Buying your first home is an exciting process, but there are plenty of less exciting aspects of home buying that you need to be aware of. Unless you’re one of the few lucky people who can pay for their first home entirely in cash, you’ll need to have at least a basic understanding of home loans. Here’s what you need to know before you buy the home of your dreams.
You may qualify for an FHA loan.
As a first-time home buyer, you may qualify for a special type of mortgage called an FHA loan. FHA loans have fewer restrictions than conventional mortgages and require smaller down payments. For this reason, FHA loans are helpful tools for first-time home buyers. To qualify for an FHA loan you’ll need at least a 580 credit score and a 3.5% down payment or, if your credit score is between 500 and 570, a 10% down payment. FHA loans can be used for either existing homes or new construction.
There are important differences between conventional and FHA loans.
With both FHA and conventional loans, your credit score and down payment will affect the size of the loan you can qualify for and your interest rate. Conventional loans typically carry higher interest rates than FHA loans, but if you can put at least 20% down on a conventional loan, you can avoid the need to purchase mortgage insurance, which typically more than offsets this cost. If you’re a first-time home buyer with less than 10% to put toward a down payment, then a conventional loan is probably not an option.
How your interest rate is calculated matters a lot.
When you get a fixed-rate mortgage, your interest rate remains the same throughout the life of your loan. While a you may be offered a slightly lower variable rate, getting a fixed rate gives you the peace of mind of knowing that it’s locked in and you won’t be surprised by a sudden jump in your monthly mortgage payment.
An adjustable-rate mortgage (ARM) typically starts off with lower monthly payments and interest than its fixed-rate counterpart, but those amounts change over the life of the loan. If interest rates rise, then your monthly mortgage payment may swell beyond affordability. One of the benefits of an ARM, on the other hand, is that there is a chance that your interest rate will actually go down.
While Fed Chair Janet Yellen recently declared that a rate cut is possible in the near future, keep in mind that this is uncertain, and even if the rate does come down, current interest rates are very low compared to historical data, so there is a hard limit on how much further they can drop.
Buying sooner rather than later could be beneficial.
Depending on the growth of the economy, the Fed may raise rates a few more times before the next recession. In other words, interest rates are lower now than they may be again in the near future. As someone looking to buy, it may be prudent to act now rather than wait as your chances of obtaining a lower interest rate decrease. It’s important to research different lending opportunities so that you can find the mortgage that is best suited for you.
Get pre-approved before you even begin house hunting.
This is a crucial step in the home buying process. If you plan on paying for your home with a loan, you'll definitely need to be pre-approved. Most realtors won't show you homes without a pre-approval letter, and most sellers won't accept an offer without one, either. For this reason, it's wise to get pre-approved before you start seriously searching for your home because your approval conditions will affect what homes will be within your reach.
If you’re ready to build your first custom home, contact the experts at Homes by Brill. Our team of home building professionals can walk you through each step of the home building process, from start to finish. Schedule a consultation to get started making the home of your dreams a reality.