How to Get A Home Loan: Guide For First-Time Home Buyers
Are you ready to buy your first home? Congratulations! This marks the starting point of your journey to becoming one of the 65.1% of Americans who own the home they live in. But if you are not careful, your dream of homeownership can quickly turn into a nightmare.
This is because the process of getting a mortgage for a first home is surprisingly filled with difficulties. Most first-time buyers don’t study the process because they are unprepared for what they encounter. Navigating this process can be hard if there is no one to direct you.
That’s why Cavalier Estates LLC created this guide to help you be prepared when you approach lenders to get financing for your first home. It will improve your chances of coming away with a home, rather than empty-handed. Here is what you need to know to get a loan as a first-time homebuyer.
1. Your financial health
The first thing to be aware of is that no lender will provide 100% of the funds needed to buy a home. In addition to providing a considerable part of the home’s purchase price, you will pay out-of-pocket for other costs. Here are your main costs:
- Down payment: This is the portion of the purchase price of the home that you must provide. Depending on the type of mortgage, it can range from 3% to 10%. This means that for a home valued at $300,000, you will be required to provide $9,000-$30,000. The factors which determine how much you will pay down are discussed later.
- Closing costs: Closing costs include all fees and costs that you incur as part of the processes for finalizing the mortgage. It can amount to 2% -5% of the home’s purchase price and includes application fees, legal fees, closing fees, property appraisal fees, underwriting fees, and over twenty other fees. The funds provided by the lender will not cover these fees.
- Emergency funds: Lenders expect you to have an emergency savings account with enough money in it to cover six months of living expenses, including, ongoing expenses for the home and the monthly mortgage payments. It doesn’t include the money for the down payment and closing costs for the mortgage.
These requirements mean you must have enough money set aside. If lenders feel your financial position is fragile you will be viewed as a high-risk borrower and your application will be denied. If you are not financially stable enough to meet these conditions, you can start saving today in preparation for owning your own home in the future.
2. Know your budget and monthly payments
Owning a home is a big responsibility. A substantial part of your monthly income will go to maintaining the home and making monthly payments. These payments include the principal on your mortgage, interest payments, taxes, and insurance premiums. To make sure you can afford these payments, must determine how much housing you can afford and how much you will need every month to meet your obligations.
3. You must have good credit
Your credit score is the measure of your trustworthiness and competence in financial matters. It is one of the key things lenders look at to deny or approve your application. It determines how much you will be asked to pay in down payment and interest rates. Borrowers with high credit scores may be able to access a home loan without paying any money down. To make sure you are not denied, aim for a credit score of 500-580. But if you can push the score up to 620-640, you will get even better terms.
4. Know what mortgage options are available
There are several pathways to buying a first home, including government programs designed to make it easier for first-time buyers. The common mortgage options are:
- Conventional mortgages: These are the standard home loans that are not guaranteed by the government. They require 10% down if the borrower buys Primary Mortgage Insurance (PMI). Without PMI, the down payment can be 20%.
- FHA loans: These are issued by the Federal Housing Administration to borrowers with credit scores no lower than 500. The down payment is usually 3.5%.
- USDA loans: These are guaranteed by the U.S. Department of Agriculture for homes in specific rural areas. The required credit score is 640 and there is no down payment.
- VA loans: These are guaranteed by the Department of Veterans Affairs for current and veteran military service members. The required credit score is 620 and there is no down payment.
- State-assisted programs: These programs use low-interest rates, down payment assistance, closing cost assistance, or tax credits to attract people to settle in certain parts of a state.
5. Type of interest payment
Finally, you should find out if a loan is a Fixed Rate Mortgage with the same interest rate over the lifetime of the loan. Or if it is an Adjustable Rate Mortgage with an interest rate that changes according to the market conditions. Each type of mortgage offers specific advantages that may or may not be attractive to you.
If you follow these guidelines you would have done more than enough to qualify for the loan