A Crash Course On Financing Your First Home

We have all felt that not-so-subtle pressure to buy our first home. There’s the gnawing feeling that you are losing financial ground, then there’s seeing your friends buy a place and of course there’s the never ending “money” conversation with your parents. 

Buying a home for the first time is daunting, though, because of all the steps, tasks, and financial requirements. Never mind trying to find something in your price range and remembering all of the little things about each property. 

Looking at the bright side, there are some advantages to being a first-time homebuyer. You will have access to state programs, tax breaks, and federally backed loans if you don’t have the usual minimum down payment. Before we get started, here are a few conditions that, if met, mean that you qualify as a first time homebuyer:

• 1) An individual who has not owned a principal residence for three years
• 2) If you are married and you have owned a home, but your spouse has not
• 3) A single parent who has only owned a home with a former spouse while they were married.
• 4) A displaced homemaker who has only owned a home with a spouse
• 5) An individual who has only owned a principal residence not permanently affixed to a permanent foundation under applicable regulations
• 6) An individual who has only owned a property that was not in compliance with state, local, model, building codes—and cannot be brought into compliance for less than the cost of constructing a permanent structure

These are all according to the U.S. Department of Housing and Urban Development or HUD.

Factors to Consider Before Buying

How’s your financial health?

You’ve probably heard the same advice as most other first time homebuyers. Have an honest conversation with yourself about money. Ask yourself, can you afford a new home? Audit your finances, know your budget, and know your target price range. But, what do you look for when looking at your financial health?

1. Look at your savings. It would be best if you were prepared for the future and ongoing expenses. You will also need an emergency fund because lenders might require it. It is advisable to have emergency savings that can sustain three to six months of living expenses.
2. Review your spending. Know how much you are spending in a month so you can figure out how much you can set aside for your mortgage payment. Make sure to account for everything that you spend for. This can also reveal if you are truly ready to purchase a house.
3. Check your credit. Your credit score determines what type of loan you can apply for. More on that later.

Let’s talk about the mortgage rate: How much mortgage do you qualify for?

Knowing the amount you can borrow is a good place to start when buying a home. It will make it easier for you to buy a house if you have a pre-approved loan. The things lenders or banks consider when assessing the loan amount is the debt you have, your monthly income, and the amount of time you’ve been working with your current employer.

How much can you afford?

It is hard to look for a house if you don’t know what you can comfortably afford to spend.  if you are approved for a $300,000 loan, it does not mean that you should spend that much. Make sure that your monthly payments are within your budget.  As mentioned earlier, reviewing your other expenses like property taxes, mortgage insurance, house improvements, and closing costs should be part of your budget. .

When buying a house, you will need a home loan, and there are two sources to choose from: a mortgage broker or a bank. It is vital to be knowledgeable about your loan options to find the right lender for you.

Use a mortgage broker if you need special assistance with your loans. A mortgage broker can easily find alternative options that aren’t readily advertised to you. Working with a mortgage broker will give you access to lenders you wouldn’t think to look for. Mortgage brokers can also help you get in touch with real estate agents when you are ready to purchase a home. Go to a bank if you want a faster and easier (only if you have the right and complete requirements) process. 

Purchasing a home has a lot of steps and processes. It is definitely tedious but one of the first few things that you should be concerned about are mortgage rates.

Home Loan Rates / Today’s Mortgage Rates

A mortgage rate is the interest rate of the loan amount given to you. So loan amounts are paid back with mortgage rates. The mortgage rates can either be fixed or adjustable and the lender determines the interest rates and mortgage rates.

Encountering mortgage rates is part of buying  a home. There are a lot of loan options with lenders who give different home loans and loan amounts. It would be best to find the right mortgage than find the lowest rates or at least the best rate for you. It is ideal to find one that has low-interest rates and minimal to no fees.

Here are the current mortgage rates of different loan options:

Conventional Fixed-Rate Mortgages (30 year fixed rates and other options)

Conventional loans are known for their fixed interest rates or mortgage rates. This is a good option for first-time homebuyers since this mortgage requires a minimum credit score of 620 and a 3% down payment. The two most popular agencies that process conventional fixed-rate loans are Freddie Mac Home Possible and Fannie Mae Home Ready.

You may also choose to spread your mortgage payment to over 20 to 30 years, which gives you a lower monthly payment. A 30 year fixed loan rate is 2.875% with a loan term annual percentage rate APR of 2.942%, while a 20 year fixed loan has the same rate of 2.875% with an APR of 2.971%. If you wish to pay off your loan faster, it would be better for you to consider a short-term loan option like a 10 or 15-year mortgage.  A 10-year loan’s fixed rate is 2.500% with an APR of 2.68%, while a 15 year fixed rate is 2.375% with an APR of 2.497%.

Adjustable Rate Mortgages (ARM)

As is said in the name, an adjustable-rate mortgage refers to loans subject to change without notice. For example, a 5/1 hybrid adjustable-rate mortgage or 5/1 ARM offers an initial five-year fixed interest rate period followed by a rate that adjusts on an annual basis. In this case, the “5” refers to the number of years with a fixed rate, and “1” refers to the number of times the rate adjusts after the fixed term – once a year.  One thing that’s risky about this option is its chance to fluctuate up or down for the next 25 years.

The 10 year ARM rate is 4.250% with an annual percentage rate APR of 3.797%, while the 5 years ARM interest rate is 3.625% with an APR of 3.204%. Aside from the 5/1 ARM, there are other available options for this kind of mortgage: The 7/1 ARM interest rate is 2.910% with an APR of 3.797%, while the 3/1 ARM has a 4.500% interest rate with an APR of 3.366%.

FHA Loans

Another great option for a first-time homebuyer is the Federal Housing Administration (FHA) Loan. With the lowest score requirements offered compared to other programs, you can be eligible to apply with a minimum credit score of 500. Aside from this, the FHA mortgage insurance also provides a flexible down payment term and lower interest rates. For those with 500 credit scores, you can start your home buying journey with only a 10% down payment, while those with a credit score of 580 only need to provide a 3.5% down payment.

With FHA, the 30-year fixed rate is 3.250% with an APR of 4.31%, and the 15 years fixed rate is 4.331% with an APR of 4.331%.

VA Loans

Another option available is the VA loan. Offered to veterans and some veteran spouses, service members, and military-affiliated individuals, the VA loan only requires a minimum credit score of 580-620.  With the Department of Veteran Affairs’ backing, the VA loan does not require any down payment and offers a low-interest rate.

With the VA loan, the 30-year fixed rate is 3.125% with an APR of 3.367%, and the 15-year fixed rate is 3.250% with an APR of 3.71%.

Jumbo Loans

For those with a higher budget and are looking for a luxurious home, the Jumbo loan might be the one for you. This kind of loan offers mortgage rates that exceed the normal loan amount limit. However, a low debt to income ratio and higher credit scores are required for individuals to avail of this loan option.

You can choose between a 15-year fixed term (3.125% with an APR of 3.25%), a 20-year fixed term (3.250% with an APR of 3,347%), and a 30-year fixed term (3.125% with an APR of 3.193%).

Before you start your path to home-ownership, it is best to get as much information and prepare for the financial responsibility ahead of you. Hopefully, the details we shared in this article can guide you and bring you closer to getting your dream home.