Purchasing a home involves a lot of language and action that may not be common to first-time homebuyers. When you factor in the relatively high investment in a home, it only makes sense to make sure you are as familiar with the process as possible before buying a home. The majority of learning that needs to be done by first-time homebuyers pertains to mortgages.
Work on Your Credit Score
The importance of maintaining a good credit score is often discussed. But never is this concept more applicable than when purchasing a home. Visible Equity explains that there are certain environmental and qualitative factors that lenders look at under the new CECL model. A complete review process examines your income, credit history, financial assets, etc.
That said, the best interest rates are often given to the homebuyer with the highest credit score—since this indicates that there is less of a lending risk. Even a one percent decrease in the interest on a mortgage could save tens of thousands of dollars on a $200,000 mortgage.
Put Down 20%, if You Can
It was once standard practice for most homebuyers to save until they possessed 20 percent of the cost of a home to put down on a mortgage. It is a practice that first-time homebuyers today should revisit. Like other types of installment loans, the security on the loan will affect the terms of the loan. The second benefit of a 20 percent down payment is that it eliminates the need for private mortgage insurance. PMI is extra insurance paid by homeowners who owe more than 80 percent of the cost of a mortgage.
Eliminating this monthly expense will save you a significant amount of money. Other advantages of a 20 percent down payment are better chances to qualify for a loan, paying less over the life of the mortgage, and the ability to build instant equity.
Keep the Payment to 1/4 of Your Take-Home Pay
It is a good idea to only accept a mortgage that will result in monthly payments no more than 25 percent of monthly take-home pay. You should adhere to this principle even if the bank is willing to loan you more money. First-time homeowners often underestimate the other expenses involved with owning and maintaining a home. Keeping your mortgage at 25 percent of your take-home pay will ensure you have sufficient funds for your monthly expenses, as well as, any unexpected costs that occur.
Getting pre-approved by a mortgage lender will benefit you in two ways: First, it will predetermine the limit for the price of your new home. Secondly, it will demonstrate your seriousness to real estate agents who will then negotiate more aggressively with sellers.
Purchasing a home can be a complicated process for a first-time homebuyer. This includes learning and understanding how mortgages work. Navigating the mortgage process will be a little simpler with the four tips profiled above.
If you still have questions about buying a home, please feel free to contact Magnolia Properties. We would be happy to help you navigate the process of finding and purchasing your first home!