Owning a home is a major life step. For many people, it’s the biggest purchase they will ever make — and one that usually needs financial assistance in the shape of a home loan. So whether it be your first-time purchase or upping to your [ultimate] dream house, you must know how a home loan works so you can make a sensible and pragmatic financial decision.

In this blog, we’ll discuss what a home loan exactly is, how it works, what types of home loans are available, and how to improve your chances of getting approved — keeping the SEO keyword “home loan” in mind.

What is a Home Loan?

A home loan, or mortgage, is a loan taken from a bank or financial institution used to buy a house or property. The borrower then repays the loan over a specified term, typically in monthly payments comprising both principle and interest.

Home loans are secured loans, meaning that the property itself serves as collateral. When a home is financed through a mortgage and the borrower doesn’t pay back the loan, the lender can foreclose—take back possession of the home.

Types of Home Loans

Home loans are of several types to meet various financial needs and situations:

Fixed-Rate Home Loan

With a fixed-rate loan, the interest rate is constant over the life of the loan. This is perfect if you want to have fixed payments and stay in your home for the long haul.

Mixed-Rate Mortgage (Fixed and Variable)

With an ARM, you’ll get a lower interest rate for a set initial period, and then adjust on a schedule determined by market conditions. This works well if your borrower plans to move or refinance after a few years.

FHA Loan

Guaranteed by the Federal Housing Administration, FHA loans are intended for first-time purchasers or those with low credit scores. They generally demand lower down payments.

VA Loan

Designed for use by qualifying veterans, active-duty service members and some members of their families, VA loans — which are backed by the U.S. Department of Veterans Affairs — can come with benefits like no down payment and no private mortgage insurance.

Jumbo Loan

If you’re buying a luxury home or property in a high-cost area, you could need a jumbo loan, which exceeds the limits for conventional loans.

How to Qualify for a Home Loan

There are some key factors that determine qualifying for a home loan. Here’s what lenders generally want to see:

Credit Score

Good credit (typically a score of 620 or higher) makes you more likely to be approved — and helps you save on interest rates.

Stable Income

Lenders will evaluation your earnings to make certain you may pay for the month-to-month funds. Have tax returns, pay stubs or other evidence of income ready to provide.

Debt-to-Income Ratio (DTI)

DTI measures your monthly debt payment against your gross monthly income. A lower ratio indicates whether you can handle new debt responsibly.

Down Payment

Most home loans expect a down payment of 3% to 20%. The more you stake upfront, the less risk for the lender — and the lower your monthly payments might be.

Employment History

Stability of employment (at least 2 + years or more with one employer is good for lenders)

Home Loan Process — Step-by-Step Explanation

Here is a simplified overview of how the home loan process works, step by step:

Step 1: Pre-Approval

Get pre-approved for a home loan before you start house hunting. It helps you better understand how much you can afford and demonstrates to sellers that you’re a serious buyer.

Step 2: Find Your Home

Search with a realtor for a place that meets your needs within your budget pangs.

Step 3: Apply for the Loan

Complete your full application with supporting documents (ID, income verification, credit reports, etc.).

Step 4: Home Appraisal and Inspection

An appraiser is required by lenders to verify that the home is worth the amount of the loan. A home inspection reveals any problematic issues with the property.

Step 5: Close on the Loan

Once everything is verified, the lender closes your home loan. At closing you’ll sign the paperwork, pay your down payment, and get the keys to your new home!

Ways to Increase Your Home Loan Approval Odds

• Check Your Credit Report: If there are mistakes in your report, fix them and improve your score before applying.
  
  

• Save for a Bigger Down Payment: The more you save, the better the terms (the interest rates and fees) will likely be.
  
  

• Reduce Outstanding Debt: If your DTI or their overall debt is a problem, this is the number one solution.
  
  

• Avoid Large Purchases or Opening New Accounts of Credit: These can impact your credit and financial profile while you are in the loan process.
  
  

• Get Pre-Approved: It demonstrates to lenders and sellers that you’re financially prepared.
  
  

Cardinal Home Loan Mistakes to Avoid

• Disregarding extra expenses such as closing costs, property tax and insurance.
  
  

• Taking on a loan bigger than your budget can handle.
  
  

• Not shopping lenders to find the most favorable interest rates and loan terms.
  
  

• Foregoing pre-approval and missing out on ready buyers.
  
  

• You fail to lock in your interest rate when rates are low.
  
  

Read the Basics of a Home Loan: Is It the Best Choice for You?

A home loan can turn your dreams of owning a home into a reality, but it’s important to do your homework and be prepared. Learn how home loans work, what kinds there are, and how to qualify so you can make smart decisions and avoid costly mistakes.

Whether you’re in the market for your first house, or you’re looking to refinance, a trusted lender or financial advisor can help you get the right loan for your individual needs and goals.

Want Assistance with Your Home Loan Choices?

Contact a reputable financial advisor today to get on your road to homeownership with confidence!