First Time Getting a Mortgage? What You Need to Know
Photo by Aubrey Odom-Mabey on Unsplash
Are you interested in buying a new home? Congratulations! For many new homebuyers, this is an exciting time in their life – and you’re probably no exception! But before you start daydreaming about all the holiday get-togethers you’ll hold and the memories you’ll make in your new home, you should take the time to acquaint yourself with how to get a mortgage and the steps of the home-buying process.
Here’s everything first-time homebuyers should know:
Types of Mortgage Loans
Before you apply for a mortgage, you should take the time to learn about the different options that may be available to you. Generally speaking, there are five types of loans homebuyers should be aware of. These include:
Jumbo loans: These loans are intended for use by those looking to purchase large homes in high-cost areas such as Hawaii or New York City. Buyers need to put down at least 10% and have a credit score of at least 700. Furthermore, buyers must show proof of cash assets.
Conventional loans: Conventional loans aren’t backed by the government. Instead, depending on whether they’re conforming or non-conforming, they may have to follow regulations set forth by the Federal Housing Finance Agency, or FHFA. With conventional loans backed by either Fannie Mae or Freddie Mac, buyers may be able to put down as little as 3%. Furthermore, sellers may be able to contribute to closing costs. Buyers looking to obtain a conventional loan usually need to have a minimum credit score of 620 and have a debt-to-income ratio lower than 43 percent.
Government-backed loans: These loans are backed by three government agencies – the U.S. Department of Agriculture (USDA), the U.S. Department of Veterans Affairs (VA), and the Federal Housing Administration (FHA). VA loans are available to veterans, active-duty military, and their spouses. They are low-interest mortgages that don’t require a down payment or insurance. USDA loans are aimed at homebuyers who have low to moderate income and may not require a down payment. Likewise, buyers who have a credit score as low as 580 may qualify for an FHA loan. FHA loans also require two mortgage premiums, one of which must be paid upfront and the other annually throughout the lifetime of the loan.
Fixed-rate mortgages: With this type of loan, your interest rate will be fixed – meaning it won’t change – for the duration of your loan. Fixed-rate mortgages are usually available in 15- or 30-year options.
Adjustable-rate mortgages: This kind of loan has a variable interest rate that fluctuates over time. Usually, with this kind of loan, the interest rate is initially fixed for a period of time before it eventually switches to a variable interest rate, often changing either monthly or yearly. The amount of interest depends on the state of the economy and how much it costs to borrow.
Your Credit Score Matters, So Improve It
As briefly noted above, your credit score plays a significant role in what kind of mortgage loan you qualify for. However, many first-time homebuyers don’t know just how big of a role it plays. Houses are expensive and buying one comes with additional fees like down payments, closing costs, utilities, and furnishings. Before you start looking for a house, go over your current credit score and debt-to-income ratio to figure out what you can genuinely afford.
Then, figure out how you can make cutbacks in order to save for these expenses while simultaneously improving your score. Pay off lower balances first and try to pay more than the minimum amount owed per month to pay them off faster.
Figure Out What You Can Afford Using the 25% Rule
Before you put down cash on that beautiful house you just saw, you want to make sure that you can afford to live there. The general rule of thumb is that your monthly housing costs should cost you no more than a quarter of what you take home in a month. For example, let’s say you bring home about $6,000 in a month. Your monthly costs, including all taxes, fees, insurance, and mortgage, should be no more than $1,500. There are online calculators that can help you assess what you can afford, but if you have any questions, your realtor should be able to crunch the numbers for you.
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Don’t Forget About Closing Costs!
Just because you’ve signed off on that mortgage and are ready to close doesn’t mean you’re quite out of the woods yet. Don’t forget that there are closing costs involved with buying a home. These costs are usually about 3-4% of the cost of the house and cover a number of different things including inspections, attorneys, credit reports, homeowners insurance, and the appraisal process. This is why it’s recommended that you set money aside before looking for a home in order to be able to afford these costs at closing.
Get Pre-Approved Before You Look
This might seem a little backward. Why would you need to get a mortgage before you’ve even started looking for a home? This is because being pre-approved shows potential sellers that you’re serious about buying a home. This also helps you get ahead in a competitive buyer’s market. If you’re already approved for a mortgage, then it makes the process that much faster and easier for everyone involved.
Ready to Move Forward? Call the Team at M&M Mortgage Today
Buying your first home is exciting. At M&M Mortgage, we’re here to help. Whether you need answers, recommendations, or someone to share the good news that you’re qualified, we can help. We have years of experience working with first-time home buyers. We will help you understand what kind of mortgage is right for you and your budget.
Contact one of our experienced mortgage experts today. Our phone number is (651) 639-9800.
