It’s normal for first-time homebuyers to feel overwhelmed by the process of becoming a homeowner. First-time homebuyers are often excited in the thought of making one of the biggest investments in their lives. Along with this, they also need to make solid financial decisions to determine if they can sustain living in the house they are choosing.
Taking on a mortgage is the easiest way to homeownership. This is especially true for the majority of millennials who are still repaying student loan debts and only starting to build their credit score. While getting a mortgage makes it affordable to own a home, a new buyer must be mindful of the upfront payments. As a first-time homebuyer, you may want to ask yourself these smart questions to make sound decisions in choosing a mortgage:
Can I repay the loan?
You may want to determine first how much loan you can afford to pay off. Your debts, source of income, employment security and the price of the home you want are some of the important factors that will help you determine how much loan you can afford to repay.
When taking conventional loans, there are lenders nowadays that only require at least a 5% down payment for a conventional loan. But, of course, the more you pay for a down payment, the lesser your monthly payments would be. Most first-time homebuyers who find it costly to pay for a down payment apply for government-backed loans. The FHA and USDA offer loans with 3.5% or sometimes, even 0% down payments. Closing costs are additional expenses that you need to pay upfront that usually go around up to several thousands of dollars. These upfront payments would not be a big problem if you’ll receive a gift from your ultra-generous parents.
While government-backed loans are the usual recourse for eligible first-time homebuyers with lower credit scores and very limited financial resources, there are still additional payments that they need to pay like mortgage insurance premiums.
Will it be comfortable for me to make monthly payments?
Figure out how much the estimated monthly home payment you’re comfortable to be paying. You may want to adjust your estimated total monthly mortgage if it will eat up the bulk of your monthly paycheck. Other than a mortgage, you’ll also have to pay for insurances, fees, property taxes, and utilities. Figure out all your debts and a reasonable monthly budget when making estimates. You may want to ask your family or spouse (if you’re married) to help you set a realistic yet workable budget that will cover the costs of owning a home like repairs and furniture.
If you want to know the percentage of your income that will go to the monthly home payment, simply divide your estimated total monthly home payment to your total monthly income before taxes and then multiply it by 100. To determine how much will remain for your personal expenses, subtract the amount of your estimated monthly home payment and all the debts you have from your monthly income before taxes and decide if you can still have a comfortable living.
You may want to use a calculator to give you a clear idea of what you can comfortably afford.
Have I shopped enough to get the best deal?
Real estate experts often advise first-time homebuyers to shop for a mortgage to determine which lender can give them the best offer. After you determine the affordable monthly amount you can spend on housing, it’s time that you look and compare mortgage rates offered by lenders. Most first-time homebuyers shop and compare up to three different lenders.
Interest rates, points paid to lenders, closing and loan origination fees, down payments and private mortgage insurance (PMI), if it applies to you, are the most important information you need to get and compare from several lenders. You may want to use a mortgage shopping worksheet to help you compare lenders side by side.
Before shopping for a mortgage, some people work to increase their credit scores to get better deals. Normally, lenders easily approve borrowers with a credit score in the mid- to high-700s or above because they are considered low risk, which means they are unlikely to default on their loan payments. Although some lenders approve borrowers with lower credit scores, they often have to pay more in terms of interest and insurances.
It takes time to improve your credit score that’s why paying your debts on time and disputing potential credit report errors may help improve your score.
Sometimes, you may find it better to delay homebuying if you think you’re not getting the best offer from lenders. Pause for a while, then shop and compare rates again until you get the best deal. Don’t let bad offers frustrate your homebuying experience.
Once you locked your target to a particular lender, make sure to exercise your negotiating power especially if you have an excellent credit score. If you’re satisfied with an offer, apply for the loan and secure a loan estimate.
Do I totally understand the features of the loan I will get?
It’s important that you fully read and understand everything about the loan features before signing to prevent you from surprises as you start making monthly payments. Loan features are often determined based on the type of mortgage that you’ll choose.
Normally, homebuyers have to choose between a fixed-rate mortgage and an adjustable-rate mortgage. Most first-time buyers often choose a fixed-rate mortgage, so they can pay for the same amount until their loan matures. This means that they have to pay for a fixed interest rate amount even when the average interest rates fall. On the other hand, some homebuyers opt for an adjustable-rate mortgage so they can start making lower payments for a period of time. Thereafter, depending on the prevailing rates, they may have to make the same or much higher payments.
The first page of the loan estimate will give you a clear idea if you can handle the features of the loan you’re getting. Under the loan terms of a loan estimate, you may find it risky if the loan has a “balloon payment” feature because you’ll have to pay a large amount at the end of your loan. Make sure to ask the lender for other options like a prepayment penalty instead.
Having a thorough understanding of the loan features lets you know if your loan’s principal and interest will increase as you make payments.
Final thoughts on homebuying
As a first-time homebuyer, you need to make solid financial decisions while treading the exciting, yet complicated process of homeownership. Making sound homebuying decisions include having a full understanding of your finances, credit score, loan options available to you and the risk of loan features that you can handle. As you shop for a mortgage, make sure to clearly get all the answers to your questions, especially if it has something to do with the loan features. Only sign the papers once you have a thorough understanding of the terms, features, and conditions of the mortgage you’re getting.
The Consumer Financial Protection Bureau provides readily available comprehensive information to guide you in the homebuying process.