Buying a home—especially your first home—is a truly memorable experience. Even with all the ups and the downs and the stress involved, we have comfort in knowing that soon after, we will be happily nestled in our dream home. But, before you even begin searching for a home, you need to know what necessary steps you’ll have to take to secure a home loan. (That is unless you’re one of the lucky few who can afford to pay cash for your home!) Most homeowners have a mortgage, and that’s not a bad thing at all. You can even use it during retirement to secure a reverse mortgage loan. You can read more on the reverse mortgage at https://reverse.mortgage/how-does-it-work for all you need to know.
That being said, buying a home is a lifetime investment and one of the most expensive. As such, several considerations must be made before taking that decision. Here’s what you need to know before starting your home search…
Knowing what you need
Before hitting the real estate market or you talk to an agent, know the type of home you need. Do you need something for yourself or a family-size home? Are you considering a new or an old renovated home? If you are going for an old house, you will need home renovation, and you have to factor in that cost. That aside, what do you look for in a new home? Do you need something with a large living room, pool, garden, garage, and a big front yard, or something a little less overwhelming? Knowing what you need helps you to make the right choice.
How much are you willing to spend on a new home, and how do you intend to finance it? Can you pay outright, or you may need a loan to finance the home? Remember that buying a home is a considerable investment, and any miscalculation would be detrimental. Since this piece is about home financing, read more for available options.
Where you live matters and must be considered when looking for a new home; make a shortlist of all your preferred neighborhoods and search accordingly. You may have to ask the following questions when settling on a location. Does the neighborhood has or close to all the required amenities, including access to water, electricity, health care, and school if you have kids? Having all these on your checklist will help scale down your search.
Now that you know some of the things to consider when buying a home let’s delve into how to finance the home.
Ways to finance your new home
Consumer confidence keeps dwindling with a surge in inflation and a bleak economic outlook. Despite the low purchasing power, housing needs keep rising. As such, many new potential homebuyers are exploring the financial market for the cheapest way to finance their first home. First-time homeowners can explore several home financing options. But which loan option gives the cheapest interest rate and longest repayment duration?
Each mortgage facility comes with its financial requirement and criteria. This means your financial status must be at a certain level to access any of the available home financing options. The only difference is that the threshold differs.
First-time homebuyers seeking a mortgage must have proof of income. Not just that, you should receive the income for at least two years, which must be sufficient to pay off the loan. That aside, you should be able to make a down payment of at least 3.5 percent, depending on the type of mortgage. Most important, you should have a good credit score of about 620. That said, some mortgage programs allow zero down payment for first-time buyers and a credit score of around 500.
Aside from having a good credit score, lenders consider the following before granting a mortgage loan.
Your debt-to-income ratio is one of the first things lenders check when it comes to mortgage financing. Anything above 36 percent makes it almost impossible to attract a favorable and low-interest mortgage loan. Lenders check this to ensure you are not debt distressed and wouldn’t default on the loan payment. To calculate your debt-to-income ratio, divide your monthly gross income by all your monthly debt payments, including the estimated mortgage payment.
How much of a down payment can you make
Most mortgage home financing packages require a down payment. Depending on your credit score, you may need to make a down payment of 3.5 percent or more of the total cost. Also, the higher your debt-to-income ratio, the higher the interest rate could be.
Mortgage options for first-time homebuyers
Conventional mortgage loans
Conventional mortgage loans are not federal government guaranteed loads and are mostly fixed-rate mortgages. Conventional mortgages have stricter rules and requirements, making them one of the most difficult loans to access. This is because they are not federal government guaranteed; hence, lenders are extra careful. Ironically, they are less costly when compared to loans guaranteed by the federal government. Conventional mortgages come in conforming and non-conforming loans.
Conventional mortgage loans require a substantial down payment, a very high credit score, and a very low debt-to-income ratio to qualify. That aside, you may need private mortgage insurance.
Federal Housing Administration (FHA) Loans
Federal Housing Administration (FHA) loans have a lower down payment requirement and are easier to access compared to conventional loans. This makes it very suitable for first-time homebuyers. However, there is a limit to how much loan you can get.
You may need to make a down payment of about 3.5 percent of the total loan cost.
You are required to pay a mortgage insurance premium, which is included in the mortgage payments. The insurance package protects the lender in case of any default.
U.S. Department of Veterans Affairs (VA) Loans
The U.S Department of Veterans Affairs guarantees veteran loans. The department doesn’t give loans by itself but is a guarantor for veterans to access mortgages from qualified lenders. Veterans who qualify are issued qualification certificates from the VA, which they can use to apply for the loan. VA loans are usually without a down payment and are easier to qualify for compared to the other loan options.
You need to be a veteran
Request for eligibility from the veteran affairs
As a first-time homebuyer, you must consider which deal you sign up for. Any wrong choice can mess up your entire financial health. Be abreast with the terms and conditions of any mortgage loan you try to consider. Also, be clear on the required monthly deductions to avoid getting trapped in any unsustainable debt.