getting pre-approved for a mortgage by a lender is the best way to keep your heart from getting broken due to home loan application rejections. In this instance, the lender or lenders you approach will take a look at your income, credit history and standard expenses. Based on that, they will tell you how much you can get and at what percentage. They will also tell you how much you will need to pay back monthly and for how long.
This gives you an excellent picture of what you can comfortably spend on your new house. It keeps you from falling in love with houses that are way out of your reach and gives you a general idea of what size loan for which you can realistically apply.
Get rid of your debts
Before you apply for that home loan, you need to know that lenders typically look at how much you generally owe. As a rule of thumb, your income to debt ration should be favourable (your monthly debt repayments, including the mortgage you are asking for, shouldn’t exceed 36% of your gross income). Since most mortgage lenders are a little skittish these days, having a high income to debt ratio will almost guarantee a rejection. You need to show them that you have no debt or that you have minimal debt and thus can handle your mortgage repayments without issue.
You should also know that just because your income to debt ratio was favourable when you applied for the loan does not mean that you will automatically get it should you incur more debt after the process has begun. Lenders strictly re-check your credit score before closing. Should you incur more debt before that, you may actually get denied or the mortgage size will get reduced.
It takes a great deal of smart play, frugal behaviour and forethought before you can start applying for a loan. These tips should help you get on that approval track.