For young Americans looking to buy their first home, the process can be pretty daunting. Aside from the baseline financial requirements, there is a lot that goes into finding the right real estate agent, deciding what type of house and neighborhood you want, and of course, applying for a mortgage.
With a mortgage specifically, the process goes hand in hand with closing on the purchase of the home, so it’s important you’re attune to every pertinent detail along the way. Moreso, there are steps to take way ahead of applying for a mortgage, to ensure you’re in the best financial position to manage every cost that comes with buying a home.
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Here are some helpful long-term and short-term tips for young professionals when buying their first home.
It may seem like stating the obvious, but many future homeowners don’t fully comprehend all the costs that go into buying a home — and that’s before making one mortgage payment. First off, there is the down payment, which may range from 3% to 20% of the home’s total cost. So for a $300,000 to $500,0000 home, that’s anywhere from $9,000 to $100,000 off the bat.
Anyone serious about buying a home should have money for a down payment slotted firmly in their budget — but that’s not all you’ll pay upfront. There are also closing costs, which are made up of a variety of fees and expenses that cover loan processing, property appraisal, inspection, title work, settlement services, homeowners insurance, and even an advance on property tax. Borrowers also have the option to buy mortgage points (that can lower your interest rate), which is another fee tacked on at closing.
All of the above doesn’t even include moving expenses, potential renovations/repairs, and other miscellaneous costs. As such, it’s important to save early and develop a sound budget for every expense you may encounter when buying a home. The sticker price on the house is merely part of the equation.
Boost Your Credit
Once you’re ready to obtain a mortgage, with all your money saved for the associated costs, it’s important you possess the qualities of an ideal loan applicant. While income plays a big role in determining if you’re approved for a mortgage and at what rate, so does your credit history and current standing.
For consumers with average to poor credit, it’s vital to do everything you can to boost your rating (whether it’s your FICO score or another metric) ahead of applying for a mortgage. Some of the most important factors in determining a credit score, which can also help boost your score, are paying bills on time and limiting/eliminating credit card debt. Consumers can track their progress by obtaining a free credit score from sites like TransUnion.
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Explore Mortgage Options
When it comes to how a mortgage is structured and repaid, there are multiple options for new homeowners to consider. What you ultimately choose will depend on what type of financing you need, how long you plan on living in the home, and how you want to tackle interest.
The most common type is either a 15-year or 30-year fixed-rate mortgage. With a fixed-rate, a homeowner will be able to lock in the same interest rate for the life of the loan, which provides transparency regarding their monthly payment. A 30-year option will stretch out the repayment while lowering the monthly amount, while a 15-year will have a higher monthly amount, but allows a homeowner to pay off their mortgage quicker and save on total interest.
However, some borrowers may find that a conventional loan does not work for them. They may need a lower down payment or credit score requirement for financing and can pursue a government-backed mortgage, like an FHA (Federal Housing Authority) loan. Veterans can also pursue a VA (Veterans Affair) loan, which offers its own set of advantages. And for people who want to take advantage of a low interest rate environment, an ARM (adjustable rate mortgage) may be a more cost-efficient option than a fixed-rate option during the introductory period. For some ARMs, the rate can vary greatly later in the loan term depending on market conditions.
Get Your Paperwork in Order
Being organized and on top of every fine detail is important in many aspects of life — buying a home being no different. When applying for a mortgage, you’ll need copies of your tax returns, W-2s, pay stubs, bank statements, rental history, and more, depending on what is required of your lender.
Having all of these documents in order will assist you in getting a mortgage pre-approval letter from your lender, which can come in handy when bidding for a home with other potential buyers, as it shows you are a strong candidate.
Beyond all of the above, there are many other tasks along the way that require documentation, from getting a home inspection performed, to obtaining homeowner insurance, to getting the home appraised by the lender.
With fluctuating rates, varying housing markets, and personal preferences all considered, no two home buying experiences are going to be the same. You may encounter your own unique bumps along the way, but it’s important to understand the basics of the process and how being the most prepared possible is half the battle.
For prospective homebuyers looking to start their mortgage journey, Fiona allows you to compare options from multiple top lenders, with an array of rates, terms, and financing options.