Purchasing a home for the first time can seem overwhelming. Fear of the home buying process typically comes from fear of the unknown. There are so many directions you can take and a lot of decisions that go into the process. While this lengthy undertaking is meant to protect you, as the buyer, it is still important to settle on an objective for what you are looking for and what you can afford. The best thing you can do is prepare yourself as much as you can through research, so you know what to expect.
We have collected a series of the MOST asked questions from first-time home buyers so that you can start this journey confidently – making your home buying experience stress-free!
- What is a mortgage?
Let’s start with the basics. A mortgage is a type of loan that you agree to pay back monthly in installments over the course of so many years. When you begin making these payments, a portion goes towards principal (the amount you borrowed as the loan) and interest (the cost of the loan).
- How much of a down payment do I need?
This amount varies from which financing options are offered and what you choose; however, the average amount is substantially less than what many may believe. While there are those who put as much as 20% down, other options are always available that require less, some as low as 5%! If the down payment seems intimidating, it is a good idea to investigate more financing options to see which is the best fit for you and your situation.
- What is a credit score and why should I care about it?
A credit score is a numerical assessment ranging from 300-850 that analyzes how much of a risk you are to lenders – in other words, your creditworthiness. This lets them know how likely you are to pay your bills on time. Generally, the higher your score is the lower risk you are to lenders. Poor credit history or no credit at all are usually one of the two main culprits of credit challenges when it comes to buying a home.
A. Poor credit history
While a good credit score is very valuable, a poor credit score does not automatically count you out of the home-buying process. It is always beneficial to talk to several lenders to see your options. A good loan officer, or mortgage specialist, will be able to offer assistance in resolving your credit challenges through creating a plan of action. This plan would consist of ways to consolidate your debt and create a strategy to increase your credit score in the future. This could take some time and is always smart to be proactive.
B. No credit history
You may have no credit history if you are new in the workforce, or do not have opened credit cards. Some options to still qualify for a loan despite this would be to secure help with a cosigner. This is typically a parent or close relative who “vouches” for you by agreeing to make your payments if you fail to. A positive to this option would be that there are few better ways to establish good credit than by making timely payments on your mortgage.
- What are the benefits of buying instead of renting?
One of the biggest benefits of buying a home instead of paying rent each month is that you are able to lock in a fixed-rate mortgage. Landlords increase rent by about 3-5 percent each year, according to the U.S. national average found on Millionacres. Even if rent was locked in at a fixed-rate, you would be essentially losing money because you are not building what is called “equity.”
- What does building equity mean?
Equity is the portion of your home’s value that you own. It is the amount you would receive after selling your home, and settling your mortgage/selling expenses. This is important because it helps determine your net worth, or the dollar amount when you add everything of value you own minus what you owe.
The first way to build equity is by paying down your mortgage. You are paying two things when you pay your mortgage: principal (the amount you owe), and interest (the payment for the loan given). As time goes on, you begin to own more and more of your home’s value because you are making payments towards your principal.
Another way you can build equity is by your home appreciating in value. This is because home prices inflate exponentially over time meaning that what your home is worth when you are ready to sell it will be significantly higher than what you bought it for.
These are the basics of what you need to know before making the leap to start the home buying process. It is important to note that laws vary from state to state and you should invest in a quality team of professionals who are knowledgeable in the area and conduct business with integrity and reliability. Remember to keep it simple and not to let the opinions or advice from others deter you from staying focused on the plan you create for yourself. Now go on and seize the opportunity!
Keller, Gary, et al. Your First Home: The Proven Path to Home Ownership. Stonesong Press/McGraw-Hill, 2008.
How did we do answering your questions? Were there any topics that we did not cover that you would like to know more about? Leave us a comment and let us know what we should include in part two – or send us a message on social media!
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