Buying your first home is exciting, but it can also be bewildering. Of all the daunting tasks facing first-time buyers, probably the toughest is getting to grips with the mortgage market.
If you’re new to the world of home loans, you may be thinking, “Where to start?” Do not be afraid! We are here to guide you through it, step by step, so that you can make informed decisions and feel confident every step of the way.
Table of Contents
What is a Mortgage?
Before we get into the details, let’s go over what a mortgage is. A mortgage is an amount of money lent to a person for the buying of a house.
It’s collateral in itself, that if in case you default on your payments, the house would remain with the lender.
Serious business, yes? Yes, but with just a tad of knowledge, you can pass through everything easily.
Types of Mortgages: Which One Is Right for You?
There are quite a number of types of mortgages available, and choosing the right one is extremely important. The several types can be listed under one main heading of two categories:
Fixed-Rate Mortgage
The fixed-rate mortgage is one in which the rate of interest does not change during its tenure. In other words, your monthly repayment amounts would also not differ throughout, making budgeting easy without any financial surprises.
Fixed-rate mortgages are extremely popular among first-time buyers for this very predictability of the mortgage.
Adjustable-Rate Mortgage (ARM)
An ARM is a kind of mortgage in which the interest rate can fluctuate over the years. It is generally lower for the first couple of years and adjusts periodically based on market conditions thereafter. While this may grant you lesser initial payments, remember that your payment amount can increase manifold after some time. Use our Compound Interest Calculator to understand how changing rates can impact your payments over time.
FHA Loan
An FHA loan is a loan insured by the Federal Housing Administration; it is for first buyers. These loans normally require a smaller down payment and have easier credit requirements. These typically have mortgage insurance associated with them, further increasing your monthly expenses.
VA Loan
If you are a veteran or an active military person, then you are entitled to a VA loan. Since the rates of interest are competitive, there is no down payment or mortgage insurance involved with VA loans, and it is a very good option if qualified.
USDA Loan
If you are going to look in rural areas for your house, then a USDA loan can be availed at low interest and no down payment whatsoever against it. The loans are guaranteed by the U.S. Department of Agriculture, purposed to facilitate buying in less populated areas.
How Much House Can You Afford?
It is important that you can determine the price you can afford before house hunting. This is a simple method of estimating:
- Calculate Your Income: Add up all your sources of income. It will include salary, any bonus, freelance work, or other forms of income. The whole reason this is important is so you will know exactly how much you can afford.
- Take into Account Your Debts: Next, calculate all your monthly debts from car payments, student loans, to credit cards. Your debt-to-income is going to be factored into how much you can borrow. Generally speaking, the lower the DTI, the larger amount one can borrow.
- Down Payment and Closing Costs: Be sure to budget for your down payment and closing costs. The typical down payment can be up to about 3-20% of the price of the home purchase, while closing costs can be around 2-5% of the loan amount. Build enough savings for covering these costs.
- Utilize a Mortgage Calculator: A mortgage calculator is certainly the handiest gadget which can assist you in estimating your monthly payments with regard to different loan amounts, interest rates, and down payments. This will give you a clear picture of what you are able to afford comfortably.
Mortgage Application Process: What to Expect
The whole process of a mortgage application might be quite overwhelming, but forewarned is forearmed. Here’s what you can expect from the process:
- Get Pre-Approved: The best first step you can take to prepare for house hunting is to seek pre-approval for a mortgage. You’ll share your financial information, and a lender decides how much they’re willing to lend to you. A pre-approval letter tells sellers you are a serious buyer.
- Choose a Lender: You have pre-approval, and now it is time to get settled down with a lender. You should go out and shop around for interest rates and fees and the customer reviews with regard to customer interaction. Do not be afraid to ask questions and negotiate the terms. This is among those huge financial decisions you are going to make in life; therefore, it is pretty significant that you find a lender whom you can trust.
- Apply: Once you have chosen a lender, now you will formally apply for your mortgage. You will be asked to provide detailed information about your income, assets, debt, and credit. You will want to have all of your documentation ready to go, including pay stubs, tax returns, and bank statements.
- Underwriting Process: Once you submit your application, the process goes into underwriting. This stage is when the lender will actually verify your information and creditworthiness. They may request additional documentation or clear some items over. Be patient and responsive at this time.
- Approval and Closing: Finally, if everything checks out, it’s mortgage approval. The last step is closing: where you actually sign the loan documents, and voilà! You are a homeowner – Congratulations!
Tips for First-Time Homebuyers
Buying your first home can be quite an emotional roller coaster, but here’s a small help to keep you on track:
- Start Saving Early: The more money you put down, the better. For saving down and closing costs, the earlier you start, the better.
- Check Your Credit Score: Your credit score will ultimately determine what interest rate you qualify for in terms of your mortgage. Keep checking your score and making improvements as necessary. Use this BMI Calculator to track your health and stay fit for the big move.
- Do Not Rush: Be prepared to take on all the responsibilities that come with owning a home, as this is a serious and critical part of your life. Just because you got the home loan doesn’t mean you have to buy.
- Find a Real Estate Agent: A good real estate agent will be able to walk you through the process of buying a home and help you find the right property that fits within your budget.
Conclusion
The mortgage market is quite complicated, yet definitely workable if one has proper knowledge. The types of mortgages available, how much one can afford, and being application ready – just a few things that will help someone get well ahead with their first home.
Well, that is exciting; one step at a time, and most importantly, never be afraid to ask for help where you need it. Good luck with house hunting!
