Buying a home for the first time is an extremely exciting time in a person’s life. However, securing a mortgage and dealing with the other issues that arise can be extremely stressful.
The best way for first-time homebuyers to prepare for this process is to learn as much about mortgages as possible. Understanding mortgages can help them find the right loan for their needs while also negotiating the best possible rate.
Some other tips that you should keep in mind as you prepare to secure your first mortgage include:
1. Figure out a budget.
For the most part, lenders will use two different strategies for calculating how much an individual can borrow. Both strategies involve looking at total pre-tax monthly income. Then, lenders will either calculate 28 percent of this income to find the monthly maximum housing payment, including all taxes and insurance, or they will look at total debt, including the mortgage payment, which should be no more than 36 percent of income. Lenders tend to use the lower payment for each of these strategies.
While some lenders will use more generous qualification ratios, it is important to keep in mind that you do not need to spend the whole amount you qualify for. If you qualified for a $20,000 credit card, you wouldn’t spend the entire amount, so in the same vein, you should not buy a home out of your budget even if you’re approved for it.
2. Get mortgage pre-approval.
You do not need to be pre-approved for a mortgage before you begin house hunting. However, the pre-approval process virtually guarantees that you will get full approval, so it is a rather valuable bargaining chip. Including mortgage pre-approval along with an offer sends the message to sellers that you are serious and will not likely have issues securing financing.
The pre-approval process is different from pre-qualification. A pre-qualification only takes into account the financial details provided by you and represents no commitment to actually lend money. Thus, pre-qualification does not carry the same weight as pre-approval, which ensures that the lending will happen since it involves verification of all financial information. Pre-approval should come with a letter that can be made part of formal purchase offers.
3. Shop around for different lenders.
Too often, first-time homebuyers get so excited that they are approved by one lender that they just sign the deal. All lenders will offer different rates, so it is important to shop around a bit. Even a small difference in interest rates can save thousands of dollars over time. Importantly, multiple inquiries into your credit will not significantly affect your credit score since as they will take place over a short period of time.
It is also important that you talk to smaller lenders, not just the big, national names. Regional and local banks often have unique lending programs intended for first-time homebuyers. These programs can help save you money by offering better rates or by removing some of the usual hurdles, such as the requirement of mortgage insurance.
4. Consider the best down payment.
You might’ve heard that you will need to be prepared with a 20 percent down payment on a home. However, you can get conventional mortgages with much less down, as low as 3 percent of the purchase price. Beyond that, some of the specialized loans, such as VA and USDA mortgages, may not require a down payment at all. Of course, more money down means lower monthly payments and less money paid in total due to interest.
Sometimes, putting less money down comes with caveats. If you put less than 20 percent down on a mortgage, you may have to pay for private mortgage insurance, which is to protect lenders in case you default. The rates for private mortgage insurance depend on your credit history, the length of the mortgage, and the down payment amount, but the cost can be quite significant.
5. Hire an experienced buyer’s agent.
Throughout the entire purchase process, you will likely work very closely with a real estate agent. Finding someone who is experienced and knowledgeable about the industry is extremely important, as they can help negotiate the best deal and provide guidance about what to expect in terms of closing costs and other fees. The closing process can be arduous, and great agents will help avoid, or at least prepare for, any issues.
Your agent should also be able to work within your needs. For example, if you have limited savings, you may want to negotiate seller-paid closing costs into the offer, which could mean increasing the final offer amount so that your out-of-pocket expenses are minimized. Great agents will understand these workarounds and help you figure out the best deal for your situation.