How do home loans work?

Home loans are used to purchase a home, piece of land, or another type of real estate. A home loan is sometimes also called a mortgage.

The home loan amount will depend on a few factors. Lenders will look at the type of home, your financial history, and current interest rates to create a loan offer.

Home loans are some of the most common loans in the U.S. On average, 65% of home buyers use a home loan to buy a home.

For 99% of the population, buying a home will be the most expensive purchase of their lives. Thus, understanding how home loans work is important for your financial future.

How to use the home loan calculator?

The home loan calculator above will tell you your monthly payments and the expected interest amount. All you need to do is input the size of the loan, the loan terms, and the interest rate associated with your home loan.

What size home loan can I afford?

If you are looking to buy a home, you will want to figure out what size home loans you can afford. In general, home buyers can afford between two and two and a half times their annual gross income.

If you earn $150,000 per year, you should look at home loans between $300,000 to $375,000. However, lenders may be willing to offer higher home loans based on your credit history. Additionally, the same rule applies to couples. Couples who make $300,000 in joint annual gross income can afford home loans between $600,000 and $750,000.

Homebuyers should also consider the down payment they need. In general, first-time buyers will make a 6% down payment on their home loan. However, repeat home buyers will make a 13% down payment on average. You will always receive better interest rates with a larger down payment.

What home loan can I get with bad credit?

For most home loans, lenders want you to have a credit score of 620 or higher. The better your credit score is, the lower your interest rates will be.

If you have bad credit, don’t panic. In the U.S. there are many programs to help people with bad credit buy a home. FHA loans are a common home loan for people with bad credit. FHA loans are for first-time home buyers. Most FHA loans require a minimum credit score of 500.

Compared to other home loans, FHA loans need a smaller down payment. For homebuyers with a credit score of 580 can apply for an FHA loan with a 3.5% down payment.

The U.S. government offers special home loans for veterans. VA loans allow veterans to buy a home with $0 down and a minimum credit score of 580. The U.S. government also offers loans for prospective farmers. USDA loans allow people to buy homes with $0 down and a minimum credit score of 640.

These home loan options offer buyers with bad credit several ways to afford a home. However, buyers with a better credit score that offer a bigger down payment will receive better interest rates on their home loans.

Are home loan interest rates going up?

Home loan interest rates depend on market conditions.

The U.S. central bank plays the largest role in determining interest rates. The central bank is in charge of maintaining economic stability. The central bank can affect the economy by buying/selling bonds and other policy actions.

During hard economic times, interest rates will rise. For instance, rising inflation in 2022 has caused interest rates to rise. Conversely, when the central bank wants to encourage investments, interest rates will fall. During the covid-19 pandemic, the central bank wanted to boost the economy which led to historically low-interest rates.

While interest rates are determined by external factors, you can take action to lower your interest rates. By offering a larger down payment, lenders will offer better interest rates. Further, if you improve your credit score before buying a home, you will receive lower interest rates.

Where can I get a home loan?

Because home loans are so common, there are many places to apply for a home loan. In general, credit unions and banks are the best places to apply for a home loan.

Since home loans are so important, you will want to work with an experienced lender who understands your financial situation.  Your loan options will vary depending on the type of home you want and your credit history.