Congratulations! You’re on your way to owning your first home!
May it be as a family home for a newly-wed couple or a bachelor/bachelorette’s home, buying your first home is a huge step. But before planning that housewarming party or buying new furniture, it’s best to take it one step at a time.
And the first step in owning your first home is buying it. Or at least, financing it.
There are lots of financing options for first-time homebuyers, so much so that it can get easily overwhelming. However, learning the basics of property financing can help you save a lot of money. Sit down and look over your finances to ensure that you are getting the mortgage that best suits your needs and capabilities.
1. Learn about loan types
A mortgage is one type of loan that is not insured by the federal government. It falls under the conventional loan type that has stricter requirements, including bigger downpayment, higher credits scores, and lower income-debt ratio. However, in the long run, it’s definitely less expensive.
Conventional loans are divided into conforming or non-conforming loans.
Conforming loans conform or follow guidelines like loan limits set by government-sponsored enterprises. The loan limit this 2020 for a conventional mortgage is $510,400 typically. It may cost more in more expensive neighborhoods.
It’s possible to get a higher loan than this. This type of loan is called a jumbo loan, and it has a higher interest rate due to a bigger amount of money involved.
Non-conforming loans, on the other hand, the lending institution (usually a portfolio lender) sets their own guidelines.
2. Consider FHA or VA Loans
FHA stands for the Federal Housing Administration, part of the US Department of Housing and Urban Development. They provide various mortgage loan programs with lower down payment requirements and less strict credit requirements. The down payment can also be as low as 3.5%.
However, all FHA borrowers are required to pay a mortgage insurance premium rolled into their mortgage payments.
VA loans, on the other hand, are given out by the US Department of Veterans Affairs. The VA does not make loans but rather guarantees mortgages made by qualified lenders.
This allows veterans and service people to obtain home loans without a down payment and with easier requirements. It follows the usual loan amount limit set by conventional mortgage loans. However, this is only open to veterans and service people.
3. Know your equity and income requirements
Lenders are meticulous in checking the borrower’s credit score and history. This includes checking your FICO score, loan-to-value ratio (LTV), and debt-service coverage ratio (DSCR).
LTV is the amount or value of the actual equity that is available in the collateral being borrowed against. This is determined by dividing the loan amount by the purchase prices of the home. The more money you put down for down payment, the fewer interest lenders will charge you with.
DSCR determines your ability to pay the mortgage. This is determined by dividing your monthly net income by the mortgage costs to assess the chances that you’ll default on the mortgage. The greater the DSCR, the more likely the lender will negotiate for a lower loan rate.
Knowing these terms can help you prepare financially before approaching a bank or a lender.
4. Understand what private mortgage insurance is
LTV also determines whether you will be required to purchase private mortgage insurance (PMI).
This helps the lender avoid defaulting from the loan by transferring a portion of the risk to the mortgage insurer. Most lenders require PMI for any loan with an LTV greater than 80%.
This is usually collected monthly, along with tax and property insurance escrows. Once the LTV dips to 78% or below, the PMI is eliminated automatically. You can avoid purchasing or paying for a PMI by borrowing less than 80% of the property’s value or by using a home equity financing (or a second mortgage) to provide more than 20% down payment.
5. Know the difference between fixed and floating rate mortgages
Basically, a fixed-rate mortgage is a type of mortgage wherein the rate does not change for the entire period of the loan. This allows the borrower to know how much they need to pay every month. If the prevailing interest rates are low, then you’ve got a good buy.
Floating-rate or variable-rate mortgages, on the other hand, are designed to assist first-time homebuyers that expect their incomes to rise over the loan period. This allows them to have lower introductory rates that qualify them for more money. However, given that it’s a variable, it’s also possible for prices to rise and along with them, the loan rates as well.
Looking for a home mortgage can be difficult, with all the forms to sign and all the possibilities to consider. However, you do have options. Take your time to learn the pros and cons of each one to find the perfect and most suitable one for your goals and capabilities.
Based on Materials from Investopedia
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