How to Get The Right Loan for You
Whether you're looking to buy your first family home, adding space in your home for a growing family, or looking to upgrade your car to a minivan, you will likely need to get a loan at some point. Applications for loans (such as mortgages and auto loans) require you to dive into your family's finances and show proof of everything from your payment history to credit score to income to debt.
But the process doesn't need to be as intimidating as it sounds. Here are expert tips on how to get your finances prepared to get a loan so you can secure the funds your family needs.
Assess Your Current Debt
Lenders have specific requirements: Your debt-to-income ratio—how much you owe compared with your pretax income—shouldn't exceed 43 percent, including the proposed mortgage. Experts also recommend that your non-mortgage obligations (including any car loans you're considering) stay below 28 percent, says Stephany Kirkpatrick, CFP, Moms Money Clinic advisor and CEO of digital money movement platform, Orum. If you have more debt than that, pay it down first.
With all the additional expenses you have as a parent, it can be difficult to pay down debt you already have. If you have debt that has been difficult for you to pay off, look into refinancing your loan.
"Refinancing can get you on a path to repayment, improve your credit score, and put you in a position to qualify for the next loan you need," says Melanie Hanson, editor in chief of Education Data Initiative, Refinance. "Refinancing is almost always a smart call for credit card debt, but most people don't realize that interest rates on refinancing can often be low enough to make it worthwhile for student loans as well," Hanson explains.
Check Your Credit
The higher your score, the more likely you are to qualify for a loan with a low interest rate. Before applying, pull a free credit report from the three major bureaus at AnnualCreditReport.com to make sure there are no errors or surprises. While they charge a fee for your score, you can snag it gratis at CreditKarma.
"A score in the mid-700s or above will get the best interest rate," says Farnoosh Torabi, Moms Money Clinic advisor and host of the So Money podcast.
Gather Your Paperwork
While not every loan requires the same degree of documentation, be ready to produce tax returns for the past two years, recent pay stubs, bank and credit-card statements, proof of car or homeowner's insurance, and records of your other debt (such as student loans).
On the market to buy a new family car? Taking this step before you apply for a car loan makes it easier to negotiate a price with the dealer independent of the financing—or to solicit a better offer—according to Ronald Montoya, consumer-advice editor for Edmunds.com. It may also expedite the mortgage process, which is important in a tight market.
"Having a loan pre-approval in hand positions you as a serious buyer and makes you more attractive to sellers," says Torabi.
Choose the Right Lender
Start at a lending-comparison site such as Zillow for mortgage and home loan rates or Credit.com for auto loans. Mortgage brokers are another option for finding a good rate, though keep in mind that they may not have access to some bigger banks, and their fee is factored into the cost. It's also worth checking with local banks and credit unions, which may not appear on aggregate sites. Call prospective lenders (usually banks) and ask for a disclosure of all fees and closing costs so you can make a direct comparison. Also, check whether they'll beat or match another creditor's terms.
"Compare interest rates," savings expert Andrea Woroch tells Parents. "Rates can vary from lender to lender, and that can impact the cost of your loan and borrowing significantly," says Woroch.
Once you find the best deal, you can usually complete the application online. Mortgages and home-equity loans require additional paperwork, but you can email the forms. Bottom line: You never need to see your lender face-to-face unless you want to.
Know Your Limit
What a lender believes you can borrow and what you can comfortably handle may be two contrasting things.
"Just because the bank is offering $200,000 doesn't mean you should take it," Torabi says. Tying yourself to a hefty monthly payment for 30 years—or even five years for a car loan—could handcuff you if your budget changes (if you have more kids or switch jobs, for example). Online tools can help you figure out how much you can safely borrow: Try the home-mortgage calculator at MyFico or Bankrate's auto loan calculator.
Finance the Minimum
Borrowing all or the vast majority of a purchase is a mistake. "When you put a small amount down, you end up paying a lot more interest," says Ellie Kay, Moms Money Clinic advisor and family finance expert.
Instead, keep your old car for another year, or wait to buy a home and double down your efforts to save. Need motivation? Use Bankrate's loan-interest calculator to see how much less you'll pay in the long run by making a larger up-front payment.
Avoid Bundling Fees Into Your Loan
Many borrowers blindly agree to wrap various fees (such as the license and registration costs for a car or the processing expenses on a mortgage) into a loan. While this makes the terms look favorable, you'll pay more on the back-end due to interest fees, says Kirkpatrick. Limit financing to the loan itself.
Meet With A Financial Advisor
Every family's financial situation is unique, so if you are able to, meet with a financial advisor who can better assess your situation and help you finance your goals.
"Having children immediately changes the way you handle your finances, with how, what, and where you should save," says Jake Hill, CEO of online debt-relief platform, DebtHammer. A financial advisor "will be able to assess the parents' current financial situation, their goals, and their predicted life changes," adds Hill.
He says that while there are a ton of great resources online, a qualified financial advisor is a better bet and will be able to help parents more accurately. "Many personal details can impact one's best financial decisions," says Hill.