If you’re in the market for a new home, we couldn’t be more excited for you. Buying a new home is an amazing experience, especially for first-time buyers. Becoming a homeowner is a fundamental step as a successful, responsible adult.
However, if you’re buying a house for the first time, there are some things you should know about mortgages. House loans come in all shapes, sizes, lengths, and terms. The loan you take out will greatly impact your finances for years to come.
We want you to walk into the home buying process with your eyes wide open. Keep reading for everything you need to know about your first mortgage.
It’s Always a Good Idea to Get Preapproved
First-time buyers should get preapproved through their bank and several other lenders to learn more about their loan eligibility. If this is your first mortgage, you might have low or little credit to your name. As such, your mortgage eligibility could be limited.
Understanding your loan eligibility is essential before you start shopping for homes. Otherwise, you could be shopping outside of your price range, which will only lead to heartache and frustration. Placing an offer on a home only to have it rejected by your lender can be both embarrassing and demoralizing.
A preapproval letter will let you know exactly what homes you can afford on the market. Just as importantly, a preapproved offer is more valuable to sellers, which will give you an edge while shopping for homes.
Your Credit Score and Credit History Matters
Whether you’re seeking a preapproval letter or are ready to place an offer on a home, you’ll quickly learn how important your credit score is. In most cases, you need a credit score of 620 or higher to get approved for a mortgage. However, there are government-backed loans that require slightly lower scores.
Generally speaking, the higher your credit score is, the more money you will be able to take out for a home loan. Although, your income and debt-to-income ratio will also be taken into account. A better credit score will also grant you access to lower interest rates and better terms.
Improving Your Credit Score
If you can’t get approved for the home mortgage you want, you might need to take a step back to explore your other options. You might need to start smaller and look for “cheap houses for sale near me“.
Conversely, if you’re credit score is too low (or you don’t have enough credit history), spend some time boosting your credit score.
You can quickly improve your credit score by:
- Using credit cards wisely (using them but keeping them paid down)
- Paying all of your bills on time
- Decreasing your debt-to-income ratio
- Resolving past-due accounts
- Refuting discrepancies in your credit report
- And more
How long it takes to increase your credit score to the ideal amount depends on your current circumstances and the requirements of the loan you seek.
Using a Qualified Co-Singer
Alternatively, first-time buyers who need to get approved for a home mortgage sooner rather than later can get help from a co-signer. A qualified co-signer (one with a high credit score) can help you get approved for buying a house by signing the mortgage with you.
However, you might have a hard time finding a qualified co-signer, as it will make them equally responsible for the loan, should you fail to make payments. Having the loan in their name will also limit their ability to apply for their own credit. The ideal co-signer would be a partner/spouse, parent, or grandparent.
There Are Various Types of Mortgages You Can Apply For
When buying your first home, it’s important to know that you aren’t limited to one type of loan. There are countless types of loans available to first-time buyers. Your eligibility, of course, will dictate which ones you can successfully apply for.
Conventional Home Loans
Conventional home loans are some of the most common mortgages. They come with relatively low-interest rates and 15 to 30-year terms.
These types of loans are appealing and solid. As such, they require respectable credit scores. Additionally, conventional mortgage lenders usually demand home loan insurance for buyers that don’t put down at least 20%.
FHA Loans
FHA loans are government-backed mortgages that make it easier for people with lower credit scores and lower incomes to purchase homes. These homes are also ideal for first-time buyers who don’t have a large downpayment.
In most cases, you can get an FHA home mortgage with a credit score of 580 or higher and as little as 3.5% down. If you can put more money down on the mortgage, you may be able to get approved with a lower credit score.
Adjustable-Rate VS Fixed-Rate Mortgages
When looking at your first mortgage, you’ll notice that there are adjustable-rate loans and fixed-rate loans. Fixed-rate loans are pretty self-explanatory. If you get the loan at 4%, it will remain at 4% unless you refinance.
An Adjustable-rate loan, on the other hand, has the potential to go up or down based on the real estate market and the economy. These types of loans can be attractive, as they offer attractive rates for almost all buyers for the first few years. However, they are not as secure as fixed-rate loans and can increase your payments substantially if the market is suffering.
Think Long-Term to Save Money
Finally, understand that buying a house is a long-term investment. As such, you should think long-term to save money and make wise decisions.
For example, if you must take a loan with a higher interest rate, you can always refinance your mortgage as you spend the next few years building up your credit score.
Additionally, understand that your interest rate and loan term will play a vital role in how much money you pay for your house over time. For example, a $250,000 home over a 30-year mortgage at 5% interest will cost you a total of $483,139.
Now, if you opt for a 15-year loan, your monthly payment will increase from $1,342 to $1,977, but your total payoff amount will only be $355,857. You’ll save almost $100,000.
Alternatively, using the first example, if we switch your 5% interest rate to 3.5%, your total payoff over 30 years will drop from $483,139 to $404,140.
Want to Learn More for First-Time Buyers?
As you can see, there is a lot to think about before buying your first home. Take your time to get your finances in order, as the consequences of your actions will affect you for a very long time.
And if you’re looking for more advice for first-time buyers or financial guidance, stick around. Read through some of our other blog articles to find more information before you go. Our website was created to provide people like you with the knowledge they need to succeed.
