First time home buying can be an exhilarating and terrifying experience simultaneously. New terms, such as debt-to-income ratio, are thrown around at an alarming rate; real estate listings become a blur after several open houses. Stop right there: this process is not as daunting as it first may seem. A few key factors should be considered when shopping for a first home mortgage. The average home buyer has an advantage in the market if he or she understands certain terms and actions performed by both the real estate agent and mortgage lender.
One of the most important preliminary steps to obtain a first home mortgage is qualifying with a bank or lender. The lender will need all the information regarding your debt situation; personal, vehicle, and student loan amounts will be analyzed, as well as any credit card balances. Excessive debt with other lenders can hurt the first time home buyer: the more debt accrued for other items means less money to borrow for a home. If possible, try to pay down some of the debt before visiting a lender.
This qualification process will determine the maximum amount that can be lent to a borrower, as well as the down payment quantity. Currently, banks are asking for higher down payment amounts than in the past; borrowing money is not as easy as it once was. The lender wants to make sure that the borrower can pay the loan balance back; many lenders require an extremely low debt-to-income ratio so that the home loan does not exceed 28 percent of the borrower’s monthly income.
Mortgage Lender Shopping
First time home buyers should try and visit several different lenders; each bank will offer different interest rates and fees. Ask questions about every fee. Most fees are negotiable and each bank has its own policies for rate determination. It is not a good practice to simply get one quote and stay with that lender. Think of buying a car; most buyers shop around for a vehicle before deciding on a dealership. The same is true for home buying; the investment is much larger than a vehicle.
A good rule of thumb to have a low monthly first home mortgage is to reduce the loan amount with a generous down payment. Many lenders are now requiring a minimum of 20 percent down. For example, a buyer that qualified for a $200,000.00 home must pay approximately $40,000.00 as down payment. Buyers that cannot make this large upfront payment must bury it within monthly payments; high monthly mortgage bills can backfire if a family member loses their job or is involved in an accident.
Mortgage Loan Term
A loan term is the length of the loan period, usually either 15, 20, or 30 years. To retain a lower monthly payment, many home buyers choose a 30-year loan term to stretch the payments out. However, a home buyer that wants to pay off the property quickly, and has the funds to do so, should choose a 15-year mortgage.
Fixed Rate Vs. Adjustable Rate
Buyers must decide between a fixed and variable interest rate. Fixed rates are just that; an interest rate is locked in at a certain percentage, such as 6.25, and remains that amount for the duration of the loan. The benefit of the fixed rate is its consistency. Monthly mortgage bills remain at the same price over the years, regardless of the percentage changes in the financial sector.
In contrast, the variable rate fluctuates on a monthly or yearly basis, depending on the lender and the loan’s terms. In the past, many buyers enjoyed the variable rate since it followed the current percentages in the financial marketplace; the monthly mortgage payment would drop substantially as interest rates dropped. However, this rate type can fail for the first time home buyer. Interest rates also increase at times, causing the buyer to pay a considerably higher monthly payment. Some homeowners have found that they just cannot pay the monthly mortgage at that point, eventually facing foreclosure.
Buyers should keep in mind that all the interest and property taxes paid during a calendar year are deductions on income taxes. In addition, any extra money paid toward the loan in the form of discount points is deductible. These amounts can add up over the course of a year, giving the home buyer a generous tax refund.
Home mortgages have reams of paperwork involved in their processes, but the procedure for home ownership is not that daunting. Enjoy the prospect of owning real estate; it is an investment worth making.
First Time Home Buyer Must Reads
The resources out on the web are abundant and the US Government has a huge network of information to tap into as well as the big companies, brokers and mortgage blogs. I’ve done my best to round up the most useful information I could find that wasn’t overly trying to sell you something and suck you into a sales funnel. This is where it got crazy as there was a boat load of information on this topic, so please share with us the good stuff that helped with your first mortgage because others need to know.
Here’s an interesting look at how Bank of America kicks off the process and has a big list of all the questions and information they’re going to want. A lot of people we talk with are usually completely blind going into the application process other than a credit score and a deposit down. This should clear things up a little and show you what to expect going into your first mortgage.
Your very first mortgage is the important first step to being a homeowner and it can also be a scary one. Don’t fret though, as we’re here to help along with the process with all these wonderful resources freely available all over the web. Knowing a little before you proceed in your first mortgage will make the process easier for both you and your loan officer and after all, knowledge is power!
There is almost *too* much information out there regarding mortgages and a first timer in the market is definitely going to find it difficult to wade through all this. I’ve done my best to find and catalog here a handful of useful resources that should make everything easier and actually more enjoyable. Like with every blog post I always mentioned to please email us or leave in the comments great resources that I’ve missed because I’ll add them in!