Read This Article Before Shopping for Your First Mortgage
Buying your first home is one life’s most rewarding and memorable experiences. But if you aren’t careful, it can wind up being an experience that you may regret for years to come.
Whether you have a positive experience or a negative one will likely be determined by how prepared you are for the process. As always, the more you know, the better off you will be and the more likely you will be able to avoid many of the common pitfalls that can turn the mortgage process into a nightmare.
So, here’s some of the most important things you need to know before you start applying for your first mortgage.
First Things First – Your Credit
Qualifying for a mortgage today isn’t as easy as it was back in the 90s. Today, having good credit is not only essential for getting a low rate, but you also need it just to get prequalified. So, before you even start applying for mortgages, you first need to check your credit.
Find out your credit score and then check your credit report carefully for any errors. If you find errors, dispute them to have them removed. Continue to check your credit report to make sure the errors are removed before you apply for a loan.
When you are ready to apply, avoid opening any new lines of credit or missing any credit payments as these will make your score drop. If anything changes on your credit report from the time you apply to the time you close on the home, you could wind up being denied for your mortgage loan.
Crunch the Numbers – Create a Budget
While your credit history is very important, what any lender really wants to know is whether you can afford to repay your mortgage. As a result, they will look at how much your prospective mortgage payments will be compared to your income. So, knowing how much home you can realistically afford before you start applying for loans is critical.
To help you determine how much home you can afford, you should create a budget, so you know where your money is going and how much you comfortably afford to spend on not just your monthly mortgage payment, but all the other expenses that come with owning a home. When creating your budget, here are some of the major items to account for when factoring in your new home:
- Mortgage principal
- Mortgage interest
- Property taxes
- Homeowner and mortgage insurance
- Utilities (electricity, water, gas, cable, internet, etc.)
- Repair expenses
-
Condo or homeowner’s association dues
Down Payment – The Bigger the Better
While there are some loan programs available in which you can get approved without having to put a down payment on the home, like VA loans, you may want to opt for putting money down because how much you pay upfront will play a role in how much your monthly payments will be.
When it comes to down payments, the more you can put down, the better off you will be. A larger down payment will make it easier for you to get approved by lenders and it will help you secure the lowest possible rate.
Get to Know Your Mortgage Loan Options
Today, home buyers have access to a wide variety of mortgage options. For instance, while most home loans have either 15- or 30-year terms, there are also shorter-term loans that offer home buyers higher monthly payments but with lower interest rates and lower total costs. In the world of mortgage loans, longer-term loans tend to have lower monthly payments with higher interest rates and higher total costs, so depending on your income, paying more every month for a shorter-term loan could wind up saving you money over the long term.
Loans also come with either fixed-rates or adjustable rates. For first time buyers, fixed-rate loans tend to be preferrable because they offer predictable monthly payments. Adjustable-rate loans may offer the benefit of a lower monthly payment at the start of the loan, but after a designated period, the rate adjusts based on the market’s rate. Should the interest rate rise, then the mortgage payment will also rise, making this type of loan riskier for lenders and borrowers alike.
When it comes to choosing the type of loan you want, you also have plenty of options here. While most mortgages processed are considered conventional loans, there are certain products that are geared more for first time buyers. For instance, an FHA loan is often preferable among first time buyers because it typically carries lighter approval qualifications and can be acquired by putting as little as 3% down. There are also zero-down home loans available from the U.S. Department of Agriculture and the U.S. Department of Veteran Affairs for those who meet the qualifications.
When Should You Buy Your First Home?
Buying your first home is the single largest investment you will make in your life to this point, so you want to get it right the first time. Take the time and put in the work necessary to help ensure that you are in the best position possible to get the loan you want at the lowest rate.
With interest rates starting to rise, now is the time to get to work if you are planning on buying a home and want to take advantage of the low rates. The sooner you’re ready, the better off you’ll be at getting the home you want at a price and rate that fits your budget. Just don’t sacrifice the prep work!
