Buying your first house can be overwhelming. How much can you afford? What are the interest rates? What kind of loan should you choose? All of these questions are running through your mind when you want to finance a home. Realtor’s tend to be optimistic and maybe a little pushy when they are trying to “make the sell.” What steps should you take when purchasing your first home?
Begin by making sure your credit is in order. You can run a credit check on yourself to see if you have decent credit. Mortgage lenders look at your FICO score (which is your credit rating) to determine the rate of your loan and what types of programs you for which you can qualify. In order to get an accurate idea of your FICO score you need a report from all three credit agencies. To facilitate a report and get accurate credit scores the best place to go is www.fico.com. A report from all three agencies (Equifax, TransUnion and Experian) will cost about $40. Normally when a creditor is inquiring about your credit to determine if you qualify for financing, the inquiry will drop your credit score a little, but if you are running the report on yourself it will not affect your score. You need to keep this in mind while you are shopping around for the right mortgage company. Don’t give them permission to do a credit check until you are fairly sure that they the company you want to use for your financing.
Once you find out your credit score then you can search for the best mortgage company. A good way to find a reputable company is “word of mouth.” Part of your search should include finding a good loan officer who is knowledgeable and trustworthy. You want someone who will shop for the best possible rate and explain all of your options to you; including loan programs that are available.
After you find a reputable mortgage company, it is time to choose what type of loan will work best for your situation. There are several programs to choose from and most companies offer almost any kind of loan imaginable. Typically for “first-time homebuyers” a fixed rate conventional loan, an FHA (Federal Housing Authority) or a VA (Veteran’s Administration) are the most popular.
A fixed rate conventional loan is typically standard. It tends to be the easiest to qualify for and the most convenient. But again you have a choice, you can get a 30-year fixed loan, a 15-year fixed or they even have 10 and 20 year fixed rate loans. For example for a 30-year fixed loan, you have a set interest rate that stays the same for 30 years or the life of your loan. This loan requires sometimes requires a 3% down payment, but there might be an alternative if you don’t have the money for a down payment. Your payment remains the same for the life of your loan and your mortgage insurance, taxes and homeowners insurance are usually included in the payment. They are escrowed for you so you don’t have to worry about coming up with the payments every quarter. In order to get the best rate for this loan you want to have A-rated credit, which is usually a credit score of 660-700. If your FICO is lower than 660 you will have to go with a B or C-rated credit loan and your interest rate will be little higher.
An FHA loan is tailored for first-time homebuyers. The government sponsors it and there is no down payment required. The underwriters have more leniencies with this type of loan as far as credit scores. To quality for an FHA loan you have to fall into a certain income bracket. The qualifications vary by state so you will have to check with your loan officer to see what the guidelines are in your state. The housing market determines the rates and the loan works like the fixed rate 30 and 15-year loans.
A VA loan is only for Veteran’s and their families. You need to have the proper paperwork for this type of loan. They want documentation proving you are a Veteran and records of the time period that you served. These loans require lots of paperwork and tend to have stricter guidelines. They do have extra benefits as far as money and rates if you qualify.
The three loans listed above are the most common types of mortgage loans that are available, but there are other more specialized loans that you can explore when financing a new home. Some examples are: interest only loans, conforming ARM’s and home construction loans. These types of loans are more specialized and serve a specific purpose for the borrower.
An interest only loan is for someone who needs a low mortgage payment to start out. They work best for people who are already in an equitable position with their purchase. With this type of loan the borrower pays only the mortgage interest on the house for the first 5-10 years and then begins to pay toward the principle balance after the time period has ended (3, 5 or 10 years). Use caution when considering these types of loans because you are not building any equity in the house and you are not paying any of the principle; basically you are just paying to live there and not getting any closer to actually owning the house.
A conforming ARM loan is for people who want a lower payment option. You pay less to begin with and your payment increases after a set period of time. This loan also has an adjustable rate so you are not locked into your interest rate. It starts out being a fixed rate for 5, 7, or 10 years then the rate is subject to change as the market changes. This type of loan would be a good choice for someone who doesn’t plan on staying in the home for a long period of time. Like the interest only loan, a conforming ARM loan doesn’t pay a lot of money towards your principle balance so you need to make sure you are equitable in the house so you can sell it for more than you owe on the loan.
Home construction loans are for people who are building a custom home. You have to take out a construction loan first while you build the house. After the construction on your house is complete, then you roll the construction loan into a regular mortgage loan. In order to qualify for a construction loan you have to be pre-approved for your mortgage loan. Rates on construction loans are a higher than other mortgage rates. Usually the rates are around 10% on a construction loan and primary mortgage rates range from 5.5% to 8.0% in today’s market (those figures many vary).
Mortgage loans can be tricky and hard to understand, but if you work with someone who is familiar with the industry and can clearly explain your options, then your loan experience will be a positive one. Know your alternatives, explore the financial market and get your credit in order before you apply for your loan. If you follow the tips and advice contained in this article you will be well on your way to finding a loan that will satisfy your needs.