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owning a home of one's liking is one of the most cherished dreams of all. At the same time, it could be a challenge to gather enough money to invest on a house you wish to own especially at a time when the expenses involved is increasing by the day. Going for a home loan is certainly one of the obvious solutions to the problem. However there are many factors to be considered before you decide to take a home loan, so that when you have got the home of your liking, you would be also able to do the payback process smoothly and clear yourself from the debt. How much can I borrow before applying for a home loan, the first thing to be determined is the maximum amount you can afford. This will depend upon the factors such as your monthly income, your credit status and the cash available with you for making initial payments.
Generally, the lenders apply an empirical rule when deciding the maximum amount that one could borrow. That is, your monthly repayment should not go beyond 40% of your net monthly income. This fraction is called the IIR or the income to installment ratio. For example, if your net monthly income is $5000, it will be seen that you could repay $2000 (40 % of $5000) per month, and accordingly the maximum borrowable loan for you will be fixed. In this case, if your loan is for 15 years at 13 %, and the monthly repayment (EMI) is $ 1,250 for $1,00,000 borrowed, divide your repayment capacity($4000) by the EMI ($ 1,250 in this case) and multiply by $1,00,000 which would give $3,20,000 as the maximum amount you could borrow. Though a little complicated, this method is useful in having an idea of your current financial position and the limit upto which you could safely borrow without fear of getting into a "loan tornado"
Although the above method is generally followed to determine the maximum borrowable amount, some lenders may show flexibility with the IIR, that is they may allow the borrower to borrow a lower amount than the maximum amount and also in cases where the lending company is convinced of your good financial health, they may also approve a higher loan as well. Another point to be noted while estimating the maximum you can afford, is that how much cash you have saved already. As most lenders lend only 75 85 % of the total value of the property, your ability to make an initial payment can determine how much you can afford to.
Am I eligible to apply: You should be above 21 years of age, employed with a regular income to be eligible to apply for a home loan. The minimum income requirements for the employed and self-employed people differ from one company to another. In case if your income is not sufficient to get you a loan, you could go for an option of applying for the loan jointly with another person. In such a case you may even be able to get a higher loan if adding your income with your co-applicant makes you eligible for a higher amount. Though take good care in choosing your co-applicant to avoid any difficulties in the future.
Finding the right lender: After you have determined the maximum amount you could borrow, you must make a choice from the lot of lenders available. The factors to consider while you do this are
1) the total financing cost which includes beyond the interest, other costs like the processing fees and other governmental charges collected by the lenders in advance.
2) Extent of funding. As some lenders would offer to fund a lesser percentage of the property value, there are others who fund higher. Depending on the cash you have in hand to make an initial payment, you could choose between them.
3) Repayment plans. Certain lenders offer flexible plans for repayment. They may offer plans where the monthly payment is low at the start and increases gradually in the coming months. Lenders also give an option of fixing the monthly payment to the borrower itself in cases where the loan taken is far lower than what they are eligible for.
4) Service. Apart from the usual services, some lenders may also offer extra services which make the job of the borrower much easier in the loan process. They call on the customers home and after getting the application duly filled by the borrower, they themselves will bring the check directly to the borrower.
While making a choice of the lender, factors like the speed at which the loan is processed and the reliability of the lending company, are to be noted as well.
Documents needed: though it may vary slightly with different lenders, if you are employed with an employer, the lender generally will require along with your application, your latest salary slip, employment certificate, proof of your identification proofs of age and educational qualification, copies of agreement of the property and proofs of your bank balance.
Regulations for home loans in Maine: recently, the governor of Maine, John Baldacci signed a bill, LD 1869, which is intended to protect home owners from the menace of predatory lending. The bill, sponsored by speaker Glenn Cummings, requires that prior to the approval of the loan, the lending company, after considering factors such as the borrowers account income, the highest rate of interest that would be charged and other expenses associated with home ownership should ensure that he will be able to repay the loan in time. The bill also bans prepayment penalties and repeated refinancing (popularly known as flipping) that unfairly helps the lender to collect extra fees. The law also requires that the lenders should make sure that the borrowers applying for sub prime loans have taken the advise of a counselor about whether going for the loan would be beneficial to them or not.
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