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Tips on Getting a Loan for a New Home

You may wish you had the means to pay for a new home with cash, but even if you could, you shouldn't. Securing a loan offers significant advantages to savvy homebuyers by allowing them to put down only a small amount of cash relative to the sale price, freeing up the remainder for other investment applications. This concept is known as leverage.

Leverage essentially makes one dollar wield the power of ten dollars. You do have to pay for the privilege of using someone else's money to make up the nine-dollar difference (i.e. your mortgage payments), but the benefits of being able to buy a new home for only a fraction of its total cost are enormous. For most of us, it's the only way we can afford to own a home.

Get Your Credit Rating

Your first step toward securing a loan for your new home is to take a good hard look at your credit score. A good credit rating is vitally important in negotiating good terms for your loan. Though many Americans with poor credit scores have secured loans in the past, that is no longer the case now that the subprime mortgage market has collapsed. Even if it takes you several months or years to clear up your credit and raise your score, the ultimate financial benefits are well worth the time.

Assess Your Finances

Your next step is to determine how much you can afford as a down payment and in monthly mortgage payments. It is very important to ensure that you can consistently afford your mortgage payments based on your current and projected income, and that there is little risk of losing your job or suffering a reduction in pay. You should also be sure you have a cushion for unexpected situations such as medical emergencies. Defaulting on a loan can have drastic consequences, the worst of which is possibly losing your home.

Review Your Loan Options

You're now ready to sit down with a mortgage broker or bank lender and determine the most appropriate structure for your loan. If interest rates are relatively low, it's a good idea to opt for a fixed-rate mortgage to lock in those rates for the duration of the loan term. If rates are high, consider a variable or adjustable-rate mortgage to take advantage of possible lower rates in the future. If rates go down in a few years, you can employ a refinancing strategy to lock them in. Whatever you do, steer clear of mortgage structures that offer you artificially low mortgage payments early on and then reset to a much higher rate a few years down the line. This is the structure that has burned so many people in the subprime mortgage market, and has led to a surge of foreclosures and defaults.

If this is a second or third home, consider creating a corporation as the ownership entity, since this restricts your liability to the property itself. If all your assets are in your own name, someone suing you could go after everything, rather than just the assets associated with the ownership entity. Talk to an accountant with experience in real estate who can walk you through this process.

For more information on getting a home loan and the home-buying process in general, trust We have many years of experience working with homebuyers in Tampa Bay, and we can help turn your dream home into a reality.