Applying for a mortgage is one of the biggest financial decisions that you will make over the course of your life. Your home loan will probably be the largest debt you ever take on. And it will take you decades to pay off your loan, depending on your chosen term.
You don’t want to jump into making such a major financial commitment unless you’re 100% sure you’re prepared to be successful at getting approved for an affordable loan and paying it off on schedule. To maximize the chances of both those things happening, here are four things you need to do in your financial life before you apply for a home loan.
1. Save an emergency fund
Mortgages come with large monthly payments. Failure to make them can have devastating long-term consequences. You could face foreclosure and see your credit ruined. You don’t want that to happen.
That’s why it’s so crucial to save up an emergency fund to cover three to six months of living expenses before you apply for a mortgage. After you get your home loan, if you lose your job or your hours are cut or you develop expensive medical issues, your emergency fund can help to ensure you don’t fall behind on your home payments.
As a bonus, your emergency money will be there to help cover unexpected home repair expenses that arise. While you may be used to a landlord paying for appliance fixes or other repairs if things go wrong, these costs will be your responsibility once you become a homeowner.
2. Save a down payment
Saving up a down payment is crucial before getting a mortgage for a few reasons. First and foremost, most lenders require you to put at least some money down.
Ideally, this will be 20% because otherwise you’ll be charged an added fee for private mortgage insurance that protects the lender from losses. But, a minimum of around 3% to 10% is mandated by most lenders. So even if you don’t save 20%, saving something will still be crucial.
The more you can put down, the less you’ll need to borrow, the lower your interest rate, and the more choices you’ll have for who to get your loan from. These are other reasons why it’s a good idea to save up a down payment before applying for a loan.
Finally, you don’t want to end up with negative equity. That happens if your home loan balance is larger than the current market value of your home. Without a down payment, a small …….