When you start the search for purchasing your first home, it can both an exciting and daunting task. You may have been preparing and saving up for quite a while, or you may just now be exploring the idea. No matter what phase of the process you are in, there are many questions and ideas that you should familiarize yourself with as you move forward. While we can’t cover everything you need to know about the process, we are here to shed some light on some of the top questions we receive as financial advisors.
Should I be preapproved before I start my housing search?
The short answer is yes. It will be more favorable to a buyer, and it can speed up your timeline of putting an offer on a house if you have the prequalifications and application completed ahead of time. If you are working with a real estate agent, they will often have you start this process right when you are ready to look for homes. This also proves to buyers that you are serious about buying their home. With the housing market being especially competitive over the past few years, it is smart to be prepared to make an offer when you find the right place.
How much money do I need to put down? And should I avoid PMI (private mortgage insurance)?
When looking at how much money to put down as a down payment on your first home, a couple of factors affect this decision. PMI and the amount of cash you have saved or have on hand are both factors that may determine how much money you can put down on your first home. PMI is typically applied to a loan when less than 20% of the home purchase price is put down as a down payment. What is PMI? PMI is a type of mortgage insurance that protects the lender in case the borrower no longer makes payments. Because this is an additional cost, most people find themselves wanting to avoid paying PMI insurance. However, not everyone has the cash on hand to put at least 20% down on their first home. This is something that you should take into consideration as a first-time buyer, and talking with a financial coach or advisor can help you determine a budget for what you can afford.
What kind of loan should I consider as a first-time home buyer?
While there are multiple types of loans that you can use to finance your mortgage, they can be narrowed down based on your preapproval qualifications and the kind of payment structure you are looking for. To answer this simply, the most common mortgage is a conventional loan. This is a loan backed by a private lender which utilizes a fixed rate over the lifetime of the loan. Typically, a 15- or 30-year mortgage is the most common and the payments are fixed at that price for that period. A different type of loan that does not involve a fixed rate is what we call an adjustable-rate mortgage. Typically, there is a fixed period of time upfront. After that the rate changes to a variable interest rate for the remainder of the term. For example, someone may choose to finance their mortgage this way if they are only going to hold the loan for a short period of time. Other types of loans include a government-insured loan like an FHA, USDA, or VA loan. These all have certain qualifications to be able to apply. It would be best to talk over your options with a professional who understands the different types of loans. Someone who is licensed in the mortgage and lending profession should make a final recommendation as to which type of loan is best for you. Your financial coach can also help you navigate this decision, and they can likely introduce you to someone in the lending profession that they have worked with.
While there are still many more questions that you may have about buying your first home, this should hopefully give you a great start. Please consult with one of your financial coaches if you have any other questions about the topics discussed here or other topics.