There are several steps that you should take before you start looking for financing and you should know your options, including where to turn to in order to get the best interest rate and most favorable terms.
What’s the first step to buying your first home? Like any major decision you may be faced with, step one starts with a plan — in this case, a financial plan.
What Do Banks Look For?
Your credit score and credit reports are the most crucial pieces of information, and you must have them at your fingertips before doing anything else. These are arguably the most important factors that your lending institution will consider. Your credit score is a number that tells companies how reliable and consistent you are at keeping up with payments and other financial obligations. This is crucial; banks and other lenders are hesitant to take on the risk of lending money or extending a line of credit to people with poor credit ratings. In fact, the higher your credit rating, the lower your interest rate will be.
Many websites can provide you with your credit score and reports. As a consumer, you are entitled to one free credit report every twelve months from each of the three main credit reporting agencies: Experian®, TransUnion®, and Equifax®. You can get your free credit report by visting the AnnualCreditReport.com website.
Lending institutions will look into the following things when considering your application for a loan.
- Income versus debt ratio;
- Timeliness of payments;
- Employment length and status;
- Relationship status; and
- Length of your credit history.
It’s important to have this information and know the answers to any questions before you submit an application for a mortgage. As with everything in life, the more prepared you are, the better.
AmOne has a mortgage loan payment calculator to assist you in determining what your monthly payment will be based on the type of mortgage and the interest rate that you receive.
Banks will also require you to make a down payment on your house, most often 20 percent of the total value of the home. Without this, it is unlikely that you will receive a mortgage. According to Wells Fargo’s first-time home buyer information, borrowers with under 20 percent have to get private mortgage insurance to protect the mortgage lender in case the borrower stops making mortgage payments.
There are exceptions to the 20 percent rule, according to the U.S. Department of Housing and Urban Development (HUD). If you qualify, a Federal Housing Administration (FHA) backed loan can offer down payments as low 3.5 percent for first time home buyers.
Before deciding on a mortgage, you should understand the five types of mortgage loans available to consumers. The five types are:
- Fixed-rate mortgage loans;
- Adjustable-rate mortgage loans;
- Jumbo mortgage loans;
- FHA loans; and
- VA loans.
A fixed-rate mortgage provides borrowers with an interest rate that doesn’t change over the duration of the loan. This can help budgeting because you always pay the same amount each month. If budgets are important for you, a fixed-rate mortgage could work best. However, it also means that you will not be able to take advantage of falling interest rates unless you refinance. When you refinance your mortgage, you go through the loan process all over again, and it is possible you might not qualify if your home appraises for lower than what you paid for it.
Adjustable-rate mortgages (ARMs) have fluctuating interest rates, so the rates adjust to reflect current interest rates and market conditions. This typically happens on a year-to-year basis, meaning the amount you pay may change year to year. Most adjustable rate mortgages are reviewed on a yearly basis and are based on a certain percentage plus prime. Prime is generally determined by the prevailing LIBOR lending rate (LIBOR stands for the London Interbank Offered Rate and it’s the rate index most often used by banks to determine how much to change adjustable rates).
A jumbo mortgage loan is a very large loan — one that is larger than the Federal government limits, and as such is often subject to higher loan rates. This year, the rates set by Fannie Mae and Freddie Mac for jumbo mortgages are $417,000 in most areas and $625,500 in higher cost-of-living areas in the United States and Puerto Rico.
An FHA Loan is a loan backed by the Federal Housing Administration, which works under the Department of Housing and Urban Development. This type of loan protects the lenders by insuring the value of the loan in case you default on it. These types of loans are sought after by banks and other lending institutions because they are assured of receiving repayment on their loan.
The Veterans Administration loan or VA loan is only available to people who are serving or have served in the United States military. A VA loan is also insured so that payment is assured for the bank.
As of March 2014, first time home buyers are showing a growing confidence in the market rebound, and they are increasingly investing in their first homes with the help of lower mortgage rates. According to the National Association of Realtors, the Millennial generation (those born between the early 1980s to the early 2000s) has delayed home buying due to high student loan debt but are eager to invest, increasing demand for starter homes.
This increased confidence is having a positive impact on the housing market, and now is a great time for first-time home buyers to get a low-rate loan and enter the market.