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Purchasing a home for the first time is one of the biggest accomplishment that most people will achieve in their lifetime however, this comes with some challenges especially when it comes to the finances.
Knowledge of the general processes that are associated with financing a home will assist you to feel more comfortable and willing to deal with mortgages, down payments, and loans.
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It does not matter whether you are a first-time home buyer or you have recently begun the process of searching for your ideal home – one of the most significant steps to take is having a plan on how you are going to finance the home.
Here are ten essential steps to guide you through the process of financing your first home:Here are ten essential steps to guide you through the process of financing your first home:
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10 Steps to Finance Your First Home
Check the following steps to make you ready financially and as well as for taking the right decision while purchasing the first home.
1. Assess Your Financial Situation
The first step or part of the whole process is most importantly, evaluating your financial capabilities.
This involves a person’s earnings, expenditures, savings, and any obligation that he or she has. Analyse your budget and determine how much money you can spare in a month to make necessary expenses on a home.
It is suggested to use the budgeting application or any other tool to determine the overall idea of the financial situation. Understanding your current financial position will enable one to set a proper financial expectation that does not lead to more debt.
2. Check Your Credit Score and Report
The interest rate and other mortgage terms, that you will be eligible to are dependent on the credit score you have. Increased credit score means you are more likely to get a better interest rate which means parting with little cash over the terminal of the loan.
That is why, it is recommended to get a report from all the three main agencies, namely Equifax, Experian, and TransUnion, and check for inaccuracies.
It is wise that if one has low credit rating he should ensure that he pays the credit card balance, ensure that he pays his obligations on time, and does not apply new credit accounts before seeking a mortgage.
3. Determine Your Budget and Down Payment
Thus, knowing your finances and credit score, you may define how much you can spend on a home. It has been estimated that the amount you spend on your mortgage, property taxes and insurance should not more than one-third of your monthly income.
After that, consider the amount of money that is available for putting down as a deposit. Some of the normal conventional loan terms are with a down payment of twenty percent so as to avoid private mortgage insurance (PMI) but there are some with down payments of 3% to 5%.
4. Explore Mortgage Options
There are many choices of mortgage loans today and it is critical to choose right that protects your financial well-being.
The two main categories are the fixed-rate mortgage and the adjustable rate mortgage otherwise known as the ARM. This type of loan rate is fixed and does not change during the entire repayment period making it easier for a borrower to plan his expenditure.
An ARM, however, applies a relatively low initial interest rate, which could vary after a particular period. Also, research on government sponsored loans including the FHA, VA, and USDA loans to get more extended features for example the requirement for a lower down payment and flexible qualifying norms for those who qualify.
Consider the above mentioned advantages and disadvantages of each of the above options before arriving at an informed decision.
5. Get Pre-Approved for a Mortgage
Getting pre-approved for a mortgage is a crucial step in the home-buying process. A pre-approval letter from a lender shows sellers that you are a serious buyer and can help you stand out in a competitive market.
To get pre-approved, you will need to provide documentation such as income statements, tax returns, and details about your debts and assets. The lender will evaluate your financial information and determine how much they are willing to lend you.
Remember, being pre-approved doesn’t mean you are obligated to borrow that amount; it’s simply a helpful guide to know your budget.
6. Research Potential Lenders
While seeking a mortgage not all lenders are equal so there is need to compare the various lenders for the best mortgage rate as well as the best terms. Research about them from banks, credit unions, on-line lenders as well as mortgage brokers to empower you to compare these companies.
Opt for loans which have reasonable interest rates, flexible repayment terms, least possible charges and have a good customer relations. Do not be also shy to bargain; some of the loaning companies will agree to provide you with better terms once you agree to work with them.
A half a percent difference in the interest rate is easily possible and can translate to hundreds of dollar savings overall and therefore it is worth the time to it find a good lender.
7. Factor in Additional Costs
Most first time homeowners fail to factor other expenses in their housing plan apart from the cost of the mortgage. Some of these expenses may include property taxes, homeowner’s insurance, closing costs, home maintenance costs and where necessary homeowners association (HOA) fees.
Even closing costs which are the fees incurred at the end of the purchasing process may amount from 2% to 5% of the price of the house being bought. These are some of the costs one has to put into consideration to prevent any form of financial shock.
Ensure that you have adequate funds to cater for such expenses while at the same time leaving you with an adequate emergency fund.
8. Choose the Right Type of Mortgage Term
The type of mortgage you select has a close relationship with the amount of monthly payments that you will make as well as the total cost of the mortgage. The two most popular durations that have been attached to these are 15 years and 30 years.
A 15-year mortgage has a slightly lower mortgage interest rate and the customer gets to pay his/her home in less time but incurring higher monthly costs. While a 30-year mortgage is easier on the wallet when it comes to monthly payments, you’ll end up paying more in total interest.
There are several factors to think about before deciding on the mortgage term; one is your current financial capacity, how long you wish to live in the home and your long-term goals.
9. Stay Organized During the Closing Process
When the offer you made for the home is accepted, you will then go to the closing process which usually entails a number of procedures which include for instance the inspection of the home you want to buy, appraisal of the same home you intend to buy, and finalizing of your mortgage application.
This is the time when it is important to follow the organization’s plans and not to be overly reactive. Expect more requirements from your lender, read all documents and papers twice, cooperate closely with your real estate agent and your lender.
Any delay or mistakes on this process would impact your closing date that is why it is best to be in control of everything to have a smooth sale.
10. Lock in Your Interest Rate
Interest rates are volatile and, thus, fixing the interest rates means you get a particular rate on the amount you need for a given number of days – 30 to 60 days usually – while your loan application goes through the processing.
Because the rate can fluctuate before you finally sign the deal of your home, locking in your rate helps you avoid high interest rates on your loan. Nonetheless, the consumer should always remember that some of the lenders might require a fee for this service.
You must make the arrangements with your lender in terms of timing and the costs when you should lock your rate for your loan.
