The world of mortgage financing can be a little overwhelming for first-time home buyers.
The good news is that there are professionals to guide you through the process of qualifying for a home loan. Lenders are happy to educate buyers on the different mortgage options. You just need to know a few basics so you can have a productive conversation with your lender.
Here are finance basics for first-time buyers:
What’s included in my mortgage payment?
Your mortgage payment is more than just payments to repay the loan (that amount is called principal). Your mortgage payment also includes:
- Interest
- Property taxes
- Homeowner’s insurance premiums
- Any mortgage insurance premiums (if your down payment is less than 20%, you will need a mortgage insurance policy)
Lenders usually wrap all these expenses into one simple mortgage payment. It makes your life easier, and it assures the lender that your taxes and insurance are kept current.
How do I qualify for a home loan?
Qualifying for a home loan might be easier than you think. You just need to prove to your lender that you’re able to repay the loan.
Requirements vary slightly from one lender to the next, but here are the general home loan requirements:
- A down payment. You’ll need to pay a percentage of the purchase price upfront. Twenty percent is the old standard, but most first time buyers are qualifying for FHA Loans with as little as 3.5% down.
- Fairly good credit. Aim for a minimum credit score of 620. But if you have at least a 580, you could still qualify for an FHA Loan.
- Enough income to comfortably cover the mortgage payment. Lenders like to see your total mortgage payment stay under 28% of your gross income. And they like to see the mortgage plus all your other debts stay around 35% (or less) of your gross income.
To meet these requirements, you’ll need to provide financial documents like pay stubs, bank statements and tax returns.
Do I need to be pre-approved before starting my home search?
Sorting out your financing is actually step one in the house hunting process. There’s no point in spending weeks or months searching for a home if you don’t qualify for a mortgage loan. Getting pre-approved for a mortgage helps you understand how much of a loan you can qualify for so you know what price ranges to explore.
Plus, when you’re ready to make an offer on a home, your offer will be stronger if you’re pre-approved. The sellers will be able to accept your offer, knowing that you’ll be able to secure financing to close the deal.
It only takes minutes to get pre-approved online, and it will help your house hunting process go more smoothly.
What is the importance of interest rates?
Interest rates have an enormous impact on your mortgage loan. Lower interest rates mean your monthly payment will be lower, and you’ll pay less over the term of the loan.
Here’s how to get a low interest rate:
- Get your credit score up. First, check your report for simple mistakes and contact the credit bureaus to correct them. Then, if you have negative marks on your credit report, contact those lenders to see what you can do to remove those marks.
- Put more money down. A bigger down payment means a lower interest rate.
- Take a shorter loan term. A 15-year loan will have a lower interest rate than a 30-year loan.
- Shop around. Lenders offer different rates, so be sure to compare multiple lenders before making your final decision.
Financing your home doesn’t have to be difficult. Lenders are happy to explain the different finance options available to first-time buyers. So don’t hesitate to reach out to a lender and start the conversation today.
This post is intended for informational purposes only and should not be taken as professional advice. This post was written by Michelle Clardie. Michelle is a professional real estate blogger, specializing in ghostwriting Realtor® blogs. Her engaging content helps real estate agents become more visible online, generate more qualified leads, and increase their revenues. You can learn more at www.michelleclardie.com.
