Get the Right Loan for You
Loans. You know you're officially a grown-up when you need one. But the application process is daunting. Almost half of aspiring homeowners give up on getting a mortgage, and one in five shoppers says that negotiating financing is the worst part of buying a car. Still, loans get you what you want -- a house, an SUV, that brand-new kitchen. We help make it a little less painful.
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 vice president of financial advice for LearnVest.com. If you have more debt than that, pay it down first.
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.com. "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).
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 preapproval 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 like Zillow.com 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. Once you find the best deal, you can usually complete the application online. Mortgages and home-equity loans require additional paperwork, but you can send it all via e-mail. 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.com and the car-loan calculator at TimeValue.com.
But 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 author of Living Rich for Less. 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.com's loan-interest calculator to see how much less you'll pay in the long run by making a larger up-front payment.
Make No Mistake
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 Stephany Kirkpatrick. Limit financing to the loan itself.