Top 6 Things To Know Before Taking A Home Loan In Texas
The process of taking on a loan is a bit more complex than many people think. From advertisements, it seems like many banks are always ready to give out as many loans as possible which contradicts the dreary process one must go through to have a loan approved.
Loans, like other financial investments, require the holder to be well conversant with how a loan product works to avoid getting into financial ruins later.
The following are the important factors to be aware of before getting into a loan contract with your financial institution.
1. Determinants Of Loan Eligibility
One of the most informal ways of qualifying a borrower for a loan is to compute their Equated Monthly Installment (EMI). Often, banks will require you to part with 40 to 50% of your monthly salary which will be directed to pay the loan. Noteworthy, reimbursements and allowances are not considered part of your salary used to net the EMI.
Additionally, your EMI will be negatively affected if the loan holder is servicing another debt elsewhere using their salary stream. In other situations, banks are keen on the number of dependents under the borrower. If more money from the applicant’s salary must be diverted to other important needs, the implication is a lower loan repayment capability.
Aside from the level of income after expenses, the reliability of borrower’s income stream is also questioned. Those borrowers with a more stable income are likely to find the eligibility criteria easier compared to borrowers in self-employment with unsteady income flow.
How old are you will influence the duration of the loan repayment period. Under normal scenarios, loan repayment tenures will not exceed the retirement age unless the borrower has a younger loan co-applicant.
Also, the co-applicant cannot be minor and should have achieved a given number of years for the application process to be successful, – a law that was set up to minimize ownership disputes. A co-applicant can enable the one to get a higher loan amount if the income level of the co-applicant is considered in the eligibility test.
The value of the property also affects the success of a loan application process. Most banks will not lend more than 70-80% of the value of the property to the borrower.
2. The Type Of Loan The Borrower Seeks
The type of interest rating categorizes home loans between loans with a fixed interest rate throughout the loan repayment duration or loans with a floating interest rate that varies from time to time depending on the market conditions.
Just as the name may suggest, for a fixed interest rate loan the interest charged on the loan does not change with fluctuations in the money markets. However, the interest rate on this loan is usually 1-2.5% points above the contract interest rate on a floating interest rate loan.
The clause to add extra percentage points on interest rating for a fixed-rate loan will vary from bank to bank.
The important thing to remember is that the EMI will be affected by the amount of interest charged on the loan. A higher interest rate will increase the number of periodic loan instalments required to be paid to retire the loan.
At face value, fixed-rate interest rate loans may seem a more viable financing option until you speak to a loan expert. When interest rates in the money market fall, the borrower is stuck paying a loan above the interest rates; the borrower’s existing home loan proves quite expensive in the long run when interest rates fall.
In such a fixed-rate loan case where interest rates fall, a borrower is legally required to pay an equal amount of interest charges all the time regardless of the level at which the interest rates in the money markets are prevailing at.
Additionally, it is common for banks to insist on adding an interest rates review clause in the loan contract where the bank exploits avenues to raise the interest rate on the home loan after a fixed period or a drastic rise in interest rates.
On the other hand, floating rates are more preferred unless the borrower (with the help of a loan’s expert) can rationally foresee a big increase in interest rates in the market over the loan tenure.
You can use any of the interactive features on our website or call us anytime to speak to a diligent mortgage professional directly. We hope to work with you soon! Click here to go to the second article in this series.