For most people, finding the right property might seem like the most difficult part of buying a house. However, any experienced homebuyer would know that it's just half of the process.
In reality, you might have to spend the other half finding the right home loan package. After all, financing is an essential part of the homebuying process. Unfortunately, much like real estate properties, you'll find hundreds of home loan package providers available on the market. Hence, it's relatively challenging to find the right package out of them all.
With that said, this article will discuss six steps that should help you find the most suitable home loan package according to your budget and personal preferences.
1. Decide On Your Occupancy Status
When you apply for a home loan package, the lender would typically ask you several questions, one of which is whether you'll be living in the property or not. This is what they call the occupancy status, and it has a massive influence on the terms and type of loan the lender is willing to offer. Here's a closer look at the two possible occupancy statuses:
An owner occupied home loan means you'll be residing in the property for at least 12 months, hence the name. There are several benefits to this type of status. One, the lender may offer a smaller down payment requirement and lower interest rate. The capital gains tax (if you plan on selling the house) and property tax may also be deductible.
This status means the borrower is paying for a property while not actually managing or residing in the house. The main advantage of this occupancy status is that you can stay at your primary residence while still owning the real estate property. It's particularly handy for investors planning to sell or lease the house in the future to make a profit.
As you can see, each occupancy status has its respective pros and cons. Hence, depending on your purpose for home buying, you may need to put a lot of thought into this decision.
2. Take A Look At Each Type Of Home Loan Package
Lenders may also ask you what type of home loan package you want to choose. Like occupancy status, this option will have a massive impact on the interest rates and down payment requirements. On that note, here's a look at the three types of home loan packages:
As the name suggests, there's not much going on for conventional loans. It's your typical home loan package, and there aren't any unique characteristics to it. However, it's the most accessible type of loan package, which would explain why it's the most common.
If this isn't your first time finding a loan package, you should be aware that there's a limit to how much you can take a loan. For your reference, the maximum loan limit is usually around USD$500,000 in the US. However, the loan limit is much large with jumbo loans and can go up to USD$1,000,000, hence the name. This type of loan package is often available only in areas where you can find luxury homes or properties.
From the name alone, it's easy to see that this type of loan is insured by the government, albeit not being the actual mortgage lender. Their goal is to help more people become homeowners. They do this by offering several benefits, such as smaller down payment requirements and lower interest rates. Hence, they're objectively better than other types.
Note that while jumbo and government-insured loans are better than conventional ones, the paperwork is often more of a hassle, and there are stricter requirements. Therefore, it's not guaranteed that you'll qualify for these types of home loan packages. Nevertheless, once you choose the loan type, the next step would be to decide on the term's length.
3. Decide On The Length Of The Loan Package
Again, the length of the package impacts the overall mortgage, particularly in its interest rate. Suppose you intend to take a loan of USD$200,000 (down payment excluded) at 5% interest.
If you were to decide on a 15-year term, you'd have to pay a total of USD$84,685.71 in interest. Meanwhile, if you were to extend that and go for a 30-year term, the interest would come at a total of USD$186,511.57, which is evidently higher by a long shot. Of course, long-term loans have some benefits as well. For one, your monthly payments will be significantly lower.
Either way, as you can see, the length would have a massive impact on the interest rates and monthly payment, so you should really put a lot of thought into this decision as well.
4. Choose Between Fixed Or Variable Rates
Next, you should choose between the two types of interest rate, namely fixed and variable:
Fixed Interest Rate
When you choose a fixed interest rate, the rate will remain the same for a certain period of time, like ten years, for example. It would then turn into a variable interest rate. With this type of interest rate, budgeting is more manageable since you know what to expect.
Variable Interest Rate
On the other hand, a variable interest rate can go down or up depending on market changes. It's harder to allocate a budget with this type since the rate constantly changes, but you can benefit if the market shift pushes lenders to lower the interest rate.
5. Don't Forget About The Possibly Hidden Fees
Apart from the interest rate, you must remember that other fees are involved when buying a real estate property. Here are a few examples of these possibly hidden fees:
- Application Fees: Lenders may ask for a fee for the application process. This is negotiable and, in most cases, can be removed completely, given you have a convincing argument.
- Valuation Fees: Lenders won't decide on the total loan on the spot. They would first evaluate the property, and this can cost a bit of money depending on the lender.
- Origination Fees: The lender may also ask for fees covering their administrative efforts in preparing mortgage documents and evaluating your home loan package.
Depending on the lender, there may be more of these hidden fees. Hence, it's advisable to ask the lender for any fees concerning the transaction directly.
6. Compare Home Loan Packages With One Another
Once you're done with the previous steps, you can finally compare home loan packages with one another. For this, a comparison website can be useful, especially since you can easily compare the different terms of each lender's offerings, such as the interest rate, monthly payments, ongoing fees, and more. With this, you should be able to find the right home loan package that suits your needs.
As eager as you may be to apply for a home loan package, you have to remember that not everyone can qualify for a mortgage. You must meet the requirements first, and one of the most important requirements would be a high credit score. The higher it is, the easier it would be for you to qualify. For that reason, you may want to increase your credit score while you're looking for a property and the right home loan package.