Understanding Loan Terms

Understanding Loan Terms

Ready Your Financials And Buy A Home

by Gregory Hall

Finding a perfect home is only one part of the home-buying experience. The buyer that understands their financial situation first and then finds a home second is a prepared buyer.

Set Up a Budget

Debts compared to income is an important calculation to lenders. Debt to income (DTI) equals the percentage of debts compared to your income. Lenders vary in the ratio they expect borrowers to demonstrate. Add your current debts to any potential new debts like the mortgage payment, property taxes, homeowners' insurance, private mortgage insurance (if required), and so on. Your lender will advise you on what they want to see, but a DTI of no more than 36% debts compared to income is often preferable.

Focus on Your Credit Report and Score

Credit errors take time to correct and be reflected in your report so review the report as soon as possible. A few late payments, charge-offs, and other negative issues will impact your ability to get a mortgage. You may still be offered a loan, but the interest rate may be higher because of your credit report and score. When the interest rates rise, it affects how much you will pay for your home, how much you can afford, and your monthly mortgage payment.

Government-backed loans have less-restrictive credit score requirements while conventional loans may require higher scores. The type of loan you choose will undoubtedly affect your chances of approval if you have a low score.

Know About Loan Terms

Your interest rate, the type of loan you choose, and the length of the mortgage all affect your loan situation. Interest rates can be fixed or adjustable. It can be risky to choose an adjustable-rate mortgage since the rate could rise after a few years of stability. However, some borrowers need the initial low rate an adjustable-rate mortgage provides if they have issues with credit, a low down payment, and more. Adjustable-rate loans usually have yearly caps and an initial fixed period. If you plan to move in a few years, an adjustable-rate loan may be ideal.

Loan terms are usually either around 15 or 30 years. However, lenders are increasingly offering loans that are shorter than 15 years. The savings for shorter-term loans over the traditional 30-year loan can be dramatic and allows borrowers to build up equity more rapidly in the home. The monthly cost, however, can be prohibitive for some.

For more information, contact a mortgage loan service in your area.


About Me

Understanding Loan Terms

When I started my own company, I knew that I needed a little business capital and fast. In an effort to raise money, I worked with various lenders to discuss loans, financing, and special terms. Unfortunately, I quickly discovered that not every loan was created equally. Some loans had almost predatory terms like high interest rates and penalties, while others were completely fair. Fortunately, a business consultant of mine taught me about loans and financing, so that I could make better choices in the future. The information on this blog saved my business, and I know that it can help yours too.