A property loan is one of the financial transactions that people will make at some point in their lives. It’s under mortgages, which are official documentations that reflect one’s promise to repay a large debt under government regulations. These loans make owning your dream property possible. However, the loan process can also be a headache for some people, especially considering the fact that a property loan is a significant undertaking. With that said, it’s essential to work only with a trusted lender and to prepare before making any commitments.
Similar to the individuals they help, property loans vary. There are options for people looking to build a home for their family (housing loans) and business owners looking to build a warehouse or a company office (commercial real estate loans). When you’re thinking seriously about getting a property loan, you’ll need to know the following things.
Pre-qualification Differs From Pre-approval
Most people take pre-qualification and pre-approval steps when getting a property loan. However, only a few understand that property loan pre-qualification and pre-approval aren’t the same things.
The best way for a potential borrower to know how much he/she can borrow is to be conditionally approved or pre-qualified. The pre-qualification process gives a borrower an estimate of the amount the lender is willing to lend based on the borrower’s bank account information, credit history, employment, and income.
On the other hand, when a lender has analysed your finances carefully, you’ll be issued a pre-approval status. It’ll tell you the amount of money you may be able to receive, including the interest rate you might get once your loan application gets approved. When pre-qualification is done, pre-approval usually follows. You’ll likely get a property loan if all key factors don’t change after taking the pre-approval step. However, the pre-approval process itself doesn’t guarantee anything.
Credit Score Matters
A credit score is only a three-digit number, but it’s something that you shouldn’t take for granted. Credit scores are powerful as they’re crucial factors in whether a borrower gets approved for a property loan or not. The all-mighty credit score is what lenders use to assess the risk of lending money to you. Based on your credit rating, you can be classified as a high-risk borrower or a low-risk borrower.
Note that you’ll have better odds of landing an excellent loan when you have a higher credit rating. On the other hand, you may find getting a property loan difficult if your credit score is lower than what most lenders require.
Credit score matters not only in home loans, but also in commercial property loans. If you’re more interested in getting a commercial loan, you could look here to learn more about how significant your credit rating is when taking one.
Property Loan Rates
The interest rate you’ll get on a loan is influenced by several factors. Market condition is one of the most significant. It includes the government’s monetary policy, characteristics of the property market, and the economy.
Another factor that affects property loan rates is the borrower’s financial health. It’s indeed challenging to understand what affects interest rates. Understanding how the rates will affect you is simple though.
If you’re aiming to get a cheaper loan, choose one with a lower interest rate. Think about the market’s condition, your qualifying factors, and the type of property loan you’ll use.
Strive to save a healthy down payment, lower your debt, and increase your credit score if you want to get a lower rate on your loan. The truth is that your property loan will cost you less if your financial profile is excellent. A strong profile makes you more attractive in the lender’s eyes, putting you in good standing.
A 20% Down Payment Allows You To Pay Less On Your Loan
Saving, at least, 20% of the total property price for the down payment is highly suggested. The larger the down payment, the smaller the property loan and the less interest rate you’ll get, so it makes sense.
In most cases, you’ll also have to pay property insurance or mortgage insurance if your down payment is less than 20%. If you default on the property loan or stop paying your mortgage, the insurance will cover the lender. Note that the insurance cost is added to your monthly repayment, and its yearly cost is about one percent of your loan’s outstanding balance.
DTI (Debt To Income) Ratio
A solid debt-to-income ratio is essential to get approved for a property loan. What’s the DTI ratio? It’s a comparison between your income and your outstanding debts, including car loans, credit cards, and student loans, among others.
Note that a lower DTI ratio is what you should be aiming for. That’s because studies show that borrowers are more likely not to have trouble making monthly repayments with a lower debt-to-income ratio. That’s what lenders prefer.
Owning a property is a dream for many people. A property loan is one way to achieve that. To manage a property loan and make the most out of it, you should understand how it works and how your financial health will be affected. Hopefully, this article has helped you prepare better as you take out one for you and your family.