Saving your pennies is certainly important when it comes to taking on a mortgage, but before you shop for a loan, make sure your finances are all in order.
Buying a new home is a big investment and if you have never done it before, the process can be scary and overwhelming.
But, it doesn’t have to be. This article will help you get a basic understanding of the home loan process:
What are some basic things to know about buying a home?
First, don’t go into the homebuying process lightly, as buying a home is a big commitment.
“Buying a home is the largest investment you will ever make,” says Ryan Leahy, a sales manager at Mortgage Network, Inc. in North Andover, Mass. “It is a huge financial decision, so picking the right home, as well as the right loan, should be a well-thought-out process, because the choices you make will affect you for years to come.
Greg Cook, a mortgage consultant in Temecula, Calif., agrees. Often, potential buyers don’t do their homework before starting the process. “I think the biggest surprise most homebuyers (have) is how much it takes to buy a home today,” he says. “They’re not aware of all the costs over and above down payments.”
The homebuying process includes closing costs, moving costs, pre-paid items, inspections and many more. Cook says that those who are shopping for a new home for the first time should familiarize themselves for the many costs that are associated with purchasing a new home so they have a successful homebuying experience.
What is a mortgage?
A mortgage is a legal document that spells out the details of your home loan. This loan helps people finance the purchase of a home. It's made up of several parts that include the collateral used to secure the loan, principal and interest payments, taxes and insurance (also known as PITI). Collateral on the loan includes the home and the land that it sits on.
The loan principal is the amount of money that is actually borrowed to purchase a home. Interest is the amount of money that a bank charges people to finance them — it is a percentage based on economic figures. Most of your payments consist of the principal and interest together. The total amount is divided into equal payments over the life of the loan using a process called amortization.
When in the process of looking for a new home should buyers start thinking about financing?
“I always tell my clients that financing should come first,” says Leahy.
It’s best to determine how much you can afford to pay each month early on so that you can accurately target homes that best fit your budget. “It’s putting the cart before the horse if you’re looking at homes before you know if you can pay for them,” says Cook.
To avoid you taking on a home loan that you cannot afford, most Realtors require a preapproval letter that proves you can afford a home before they will start showing you any properties. Before you start shopping for a home, make sure your finances are well in order and know and understand your credit score.
What should first-time buyers know about home loans?
It’s best to determine how much you can afford to pay each month early on so that you can accurately target homes that best fit your budget. — Greg Cook, a Temecula, Calif., mortgage consultant Newly built homes are often a good option for first-time buyers because “in many markets, new homes are one of the few options available” to them. “In the resale market, (first-time buyers are) often shut out by investors and listing agents who require short closing periods (that) are not conducive to the loan programs first-time home buyers need.”
Because there is so much to know about home loans, it can be very overwhelming for a first-time homebuyer to learn everything on their own, says Leahy. So, he suggests that first-time buyers consult with a licensed mortgage banker who will be able to clarify the different types of loans available and who can help explain industry terms.
Are there specific house loan types that target first-time buyers?
If you are a first-time homebuyer, you are more likely to have lots of financial help available to you.
“Since down payments are typically the greatest challenge for a first-time homebuyer, FHA loans, as well as state housing agency programs, are usually the most popular choices,” Leahy says.
The Federal Housing Administration (FHA) has programs that can help first-time buyers obtain a loan. These loans differ from typical loans because they offer higher loan-to-value rates, fixed or adjustable interest rates and less-demanding income and down payment requirements. Because of these programs, homebuyers have many options that include FHA-Insured loans, VA loans (for veterans), the Mortgage Credit Certificate Program and more.
What is the difference between a home loan and a construction loan?
There are typically two ways that a homebuyer can buy a new home. In the first instance, a builder finances the cost to construct a home and then sells the home when it is built. In this case, the loan to buy the property is treated like any other loan.
If a builder is not going to finance the homebuilding project, the homebuyer needs to consider a construction loan, also known as single-close financing. This type of loan helps a buyer finance the cost of building their new home. “Just keep in mind that not all lenders do construction loans and that they usually require larger down payments than traditional loans,” Leahy says.
Purchasing a new home as a first-time buyer is without a doubt an intimidating process. However, doing a little homework before you get started will make the process of purchasing a home for the first time much smoother.
Julia West is a Search Marketing Analyst for Builders
Digital Experience. She was previously a content intern and now contributes
articles as a freelance writer on a variety of topics about homebuilding, real
estate and home and garden.