Buying a home is a very important financial decision and it should not be taken lightly. Here Are 7 key terms that all first time home buyers should comprehend.
7 Important Terms for First Time Home Buying
Down Payment Requirements – First time home buyer requirements vary greatly, but essentially, you’ll need 5 to 10 percent of the total home price as a down payment if you want a traditional loan and have somewhat decent credit. Taking out FHA loans or making use of certain other loan options could mean that you need as little as 3.5% down, and some loans – VA and USDA loans in particular – may be available with no money down required. Learn more about the best grants for down-payment assistance.
Numerous mortgage lenders may agree to an amount less than 20% of your home’s purchase price at closing. However, most financial advisors will tell you to try and save for a 20% down payment to evade private mortgage insurance, which is an expensive premium meant to safeguard your lender in case you default on your payments.
Mortgage Insurance – This is insurance that covers the risks a lender takes when extending you the loan, and can increase your interest rate by between .03 to 1.15 percent depending on the situation.
Conventional or FHA Loans –A conventional loan is one extended to you through a traditional lender like Fannie Mae or Freddie Mac, and is often out of reach for many first-time home buyers. FHA loans are backed by the federal government and are better for those with lower credit scores or first-time house buyers. They have less stringent credit score requirements and lower down payment requirements. See FHA First Time Home Buyer Programs.
Closing Costs – Closing costs are a bundle of lender fees, attorney fees, and fees from other third parties like home inspectors that are all related to buying your home. Usually they’ll run anywhere from 2 to 5 percent of the total cost of the home, but the exact number will vary.
Appraisal – This is nothing more than an estimate that places a rough value on your home. This way the lender will know just what to give you in terms of the loan and what kind of down payment you might need.
Credit Score – This is the one you’ve probably already heard, but it’s important to understand that there’s no hard limit on what your credit score should be. It’s possible to get a first time home loan with a score of less than 600, despite what many people believe. A lot of other facts are at play that may be worth understanding.
Pre-Qualified – This term is confusing since it’s different than a preapproval. Prequalified essentially means that you’re likely to be able to qualify for a loan of a certain amount. You should really only use it to start shopping around for a home since it will help you understand what’s in your price range. Pre-approval is essentially something telling you that you will actually be able to receive a certain amount in a loan – it’s for when you’re ready to buy your home.
The Mortgage pre approval isn’t equivalent to a complete mortgage approval, yet it provides an estimate of the amount you’re likely to borrow for a home.
More First Time Home Buyer Tips
Create an exhaustive inventory of your income and expenses, encompassing both consistent and irregular items. This should incorporate retirement contributions, emergency funds, and all additional costs associated with owning a home. These new expenditures may consist of water and electricity bills, maintenance and repair expenses, homeowners insurance, life insurance, property taxes, private mortgage insurance (PMI), and homeowners association (HOA) fees. We suggest determine a monthly payment for principal and interest that aligns comfortably with your financial situation.
Interest rates and lending standards for first time house buyers are subject to change without notice. Discuss your credit and eligibility with a licensed first-time mortgage lender today.
Purchasing a home can provide a sense of stability and community, especially if you plan to reside in the same area for an extended period. This eliminates concerns about rent increases or lease renewals by landlords. Additionally, it fosters the opportunity to forge lasting relationships with neighbors and establish roots in the community.
As you repay your mortgage, you’ll gradually build equity in your home, potentially benefiting from increasing real estate values over time.
We suggest that you speak with several financing professionals prior to making a deposit to a seller during the home buying process.