Many current homeowners wish they got financing tips for first time home buyers.
New buyers find financing complex and challenging. Typical mortgage terms become confusing and frightening. Yet, a mortgage is undoubtedly very important for new homeowners.
The Zillow Group Consumer Housing Trends Report claims that 76 percent of homebuyers get a mortgage to finance their home.
Here’s some tips for first time home buyers about financing.
The Myth of the 20 Percent Down Payment
No one gets 100% mortgage to purchase a home. Lenders don’t work that way. They require a down payment from would be home buyers.
Too many rumors claim that mortgage lenders require at least a 20% down payment. Wrong! While putting up an initial 20% as a down payment limit the risk lenders take with home buyers, it is not a requirement.
However, buyers making down payments less than 20% often pay a premium for the lender’s extra risk known as a Private Mortgage Insurance (PMI). Still, many buyers find they get a financial advantage than continuing to pay monthly rental payments.
Zillow’s report showed that only 37% of first time home buyers paid 20% or more as their down payment. Many only paid between 3% and 9%.
This proves that ways exist to get around the 20% down payment and still end up purchasing their first home.
Loans Come In Many Types
Just like homes coming at different styles and prices so does financing them.
Many loan options exist for first time home buyers. Therefore, you need to do some research and asking questions to lenders to find the right fit.
Most home buyers assume their best option is the well-known 30-year fixed loan. Popular because it offers stability knowing the set interest rate no matter how the housing market performs (up or down). But, unless you plan to live in your new home for 30 years, other options exist.
For instance, the Adjustable Rate Mortgage (ARM) potentially makes a better choice. This loan allows you to begin with a lower interest rate than a fixed rate mortgage. But, no guarantees exist that the rate remains low. That’s why it’s called “adjustable”.
Government Home Loans
If you get a poor credit score or you need a low down payment a government-backed loan offers you a good option.
Learn more about credit scores by reading our recent blog post about how to successfully buy a home. Here
The Federal Housing Administration (FHA) loan, or the U.S. Department of Agriculture (USDA) loans, or Veterans Affairs (VA) loans provide unique financing options for home buyers with low credit scores or can only pay low down payments. Those looking to live in rural areas also find these options appealing.
Explore the various federal home loan programs to see if any fit your situation. Zillow also publishes an explanation of the different loan options for unique situations Here. It explains loans for:
- Buyers planning to stay for the entire loan period (15, 20, or 30-year loans);
- When buyers know they’ll move in a few years;
- Mortgages for teachers and first responders;
- Jumbo loans for expensive homes;
- Buyers who can’t pay typical down payments;
- Rural home loans;
- 3% down payment offers through Fannie Mae and Freddie Mac loan programs;
- FHA loans for buyers with low credit scores;
- Buyers with high student loan debts; and
- Fixer Upper mortgage loans through FHA and Fannie Mae programs.
Shop Around to Find Lenders Who Save You Money
Too many first time home buyers simply apply for a loan with the first recommendation. They assume that one lender equals all the other lenders. That’s not true.
The Zillow report stated that 52% of first time home buyers only considered one lender for their mortgage. However, shopping around can save you money.
The Consumer Financial Protection Bureau (CFPB) a government lender watchdog agency recommends seeking out at least three lenders before applying for a home mortgage. Evaluating three lenders to compare rates and terms gives you the best options fitting your situation.
You may save thousands of dollars following CFPB’s advice.
Get Mortgage Pre-Approval Early
Lenders provide qualified home buyers with a “pre-approved” loan letter informing sellers that this buyer qualifies for a maximum loan amount. Sellers feel confident selling to a buyer with a pre-approved letter.
To get the letter, your lender looks at the loan requirements and your situation. For instance, if the lender feels you qualify for a $200,000 mortgage the letter pre-approves you for that amount.
Don’t get confused with a “pre-qualified” loan letter which only qualifies you based on criteria which may change later.
Getting “pre-approved” rather than “pre-qualified” means you are a serious buyer.
Receiving your pre-approval letter early allows a lender to review your credit report and credit score. If any errors or omissions exist penalizing you give you time to correct the errors early on rather than nearing escrow closing jeopardizing your purchase.
This letter also gives real estate agents confidence you won’t waste their time looking at homes you can’t afford.
Also, know that you are not obligated to actually use the lender who provides you’re with a “pre-approved” letter. You can apply for a mortgage with another lender if you choose.
These financing tips for first time home buyers shows you ways to:
- Pay a lower down payment;
- Find a loan best fitting your situation;
- Shop around to find a lender who saves you money; and
- Get a pre-approved loan letter early.
Use these tips to save you time and money and increase your chances to get a mortgage approved.
Before Looking For a New Home
Consider Big Block Realty as your Realtor to help you find your ideal new home.
We even published a post explaining what type of home is right for you. Here
Contact Us now so one of our Realtors can help you with answering questions about:
- Home seeking;
- Making an offer;
- Understanding a purchase agreement;
- The escrow process; and
- Other questions about buying your home.
Steven Rich, MBA – Guest Blogger
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