5 things to learn about before you apply for a home financing program
Home ownership is one of the most important long-term financial investments most families will ever make. And with a number of financing companies offering different types of home financing products, access to homeownership has become a lot easier for people.
But with all of the options facing you, preparation is key. To make sure you go into this important step prepared to secure the best arrangement for you and your family, it’s important to do a little preparation and research ahead of time.
Read on to learn about vital things that you should consider before you apply for home financing.
Preparing for a Major Milestone
Buying a home is a significant milestone. Whether you’re purchasing your first home, upgrading to a larger space, or investing in property, the type of financing you choose can have a profound impact on your financial well-being.
Selecting the right financing — and the right financier — is essential for ensuring that your home-buying journey aligns with your values, lifestyle, and long-term goals.
Factors to Consider When Choosing Home Financing
When deciding on home financing, there are several key factors to keep in mind:
- Affordability: Before committing to a financing option, evaluate your budget. Consider not only the monthly payments but also additional costs such as property taxes, insurance, and maintenance. Ensure that your financing choice fits comfortably within your financial means.
- Flexibility: Look for financing options that offer flexibility throughout the mortgage process. This might include the ability to make extra payments without penalties, adjust your payment schedule, or refinance if needed. Flexible terms can provide peace of mind and adaptability to changing circumstances.
- Transparency: Choose a financier that provides clear, upfront information about fees, rates, and terms. Hidden costs or unclear terms can lead to unexpected challenges down the road.
- Alignment with Values: For many, aligning their financial choices with their personal or religious values is a top priority. This is particularly true for individuals seeking ethical or socially just financing options.
5 Steps to Take Before Applying
Now that you’ve considered those factors, you’re closer to being ready to choose a financier and a mortgage.
Here are five steps to take to ensure that you are prepared and that you choose the arrangement that suits you best.
1. Examine and improve your credit history
If you’re aiming to secure the best home financing contract with favorable terms, improving your credit score is crucial. A good credit score reflects your financial reliability, and higher credit scores can significantly influence the rates and terms you’re offered. Here’s how to enhance your credit profile effectively:
- Establish a Strong Payment History: Consistently paying bills on time is one of the most impactful ways to boost your credit score. Ensure that you pay all your bills — including credit cards and utilities — promptly each month.
- Reduce Outstanding Debt: Lowering your credit card balances and overall debt-to-income ratio can positively impact your score. Focus on paying down high-interest debt first while maintaining regular payments on other accounts.
- Be Strategic with New Accounts: If you’re considering opening a new credit account to boost your available credit and improve your credit score, do so well in advance of applying for home financing. Opening a new account may temporarily lower your score due to a hard inquiry and the reduction in the average age of your credit accounts. Waiting several months after opening a new account before approaching a financier allows your score to stabilize.
- Monitor Your Credit Report: Regularly check your credit report for errors or inaccuracies that could negatively affect your score. Dispute any incorrect information promptly to ensure your credit profile accurately reflects your financial behavior.
- Avoid Excessive Credit Inquiries: Each credit inquiry can slightly lower your score. Limit the number of times you apply for new credit, especially in the months leading up to your financing application.
Taking these proactive steps will not only improve your credit score but also demonstrate your financial responsibility to potential financiers, increasing your chances of securing the best possible terms for your home financing.
2. Choose a mortgage and financier that match your needs and values
Take time to explore home financing options before choosing a financier and a mortgage. It’s important that you choose a home financing program that would match your needs and values.
A traditional mortgage loan is no longer the only option. More equitable alternatives to conventional loans like Islamic home financing are now growing in popularity and may better align with your values.
Islamic Home Financing: A Path to Value-Aligned Homeownership
For individuals seeking financing that aligns with Islamic principles, Guidance Residential offers a unique and ethical solution. Islamic home financing is rooted in the principles of fairness, shared risk, and social responsibility. Instead of traditional loan-based models, this approach uses a co-ownership agreement, where the financier and the homeowner share ownership of the property. Over time, the homeowner gradually buys out the financier’s share until they own the home outright.
Here are some of the benefits of choosing Islamic home financing through Guidance Residential:
- Riba-Free Structure: Islamic home financing avoids interest (riba), making it a suitable choice for those who adhere to Shariah principles.
- Transparency, Fairness, and Flexibility: The terms of the agreement are clear and equitable, and Guidance Residential’s program allows home buyers to make payments early with no penalty. The company also shares some of the risks of homeownership with the buyer in a way that traditional mortgage lenders do not offer.
- Social Responsibility: By choosing Islamic home financing, you contribute to a system that prioritizes ethical practices and community well-being.
3. Get Pre-Approved
Pre-Approval is an important step for any prospective homeowner once they begin getting serious about buying a home. Starting your home search without getting pre-approved for financing might seem harmless, but it can lead to unnecessary stress and missed opportunities. Mortgage pre-approval is a crucial step that provides a clear understanding of how much home financing you can qualify for, helping you set realistic expectations for your budget and dream home.
During the mortgage application process, financiers evaluate key factors such as your current income, credit score, outstanding debts, and other financial commitments. This thorough assessment determines the amount of financing you’re eligible for, ensuring you don’t fall in love with a home that’s beyond your financial reach. Without pre-approval, you risk being blindsided by a lower financing offer than anticipated, potentially derailing your plans.
But pre-approval isn’t just about numbers — it’s also a powerful tool in a competitive housing market. A preapproval letter demonstrates to your real estate agent as well as to home sellers that you’re a serious buyer with the financial backing to close the deal. This added credibility can give you a significant advantage, especially in a competitive market.
In short, being approved for a mortgage not only streamlines your home-buying journey but also positions you as a confident and prepared buyer. So, before you start touring open houses or browsing listings, take this essential step to set yourself up for success.
3. Be ready with your documents
During and even after the pre-approval process, you will need to show various types of documentation to demonstrate to the financing company the resources you have available as well as the payments you are making on a regular basis. This financial paperwork will help your financing company understand about your financial status.
Besides your credit report and payment history, the financier will check your employment history, tax returns, your bank account transactions, legal settlements etc. You could be provided with a checklist of documents such as pay stubs, bank statements, and other financial records to be submitted for this purpose.
Produce these documents with care and precision in a timely fashion to keep your home purchase on track. Make sure to submit all pages of all documents, even blank ones. This way, your financier will have the information they need to provide financing for your home — and you can stay on track for your closing date.
4. Know your home payments in detail
Prospective home buyers need to be fully prepared for the two types of payments they will need to make: 1. Up-front costs including the down payment, and 2. Monthly mortgage payments.
Down payment and closing costs
When buying a home, two significant upfront costs to plan for are the down payment and closing costs. These expenses are essential parts of the home financing process and should be factored into your budget early on.
- Down Payment:The down payment is the initial amount you pay toward the purchase of your home. It is typically expressed as a percentage of the home’s price and can vary depending on the type of home financing you choose and your financial situation. While some home financing options may allow for lower down payments, contributing a higher amount upfront can reduce your monthly payments and overall financing costs.Many homebuyers aim to save between 10% and 20% of the home’s price for the down payment, but options for smaller percentages as low as 5% or even 3% may be available. Additionally, some programs are designed to assist first-time buyers by reducing down payment requirements or offering grants.
- Closing Costs:
Closing costs are the fees and expenses associated with finalizing your home purchase and securing home financing. These costs typically range from 2% to 5% of the home’s purchase price and may include the following:- Title Fees: Covering the transfer of ownership and title insurance
- Appraisal and Inspection Fees: Ensuring the home’s value aligns with the purchase price and verifying its condition
- Taxes and Prepaid Costs: Including property taxes and homeowner’s insurance premiums for the first year
- Administrative Fees: Covering documentation, processing, and other services related to home financing
Request a detailed breakdown of your estimated closing costs early in the home financing process so you can plan accordingly. And start saving early so you’re as prepared as you can be.
Monthly mortgage payments
When budgeting for your new home, it’s also important to understand the four key components that make up your monthly home payments: principal, profit, taxes, and insurance. Let’s break these down:
- Principal and Profit: These two components form the core of your home financing payments. The principal represents the amount allocated toward acquiring the home, while the profit (which is known as interest in a traditional mortgage loan, or it may be a different form of profit in an alternative type of mortgage) is the cost associated with the home financing. Together, these payments ensure progress toward full ownership of your property over time.
- Property Taxes: Property taxes are an ongoing expense tied to your home’s location. The amount varies depending on the county or municipality you live in, with the national average hovering around 1.2% of your home’s assessed value annually. These taxes fund local services such as schools, road maintenance, and emergency services.
- Homeowner’s Insurance: This insurance protects your investment by covering repair or replacement costs in case of unforeseen events such as natural disasters (e.g., floods, earthquakes) or other damage to your property. The cost of homeowner’s insurance can vary depending on your home’s location, size, and risk factors, so it’s wise to shop around for the best coverage and rates. If you put down a down payment of less than 20%, you may also need to pay for additional mortgage insurance. Speak to your financier about the requirements.
Additional Monthly Costs to Consider
If your home is part of a condo association or a planned development, you’ll also need to factor in homeowners’ association (HOA) fees. These fees cover the maintenance and upkeep of shared amenities such as swimming pools, gyms, landscaping, and other common areas. HOA fees can vary widely based on the community and its amenities, so it’s important to include this cost in your budget.
By understanding these components, you’ll have a clearer picture of your financial commitment and can better prepare for the long-term costs of homeownership. Being informed about these details will help you avoid surprises and make confident decisions throughout your home-buying journey.
A path to success
The more you understand the requirements of a home financing program beforehand, the easier it will become as you go ahead with it. By keeping all the above areas covered, you can be in a better position to work out your home financing a lot efficiently.
Selecting the right home financing is a deeply personal decision that requires careful consideration of your financial situation, long-term goals, and personal values. Whether you prioritize affordability, flexibility, or ethical alignment, take the time to research your mortgage options more thoroughly. For those seeking a financing solution that aligns with Islamic principles, Guidance Residential offers a pathway to homeownership that is both ethical and financially sound.
Embarking on your homeownership journey is an exciting step. With the right financing partner, you can achieve your dreams while staying true to your values.
Ready to Get Started?
Buying a home is one of the most important decisions you will make. The team at Guidance Residential is here for you, from the first step of pre-qualification or pre-approval, on through to finding the right real estate professional for you and your family — or refinancing a home you already own. We invite you to explore the home buying process with Guidance Residential today. You can also instantly calculate an estimate specific to your personal situation with our finance calculators online.
Guidance Residential remains the #1 U.S. Islamic home financing provider, with more than 40,000 families assisted over more than 20 years. Learn more about our co-ownership model of Islamic home financing, and get started on your home finance journey today.
Your Guidance Residential Account Executive is here to help with any questions. Looking to refinance or purchase? Have a friend or family member who is looking for a home? Call 1.866.Guidance, or start an application today.
Originally published in December 2015, updated December 2024.
