Buying your first home? How exciting!
As first-time home buyers, you probably have millions of questions about the process. Getting a new home can be as overwhelming as it is a happy thought.
So, we have compiled some first-time home buyer questions that you should definitely get to know.
Get A Free Mortgage Quote1. What’s the Difference Between Pre-Approval and Pre-Qualification?
Getting a loan is the first step when buying a home. A lot of new buyers may confuse pre-qualification with pre-approval.
Pre-qualification is a rough estimate of how much you might be able to borrow based on the basic financial information you provide. It is a preliminary step that moves you in the right direction, but it is not a solid guarantee that you will get the loan.
Pre-approval is a more comprehensive process. The lender will review your credit score, income, and financial history. When you are pre-approved, you will get a concrete loan amount that you can use to bid on homes. It is a necessary step for house hunting.
Pre-approval will also help you understand what your monthly payments will be. So, make sure to pay attention to your interest rates and mortgage plan at this stage.
2. What Type of Loan Should I Choose?
Selecting a mortgage means carefully considering your own needs. There are many types of loans to choose from, each with its own pros and cons. It all depends on your finances and long-term goals.
Here are some common types of loans to consider.
Conventional Loan
Usually, conventional loans need a high credit score. You will also need to make a large down payment of 5-20%. It also has flexible terms for the loan and interest rate.
FHA Loan
FHA loans are issued by the Federal Housing Administration. This type of loan is perfect for home buyers with a low credit score. You can make a low down payment of a minimum 3.5%, but you might need to pay for mortgage insurance premiums (MIP). This will end up increasing your monthly payments.
VA Loan
If you’re a veteran or active-duty military, VA loans offer fantastic benefits. They don’t need a down payment or PMI.
USDA Loan
USDA loans are designed for rural home buyers. They don’t need down payments, and interest rates are competitive. However, they have high eligibility requirements based on location and income.
3. How Much Will PMI Add to My Mortgage Payment?
Private Mortgage Insurance (PMI) is for home buyers who make a down payment of less than 20% for conventional loans. The PMI protects your lender if you end up defaulting on the loan. While PMI is great for people who don’t want to wait too long before buying property, it does increase monthly costs.
There is some good news, though. Once you reach 20% equity of the home, you can apply to remove the PMI. Your monthly payments will go down.
PMI costs between 0.3% and 1.5% of your original loan amount annually. It depends on your loan terms and credit score. For example, on a $200,000 loan with a PMI rate of 1%, you’d pay an additional $2,000 per year, or roughly $167 per month.
4. How Much Should I Budget for Closing Costs?
New home buyers may not factor in the closing costs when budgeting for a home.
There are some fees and other expenses that need to be paid to finalize the mortgage. It includes lender fees, appraisal fees, title insurance, and more.
Closing costs range from 2% to 5% of your home’s purchase price.
For example, you are planning on buying a $250,000 home. You should expect to pay around $5,000 and $12,500 in closing costs.
There are some assistance programs that can help you cover the closing fees in case your budget doesn’t hold. Some lenders even add the closing costs to the loan, so you can try that option, too. However, it will end up increasing your monthly payments.
5. Should I Aim for a 20% Down Payment?
Traditionally, sage advice tells us to aim for a 20% down payment. Sure, it will help save you from PMI and lower your monthly payments. However, it is not necessary and may not be the best move for you.
Saving for a 20% down payment can delay when you get a home. And who’s to say that the housing prices don’t get higher by the time you have saved enough?
There are plenty of loan programs that don’t require huge down payments. FHA loans need 3.5%, while you can get a conventional loan for 5%.
Of course, you will have to pay higher monthly payments for some time until you own 20% of the house equity because of the PMI cost. You should sit down and assess your financial situation and goals before you decide how much to put down.
6. How Does My Credit Score Impact My Mortgage Rate?
Credit scores are definitely one of the most important factors in what your mortgage will look like. The higher the score, the lower the interest rate will be. A high score can save you thousands of dollars on your loan.
For example, a buyer with a credit score of 760 or higher might qualify for an interest rate of 3.5%. On the other hand, a buyer with a score of 620 might be offered a rate of 4.5%. While a 1% difference may not seem like much, it can make a major impact over the course of a 15-year mortgage.
You should definitely work on improving your credit score before you apply for a loan.
7. What’s an Escrow Account and Do I Need One?
Escrow accounts hold the funds on behalf of the buyer and seller when you are buying a home. Your lender may require an escrow account to cover the property tax and homeowners’ insurance.
Every month, a portion of the mortgage payment is set aside in the escrow account to cover these expenses. It can be a convenient option, but it does mean you will have to pay more monthly. We still recommend getting one since you won’t have to worry about any major payments for insurance and taxes later on.
Get A Free Mortgage Quote8. What Are First-Time Home Buyer Assistance Programs?
There are some home buyer assistance programs that can help with down payments, closing costs, and even decrease the interest rate for you. To reduce the financial burden of purchasing a house, these programs—which are frequently offered by state and municipal governments—provide grants, loans, or tax credits.
For example, some programs offer low-interest mortgages for qualifying purchasers, while others give forgivable loans to help with a portion of the down payment. Even though these programs can be very beneficial, each has specific eligibility requirements. Make sure to look into the choices in your area.
As a comparison, a first-time car buyer program offers similar financial assistance but focuses on helping individuals purchase their first car. Often, it comes with reduced interest rates or special financing options. The key takeaway is to explore any and all assistance programs that can help lower your costs.
9. Are There Hidden Costs to Owning a Home?
Many first-time buyers focus solely on the mortgage but forget about the other costs associated with homeownership.
Beyond your monthly mortgage payment, you’ll need to budget for:
- Property taxes
- Homeowners insurance
- Utility bills
- Maintenance and repairs
These expenses can add up rapidly. First-time purchasers frequently underestimate the costs associated with house maintenance. Building a financial cushion is a smart idea since unforeseen repairs or increased property taxes may affect your entire budget.
Conclusion
Buying a home is a huge financial commitment. Knowing the right questions to ask can make all the difference. We wish you luck in your next chapter of life!