Featured Image Caption: Housing Loan
You’ll reach a point in your life when you can say with certainty that you’re ready to purchase a house. Perhaps you’ve been renting a long time and you’ve finally decided that it’s time to own. Rest assured this financial decision could be a wise investment on your end.
Yes, real estate is still a prime commodity—one where you have the potential to earn should you decide to resell in the future. Even if you choose to hold on to your first home for the long haul, your property’s value will likely appreciate over time, giving you a source of passive income you can liquidate for profit if need be.
Ideally, at the time you apply for a home loan, you’ve got your credit score sorted out. Keep in mind that your current credit standing will affect whether your loan gets approved or not. Also, you need to be wary of the common mistakes committed by first-time homebuyers when applying for a mortgage. Here are some of them.
Borrowing without a substantial down payment
The smaller the down payment you pay, the longer the mortgage duration will be. Or if you choose a shorter payment period, the bigger your monthly mortgage dues. Either way, it’s a risky financial prospect.
Usually, homebuyers need to shell out 20% for a down payment. If you’re eyeing a house worth $200,000, you need cash on hand upwards of $40,000. It’s smart to pay more than that if only to reduce your financial responsibility for the next five years or so.
The reverse scenario is you pay a small down payment and you end up needing to allot more than the recommended percent, which is between 30% and 40% of your monthly income to a mortgage. Anything more than that will likely require you to scrimp on your weekly budget. Sure, you have a roof above your head but that comes at the expense of sacrificing the lifestyle you’ve been accustomed to.
Using up all of your savings for the down payment
This might sound contradictory to the first item on this list, but it does not have to be. The perfect scenario is you have saved enough money that you can shell out a relatively bigger down payment without emptying your savings account. This way, you get to account for contingencies.
Think, for example, if you or a family member suffers a medical emergency. If push comes to shove, and if you don’t have any savings left, you might decide to turn your home’s equity as collateral for a medical loan. Your finances will suffer however you look at the situation.
Taking out a debt that you don’t fully comprehend
You need to be a savvy loan applicant. That means exploring all of your options before committing to one.
Narrow down your best bets and compare and contrast with the pros and cons of each in mind. Thoroughly examine the home loan’s terms and conditions. Look into details such as interest rate, repayment tenure, processing charges, loan amount, annual percentage rate (APR), and loan-to-value (LTV) ratio. Once you’re offered an adequate loan amount with a low interest rate and optimal loan tenure, give it a go.
Sure, you can approach the financial institution with whom you already have an existing relationship. But don’t limit yourself to that. Explore alternative loan providers, such as an online financial marketplace. However, do not make the mistake of sending out multiple loan applications at the same time. Those will reflect on your credit file. That’s a huge red flag to financial lenders.
Not knowing your credit score
You need to know your credit score because that’s the first thing a lender will look into when reviewing your home loan application. We’ve already mentioned how a bad credit rating is enough for mortgage providers to give your application the thumbs down.
But there’s another equally unfavorable scenario that may result from having a less than desirable credit rating. That is getting a loan attached to impossible credit conditions. If you make the mistake of pursuing such a mortgage plan, despite the red flags, you’re at risk of causing even more damage to your finances.
If you have a credit score above 750, you have a better shot at getting a home loan application approved. Lenders might also offer you better interest rates. That’s why it’s crucial to first get your finances sorted out first before applying for a mortgage plan.
Pay off existing debts such as credit card debts or a car loan. Be on time with your monthly bills payments. These are just some examples of how you can improve your credit score.
Incorrectly structuring actual savings
A large sum of money deposited in a short period into your savings account is a red flag for lenders. The same goes for a savings account with too many withdrawals. Loan providers look for “genuine savings.” Those are saved and untouched over some time.
Purchasing a home that is more expensive than you can afford
This is self-explanatory. But it’s worth noting. It’s easy to get tempted by a house that you feel speaks to you. But it should speak to your finances, too. You want a home you know you can pay and, at the end of the day, own for real.
Applying for a home loan takes confidence—that is confidence in your finances. You need to be sure that not only will banks grant you the mortgage plan you deem suited to your needs but, more importantly, that you will be capable of committing to the home loan you receive.
It will be a waste of money to start a mortgage only to fall behind in payments some years into the plan. That means you risk losing the property to which you’ve already invested a portion of your income. Plus, that scenario will prove detrimental to your financial health, not to mention your mental and emotional well-being.
To prevent the worst-case scenario—ending up with a mortgage you can’t pay—avoid the mistakes included in this list at all costs. Consult with a financial advisor if necessary.
By Rose Flores
– is a licensed real estate broker and the co-founder of RE/MAX Gold Philippines, a real estate company in the Philippines. Acting and real estate have always been her passions since childhood. She confidently helps close record breaking deals for residential and commercial buyers while leading her team to success.