In this guide, we will cover home purchase loans. If you plan to purchase a house, consider purchasing a home loan to finance your dream home. But where do you start, and what do you need to know before submitting your application for a loan? Alex Carlucci of Gustan Cho Associates explains home purchase loans:
There are different types of home purchase loans. Each mortgage loan program has its own requirements and guidelines on home purchase loans. Some loan programs has zero down payment and other have a 20% down payment requirements.
Here’s what you need to know and understand about home purchase loans, from the types of loans available to the factors affecting your eligibility. We will discuss the advantages of taking out a home purchase loan, how to prepare for the application process, repayment strategies, and more. By the end of this comprehensive guide, you’ll know to decide whether a home purchase loan is right for you.
Understanding Home Purchase Loans
Purchasing a home is an exciting experience; however, figuring out how to finance your dream home can be daunting. Home purchase loans help make homeownership more accessible, but you must understand how home purchase loans work to take full advantage of this financial tool. Here is everything you need to know.
Types of Home Purchase Loans
There are several types of home purchase loans available, including:
- Conventional loans: These loans are not insured or guaranteed by the government and have stricter eligibility requirements
- .FHA loans: The Federal Housing Administration backed these loans and typically has more lenient eligibility requirements.
- VA loans: These are available to qualified veterans or active-duty military personnel and are guaranteed by the Department of Veterans Affairs.
- USDA loans: These loans are available to those who meet income and location requirements and are insured by the U.S. Department of Agriculture.
How Home Purchase Loans Work
Home purchase loans help you purchase a home by giving you the funds you need. The process starts with a loan application, during which the lender evaluates your credit score, income, employment status, and debt-to-income ratio.
When you’re looking to purchase a home, taking out a home purchase loan has several benefits compared to other financing options. There are many advantages of owning a home.
Based on these factors, the lender determines whether to approve your application and the loan terms. Once you secure a loan, you use the funds to make a down payment and pay for the home. You then start making regular payments on your loan, including interest and principal, over a set period, usually 15 to 30 years.
Requirements for Home Purchase Loans
To be eligible for a home purchase loan, you need to fulfill several requirements, including:
- A good credit score (typically 620 or above)
- A steady income
- A low debt-to-income ratio
- A down payment (usually at least 3% of the home's purchase price)
- Proof of employment
- A willingness to pay private mortgage insurance (PMI) if applicable.
Meeting these requirements can make you a more attractive borrower and help ensure a favorable interest rate and loan terms.
Tax Benefits For Homeowners
One of the most significant benefits of a home purchase loan is that the interest you pay on your mortgage is tax-deductible. Ronda Butts of Gustan Cho Associates explains the tax benefits for homeowners:
Home purchase loans often have lower interest rates than other loans, such as personal loans or credit cards. The interest rates on home purchase loans hover around 3% to 4%, compared to 10% to 20% for credit cards or personal loans. This means you can save a a large amount of money throughout your loan.
You can ask for a deduction on interest up to $750,000 of your mortgage debt if you’re married and filing together or up to $375,000 if you’re married and filing individually or single.
Potential for Profitable Investment
Purchasing a home is an investment that can be appreciated over time. By taking out a home purchase loan and making regular payments, you build equity in your home.
Home purchase loans typically come with fixed interest rates, which means your monthly payments remain the same over the entire loan term. This stability allows you to budget and plan for your monthly housing expenses, making it easier to manage your finances.
Building equity with your home over time can give you access to credit or a source of income in the future. When you sell your
You could profit if the home appreciates, depending on the housing market.
Preparing for a Home Purchase Loan Application
Applying for a home purchase loan can be a daunting process, but taking the time to prepare beforehand can make things easier. Start by deciding on the type of home purchase loan you want to pursue. Consider factors such as your eligibility, credit score, and financial situation. Research and compare lenders, interest rates, and loan terms to find the best option for you. The following paragraphs cover some critical steps to help you prepare for your home purchase loan application.
Improve Your Credit Score
Your credit score is crucial when applying for a home purchase loan. Ensure you obtain a copy of your credit report and look for errors or inaccuracies you can dispute. Pay off debt, make timely payments, and keep credit utilization low to improve your credit score. Maintaining a good credit score can help you qualify for a much lower interest rate and better loan terms.
Save for a Down Payment
Most home purchase loans require a down payment of at least 3% of the home’s purchase price. It’s essential to start saving early to have enough for a down payment. You can set up automatic savings plans and reduce unnecessary expenses to increase your savings rate.
Gather Financial Documentation
Lenders will require various documents to verify your income, employment, and financial situation. These documents may include tax returns, pay stubs, bank statements, and investment account statements.
Working with a reputable lender can help smooth the home loan application process. Get pre-approved for a loan, which could provide a guide for the home price range you can afford. Pre-approval can also give you an edge in multiple offer situations.
Start gathering these documents early to avoid any delays in the application process. When applying for a home purchase loan, your eligibility and the terms you may receive are influenced by several factors. Here are the main factors that can impact your home purchase loan,
Credit Score
The most critical factor in home purchase loans is your credit score. It reflects your creditworthiness and financial history, and lenders use it to assess your risk as a borrower. Lenders look for credit scores above 620 to approve a loan application. The higher your credit score is, the higher the chances you get a better interest rate and more favorable loan terms.
Employment Status
Your employment status is another essential factor that affects your home purchase loan. Lenders typically want steady employment or income for at least two years. If you are self-employed, lenders may request additional documentation to prove your income and may expect to see stable earnings over a more extended period.
Income
When assessing your loan application, lenders consider your income and ability to repay the loan. They usually look for borrowers whose mortgage payments, including taxes and insurance, are at most 28% of their gross monthly income. If your income is too low,
your loan application may not be approved, or you may receive a more limited loan amount.
Debt-to-Income Ratio
When lenders evaluate a loan application, they look closely at a borrower’s debt-to-income ratio (DTI). The DTI ratio is the sum of all your regular monthly debt obligations divided by your gross monthly income. A lower DTI is favorable and indicates you have
more money to make mortgage payments.
How to Improve These Factors
Many factors can impact your loan application, but you can take steps to improve your eligibility and loan terms. Consider taking these steps:
- Improve your credit score by decreasing your debt load and paying bills on time
- Maintain steady employment or income and demonstrate financial stability
- Increase your income by taking on additional work or finding other income sources
- Reduce your debt load by paying off debts or lowering your expenses
The Home Purchase Loan Application Process
If you plan on purchasing a home, you may need a home purchase loan to help finance it. The mortgage loan application leading to getting approved and closed in a process. Alex Carlucci of Gustan Cho Associates explains the home purchase loan application process:
Before you begin your home purchase loan application, you must gather the necessary documentation. This typically includes proof of income, such as recent pay stubs or W-2s; proof of employment, such as verification letters from your employer; tax returns for the past two years, and bank and investment statements.
Applying for and obtaining a home purchase loan can overwhelm you, but breaking it down into steps can make it more manageable. Here’s what you need to know and understand about the home loan application process.
Pre-Approval
Many buyers get pre-approved for a home purchase loan before looking for a home. During pre-approval, a lender will evaluate your financial information to determine how much they will lend you. Dale Elenteny of Gustan Cho Associates explains how much house you can qualify for versus how much house you can afford:
Once you’ve selected a lender, submit your loan application and the necessary documentation. Make sure to disclose all of your financial information accurately.
Getting qualified and pre-approved can help determine your home shopping budget and give you an advantage in a competitive market. Remember that getting pre-approved does not mean how much house you can afford. The big difference between how much you qualify for an how much you can afford. Lenders do not consider debts that do not report on the credit reports.
Loan Approval and Closing
Assuming underwriting goes well, the lender will provide loan approval. This means they’ll lend you the money for the home purchase, subject to any conditions. The next step is closing, during which you’ll sign all necessary documentation and pay any closing costs or down payment. Angie Torres of Gustan Cho Associates explains the underwriting process:
Once you’ve applied, the lender will begin underwriting. During this process, the lender will assess your credit score, debt-to-income ratio, employment and income, and savings and assets, among other factors, to determine whether you are duly qualified for a loan. They may also order an appraisal of the home you’re considering purchasing.
After that, you’ll receive the funds and can take possession of the home, The home loan application process timeline can vary, but it generally takes 30-45 days from application to closing. Remember that the process can take longer if there are any issues with credit or underwriting. Understanding the steps involved in the process can help you prepare for a home purchase loan application.
Repayment Strategies for Home Purchase Loans
Securing a home purchase loan is a big commitment, and once you have taken on this financial responsibility, you’ll need to start thinking about repayment. Pay your loan earlier, save on interest, and increase your equity in the home. Here are some strategies to help you repay your loan more efficiently.
Bi-Weekly Payment Option
Many lenders offer a bi-weekly payment option, allowing you to make half your monthly payment every two weeks. This method helps reduce your interest over the loan’s life because you make an extra month's payment every year. Doing this will pay off your loan years faster and save dollars in interest payments.
Refinance Your Loan
If you’ve taken out a loan at a high-interest rate, consider refinancing for a lower rate. Refinancing your loan can save you thousands of dollars in interest throughout the loan and lower your monthly payments. However, refinancing requires careful consideration, as it can come with closing costs and other fees.
Increase Your Monthly Payment
Another way to pay off your home purchase loan faster is to add more to your monthly payments. Even increasing your payment by a small amount can significantly impact the long run. You can use this additional amount as a principal payment, which reduces
interest and helps you pay off the loan earlier.
Earn Extra Income To Pay Mortgage Early
Extra income is an excellent way to pay off your home purchase loan ahead of schedule. Consider taking on a part-time job, starting a small business, or even freelancing to generate additional income. Use this extra money to make a more significant mortgage
payments to repay your loan faster.
Make One Extra Mortgage Payment per Year
Making one extra mortgage payment annually can help you pay off your loan years early. You can use holiday bonuses or tax refunds to make these additional payments. John Strange of Gustan Cho Associates explains how making one extra mortgage payment per year can shave off years of your mortgage term.
An extra payment strategy can save you thousands of dollars in interest and reduce your loan term. Looking to buy a home but need clarification about whether a home purchase loan is right for you? No worries, we got you covered. At Gustan Cho Associates, our friendly experts can guide you through the loan application process and help you get the best loan for your unique financial situation.
We’re available round the clock to answer questions and provide continuous support at every step of your homeownership journey. So, why wait? Call us today, and let’s work together to make your dream home a reality. We can’t wait to hear from you! The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays. Call or text us at 844-90-RATES. Or email us at gcho@gustancho.com.