What You Need to Know About Home Loans

If personal loans are loans you take out for personal use, home loans are loans you take out specifically to buy a house. On the surface it sounds pretty straightforward, but there are some important wrinkles unique to home loans that’s worth exploring.

You Have to Put Some Money Down Yourself

First off, the bank won’t lend you all the money you need for your new house (with exceptions; more on that later). They will usually loan out 80% to 90% of the home’s purchase price to a borrower. This means that you have to come up with 10% to 20% of the property’s market price yourself before applying for said loan so you can buy the house.

Why don’t banks just loan you 100% of the money you need like they can with personal loans? The short of it is that historically, when they did, it hasn’t been profitable for them to do so. Houses are expensive and people often take 20 to 30 years at least to pay off their home loan. That’s a long time for a bank to wait on their returns. It’s also a long enough time that borrowers’ financial standing might change such that they may not be able to continue paying the loan, which means further losses on the banks’ part if they default.

To protect themselves from these risks, banks only elect to lend out a certain percentage. Big enough to make the loan worth it, but also just short enough to make the borrower commit to the loan.