Buying a home is a major undertaking. It almost always requires you to obtain some sort of financing assistance.
Typically, home financing involves applying for a mortgage through a financial institution, such as a bank or credit union. It is important to understand not all mortgage agreements are identical. The same is true of lenders. You must understand all of the options at your disposal before financing your home.
When you begin the financing process, your chosen lender assesses your credit status. This includes your credit history and current credit score. If you are considered an acceptable borrower, a pre-approval amount is assigned to you.
The pre-approval amount is an estimate of the amount you can borrow, but it is not the final mortgage amount. Loan agreements are complicated, especially home loan agreements. Changes in your status, such as applying for new credit cards or other loans, can impact the total you can borrow.
Below is more information on home financing, including mortgage types you can choose from.
What is a mortgage?
A mortgage is another term for a home loan. A home loan is also called a property or real estate loan. When you apply for a mortgage to buy a new home, your lender must make sure you are a safe borrower.
It is too risky for a lender to blindly loan you money on faith. Full financial disclosure on your part is necessary for the lender to determine if you qualify for a loan. If you qualify, your financial information is used to set your pre-approval rate.
A pre-approval rate is the certified amount your lender lists. You can present this amount to a homeowner or real estate agent as a sign of your ability to buy your desired home. However, the actual amount you can borrow with a home loan is affected by other factors.
For example, any of the following can have a negative impact on your mortgage limit:
- Applying for vehicle loans.
- Obtaining new credit cards.
- Opening any other new lines of credit.
The home appraisal results can also affect your pre-approval limit. If the listed purchase value of the home is higher than the appraisal amount, the lender may lower your pre-approval limit.
If this happens, you can renegotiate the sale price with the homeowner or make a down payment equal to the appraisal difference. Alternatively, you can opt to not purchase the home in question and continue your housing search.
It is possible you do not even need a mortgage. For example, if you are downsizing from a large home to a small one the sale of the large home may cover the costs of your new house. However, having the ability to buy a home with cash is not automatically a good idea. Talk to a professional to make sure you make the right choice.
If you do apply for a mortgage, you may choose between an adjustable rate mortgage (ARM) or a fixed-rate mortgage. The word “rate” refers to how much interest the lender charges. You can also choose a mortgage duration.
Standard mortgage lengths are 15 or 30 years. However, your lender may also offer 10 or 20-year mortgage options. Choose the duration and type carefully. It must match your current financial situation and long-term expectations.
A 30-year fixed-rate mortgage is best when you actually intend to stay in the home for decades. Such a mortgage typically has a low monthly payment requirement. Your rate is also secured, so you do not have to worry about rate increases.
A variable-rate mortgage is often better when you are purchasing a temporary home. However, make sure the rate is low enough in the beginning. Also, do not change your plans. Moving within a few years is essential to avoid expensive rate increases.
Learn About Conventional Loans and Government Loans
Home mortgages offered by private lending companies like banks are not insured by the government. Known as conventional loans, they are available through local sources. You may even obtain a loan through your bank.
Some conventional loans, also known as conforming loans, meet Freddie Mac and Fannie Mae requirements. Those are government-sanctioned mortgage buying companies. Other mortgages do not meet those requirements and are called non-conforming loans.
Some home mortgages are issued by government agencies like the Federal Housing Administration (FHA). You may prefer an FHA loan because it is government-backed. An FHA loan also typically requires less down payment money than a conventional home loan.
Additionally, you are more likely to qualify for an FHA loan than a conventional loan because the qualification rules are less stringent. When applying for an FHA loan, you must understand the costs. Closing costs are often lower, but mortgage insurance is required.
You must make initial insurance payments and annual payments. A poor credit score may exclude you from qualifying for a conventional loan. However, you may still qualify for a government loan.
Government organizations other than the FHA that issue such loans include:
- U.S. Department of Veteran Affairs (VA).
- U.S. Department of Agriculture (USDA).
- U.S. Department of Housing and Urban Development (HUD).
Some government organizations also offer special home mortgages. You must meet specific eligibility requirements to get these mortgages. For example, if you are a teacher you may qualify for the HUD Good Neighbor Next Door Program.
You can also qualify for the program if you are an emergency responder or law enforcement officer. You can also apply for special home loan assistance programs offered in your local area. Many are run at the state level or within a specific community.
Learn About Mortgage Considerations
The cost of your home is not the only financial consideration when applying for a mortgage. You must also consider how much money you need upfront for a down payment. A down payment can be as low as three percent.
However, a lower down payment typically means insurance is necessary. This amount is factored in when you pay the closing costs and other fees at the time of the final purchase.
You must also consider long-term costs of owning your new home to make sure you have enough savings or income to cover those costs. For example, home repairs and standard maintenance procedures are inevitable for your home.