First-time home buyer guide to financing

Household 3 min read

Obtaining financing for a home purchase can be a time-consuming process. It’s best to begin as early in your home search as possible to ensure a smooth closing.

Preparing to finance your first home

If you’re embarking on buying your first home, be aware of these items:

1. Qualifying for a mortgage: beyond your credit score

As you get serious about house-hunting, you should also start to research lenders.

As you explore lenders, you’ll find that factors in addition to credit score go into qualifying for a mortgage. Job stability is one key, and debt-to-income ratio is another. Try to avoid any job changes or taking on new debt as you prepare to apply for a mortgage.

2. Understand trade-offs between shorter- and longer-term mortgages

Thirty-year mortgages have become the norm, because stretching payments out over such a long period of time makes them more affordable on a monthly basis. However, this comes at a cost. Taking longer to repay your mortgage means paying more interest over the life of the loan.

A shorter mortgage term generally features a larger monthly payment, but it also means paying interest for fewer years and typically includes a lower interest rate. Use an online mortgage amortization calculator to understand the effect that a shorter mortgage would have on both your monthly payment and the total interest paid over the life of the loan.

3. Adjustable-rate mortgages may have short-term benefits, but long-term risks

Most mortgages are fixed-rate loans, meaning your interest rate and monthly payments stay the same throughout the repayment period.

Adjustable-rate mortgages are an alternative that allows rates and payments to fluctuate according to interest rate conditions. These may offer lower monthly payments at the onset, but you run the risk of payments becoming unaffordable in the future if interest rates rise.

4. Mortgage shopping can save you money

Once you decide what kind of loan you want, take some time to shop around for the best rate.

Rates from different lenders vary, and given how long mortgages last, a lower monthly payment could pay off for years to come.

First-time home buyer checklist: closing the deal

Here’s how to navigate closing on your first home:

1. Know the merits of pre-qualification vs. pre-approval

When you’re serious enough to anticipate making an offer on a house in the near future, you should consider getting pre-approved for a mortgage.

This differs from pre-qualification, which is a preliminary process by which lenders give you an idea of whether you may qualify for a mortgage. Pre-approval is a more detailed procedure involving a formal commitment by the lender. This commitment can carry weight if you are competing with other potential buyers for a property.

2. Budget for ongoing costs: property taxes, insurance—and the unexpected

When you’re figuring out whether you can afford a mortgage, remember that you’ll have ongoing costs beyond your loan payments.

Property taxes and homeowners insurance add to your monthly expenses, and leave a little extra in your budget for home repairs and improvements that go with being a homeowner.

3. Attend the property inspection

Part of the mortgage approval process is getting the property inspected. Understand, though, that the purpose of this inspection is primarily to make sure the house is sound enough to act as security for the loan—not to tip you off to any potential problems you may encounter.

You can get more out of the property inspection if you follow along with the inspector, and ask questions about any potential concerns.

4. Have your down payment and closing costs ready in the right form

When your closing is scheduled, find out how the various parties (i.e., home seller, lender, insurance company, etc.) want to receive payment. Chances are, they won’t simply accept a personal check.

You may have to arrange to wire money, or obtain a certified or cashier’s check in the appropriate amounts.

Most important of all, keep calm and don’t get overwhelmed by the process. Knowing what to expect can help you take each step in stride.

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