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Mortgage Advice for First-Time Homebuyers

Aug 15,2021

Buying your first home can be exciting while at the same time seem overwhelming. If you are like most first-time homebuyers, you probably have many questions. In this guide we offer free mortgage advice for first time buyers to help guide you through the path to homeownership.

Make Sure You're Ready

Buying a home is a huge commitment, and the average home loan last for 15-30 years. Even though you won't have to live in the home for the entire 30-year period, you will still be making a large financial investment. It is a bad idea to buy a home because other people recommended it or family members are pressuring you to do so. Before you consider buying a home, make sure that:

  • You are ready to live in the same city for at least 5-7 years
  • You have an emergency fund worth six months of living expenses
  • You have stable income that will be able to cover the mortgage and all household-related expenses

If you can answer "yes" to these three factors, then you're likely ready to get a mortgage and buy your home.

Get Pre-Approved

While it may seem tempting to start calling real estate agents and start looking for homes right away, it's a good idea to start with a pre-approval first. A pre-approval will let you know exactly how much of a mortgage you will qualify for, and you can start your search in that price range. You may have heard the term "pre-qualification" thrown around while in your search. A pre-approval differs from a pre-qualification, so it's helpful to get pre-approved first.

  • A pre-qualification is an informal estimate of how much mortgage you qualify for. It is based off of information that you supply about your income and debts
  • A pre-approval is a formal offer to extend credit to you based on your paystubs, W2, bank statement and credit report

It is important to get a pre-approval before you start shopping for your next home.

Maintain Your Credit

So you've gotten your pre-approval and you have found the house you want. It has a huge backyard, so you're thinking about building an outdoor kitchen. It may be tempting to head to the home store and get a credit card for all of the appliances you will need. And while you're there, sign up for financing for a new in-ground swimming pool. With your new home, you're going to need a better car, so maybe upgrading your old car is the way to go. Stop. Do not do this. This is not the time to change your credit profile.

Remember that your pre-approval is based on your credit standing at the time of the approval. If you take on new credit, get a bunch of credit inquiries or increase your debt to income ratio, you risk losing the loan. When you are approved, don't make any changes. After you have signed the papers and get the keys, then upgrade your car and go on your shopping spree.

Save for Your Down Payment

This is one area that is tricky for a lot of new buyers. While there are programs that will help you to buy a home with as little as 3% down, it pays to make at least a 20 percent down payment on your new home. This will allow you to save money on private mortgage insurance, which is insurance that you are required to carry if you put down less than 20 percent. In addition, a larger down payment will help you qualify for a larger loan amount and can mean the difference between approval and denial if your credit is weak or your income is borderline.

Understand the Types of Mortgage Loans

There are several types of loans that you can secure for your new home. It pays to understand each one and choose the right one for your needs.

Conventional Loans: The most common type of loan that is offered to most buyers, conventional loans are best for buyers with a strong credit profile, adequate income and a 20 percent down payment.

FHA Loans: These loans are backed by the United States government from the Federal Housing Administration (FHA). Requirements for these mortgage loans are typically less strict than conventional loans. You can have a lower credit score, lower income and make a down payment as little as 3%.

USDA Loans: Typically meant for farmers, these loans are offered in certain rural areas. Buyers can get USDA loans without a down payment if they meet credit and income requirements.

VA Loans: These loans are offered by the United States Veteran's Administration and are strictly for veteran and active duty members of the United States armed forces and National Guard. You can secure a VA loan with no money down if you meet other qualifications

Remember Closing Costs

While most people think of saving for a down payment, it is easy to overlook closing costs. These are costs that you will have to pay once you have secured the home, but before you sign on the dotted line and get the keys. They include:

  • Attorney fees
  • Appraisal fees
  • Escrow fees
  • Pest inspection fees
  • Title insurance fees
  • Points (fees you pay to lower your interest rate)

These costs typically equal about 5% of the total cost of your home's selling price, so be sure to set these aside before you start the buying process. In some cases, you can negotiate with the seller to cover these costs, but that is not always the case. Be prepared to cover these in the buying process.

When it comes to buying your first home, there are a lot of factors to consider. Getting a mortgage for the first time can be daunting and our free mortgage advice for first time buyers will help to guide you through the process.

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