Buying a home with a mortgage can be somewhat overwhelming, especially if you are a first-time homebuyer. Many options exist when it comes to obtaining a mortgage for your new home, and it pays to learn as much as you can about how the process works. The five tips on buying a home with a mortgage below are designed to help you better understand the mortgage process to obtain a loan that’s right for you.
Have Money in Savings
One of the first things (besides your credit score) a lender looks at is whether you have enough money in savings to pay your mortgage in an emergency. Should you lose your job or become disabled, the lender likes to know you can continue to make payments until your income returns to normal.
Having said this, “reserve” savings refer to money left over after you make a down payment and pay closing costs. You could pay up to 20 percent on a down payment, and lenders don’t like to see you use all your money for these fees. Depending on your qualifications, you may not have to pay the full 20 percent for a down payment, but it’s best to show the lender that you have enough funds available in a pinch.
Only Borrow What You Can Afford
Many people tend to purchase more home than they can easily afford, thinking that over time their income will go up. In most cases, this line of thinking ends up getting the homeowner into a bind, as their income doesn’t increase as quickly as they thought it would.
Rather than struggle with a mortgage payment that’s too high, it’s best to buy a house you can easily afford at the time. You can always sell that house and buy something else later when and if your income allows.
Find out if you qualify for a Low-to-no Down Payment Mortgage
For the average mortgage, many lenders prefer a down payment of 20 percent or more. This fact alone makes many potential homeowners think they can’t afford to buy a home. The fact is, however, that there are several mortgage options available that require little to no down payment if you qualify.
VA Loans – The Department of Veterans Affairs gives mortgage loans with zero down payments to qualified active-duty service members, veterans, and some National Guard and Reserve members.
Rural Development – The U.S. Department of Agriculture gives zero-down mortgage loans in eligible rural areas.
Primary Residence – The Navy Federal Credit Union gives zero-down payment loans to qualified buyers purchasing their primary residence.
FHA Loans – The Federal Housing Administration offers insured mortgages with down payments as low as 3.5 percent. Some conventional lenders also offer mortgages with a 3.5 percent down payment on the condition of private mortgage insurance.
Don’t Stress over Imperfect Credit
While your credit score is one of the most important factors a lender looks at when considering you for a mortgage, having imperfect credit isn’t a guarantee of denial. In fact, you can obtain an FHA loan with a credit rating as low as 580 and still pay only 3.5 percent down.
Consider a No-closing Cost Mortgage
A traditional mortgage comes with thousands of dollars in closing costs. When you pay these costs out of your own pocket, you get the lowest interest rate you qualify for. However, you can opt to have the seller pay some or all of the closing costs and pay a higher interest rate.
People who plan to stay in a home for only five or six years tend to like no-closing-cost mortgages because it saves them money overall. If you plan to stay in the home longer, you’ll end up paying more in interest than if you’d just paid the closing costs upfront yourself. Be aware, however, that paying the closing costs yourself lowers your interest rate, but it may force you to have to pay mortgage insurance as well.