Unlike a decade ago when people strived to have their own houses, nowadays, where the market rates are soaring high, it is almost impossible for people to purchase their own homes. Thankfully, home loans exist to ease the burden. But the process of obtaining home loans can be tedious and time-consuming. You have the option of selection from a broad range of providers and types of home loans. To make the process easier, here’s a simple guide that will help you figure out how to overcome the obstacles that most borrowers face when trying to obtain a home loan.
How to Apply for a House Loan
A home loan is the lending of money from lenders such as banks and other financial institutions to an individual for the purchase of a house. A borrower is expected to pay back the money within an agreed upon duration of time between 15-30 years with an interest rate on top of the amount issued.
Home loans are secured loans whereby the property that is bought becomes collateral. This means that in the case where the borrower is unable to make repayments, the lender is able to take ownership of the property in order to recuperate their finances.
With the number of banks and non-banking financial companies (NBFCs) in the market, it becomes difficult to choose the right home loan that is suitable for you. In Kenya, home loans are obtainable in two major types:
- Fixed-Rate Loans: The interest rate on the principal amount is constant throughout the period of the loan.
- Floating-Rate Loans: A loan in which the interest rate is not fixed and the borrower pays according to the fluctuations in the market.
Key Steps to Getting a Home Loan
1. Confirm Your Credit Score
When a borrower approaches a bank for a home loan, the credit score is an important cashier. A score above average 700 almost always puts the borrower in a favorable position. Low scores attract higher interest rates and in some cases, rejection of the loan sought. Improvements to score can be achieved by settling debts, removing negative marks and maintaining low credit balances. Pay close attention, the score indicates the repayment behaviour of the borrower; the healthier the score, the lower the risk.
2. Maintain a Steady Source of Income and Employment
A lender will also want to ensure that you are in a position to service the loan on a monthly basis. A stable income and a work history of at least two to three years is a positive indicator of how you are faring financially. If you are a freelancer or work on contracts, you can submit your financial statements and tax returns as proof of your income. A greater income increases your ability to pay off the loan each month, increasing your chances of being approved.
3. Start Putting Money Aside for a Down Payment
With a home equity loan, you are allowed to borrow a large sum of money that is equivalent to a good part of the value of the home. But you will need to pay a down payment on the loan. The minimum deposit required is usually within the range of ten to twenty percent of the purchase price. The deposit you make also serves as collateral and as such, the bigger the deposit, the more protection the lender has. This may also mean that you qualify for a lower interest rate.
4. Analyze Your DTI Ratio
The debt-to-income ratio is applied by lenders to determine a borrower’s capacity to service a loan. The DTI stands for the value of the monthly debt repayment obligation geared towards servicing loans, expressed as a percentage of the gross income. DTI tends to be lower for people with greater post-loan repayment income. The DTI which is favorable should ideally be less than 36% of the monthly gross income. In such a case, the borrower may want to consider paying off other loans or increasing income before taking on a home loan.
5. Look Into Different Lenders And Their Deals
There are various types of home loans. Not all lenders have the same interest rates, terms, and fees. First, it’s best to try to gather more than one home loan offer and make a comparison. It is necessary to also consider other factors such as interests, processing fees, prepayment charges, and the ability to make amendments to the loan. You can narrow down the right loans for your circumstances using comparison sites online.
6. Leverage Government Schemes
The government offers subsidized home loans for new buyers at affordable interest rates. For example, in India, the government has implemented the Pradhan Mantri Awas Yojana (PMAY), which allows certain applicants to receive home loan interest subsidies. Such schemes can ease your financial burden and make owning a home a reality.
7. Loan Pre-Approval
If you’re looking to purchase a house, getting pre-approved for a home loan means providing your financial information to a lender so they can decide if you can qualify for a loan or not. Doing this gives you a clear picture of how much money you will be able to borrow, what your monthly payments would look like, and your approval chances. Additionally, it makes you look like a serious buyer, which puts you at an advantage when closing a deal with sellers.
Unique Techniques To Increase Your Chances
1. Apply With A Co-Applicant
If you do not meet the criteria independently, you can add a co-applicant, usually a spouse, parent, or sibling who has a good credit score and a stable job. Doing this increases your chances of getting a good loan amount and lowers your interest rate. However, you will have to pay back the loan together.
2. Go for Shorter Loan Terms
Yes, the monthly payments would be lower with long loan terms, but the interest will be much higher. Picking a lower loan tenure will not only be approved faster but will also be easier at the time of paying it off due to lower risk. That is the other reason one should go for a lower loan tenor.
3. Do Check for Specific Lender Deals
There could be certain banks that would have deals or terms that could benefit you. For instance, some allow their clients to change their EMI according to their current financial status. This helps if you find yourself out of a job or circumstances change and you need the time to recover.
To Summarize
It is quite clear that one must have a strategy and a good plan when looking for a home loan. But with the right things done, like applying for it with a good credit score, proper research by saving for a down payment, as well as looking into different lenders and even government schemes, your ability to get a home loan is limitless. Most importantly, don’t lose hope, being well mannered and patient will eventually let you achieve your goal of having a home.