With buying your first home comes an amazing feeling of accomplishment. You are now achieving your goals of homeownership and obtaining not only a home, but also a valuable asset. While you may be excited about the anticipated purchase of your first home, you may also feel some anxiety when thinking about what goes into the home buying process. Here are some factors to consider:
What Type of Loan Option Will Work Best For You?
There are many loan options that first-time homeowners can choose from. Your choice will most likely depend on your income, credit score, and the amount you will have for your down payment. Examples may include, but are not limited to, the following.
While conventional loans often come with reasonable interest rates, they normally require a sizable down payment, typically between 20 and 30 percent of the home's value. These type of loans often have the best interest rates for those with a higher credit score in the range of good to excellent. You will often find that there will be a required number of years at a place of employment to qualify for the income verification component as well.
FHA (Federal Housing Administration) loans are government-insured and available to all types of home buyers. Since the Federal Housing Administration insures the loan, your lender can offer you a better deal. Thus, they often also have more flexibility in regard to credit score and income level requirements. These type of mortgages often have the benefit of a low down payment, with home buyers being able to put down as low as 3.5 percent to obtain some FHA loans. While FHA loans are more accessible to more people, they are considered higher risk due to lower credit scores or less equity. Because of the higher risk, you will be required to pay private mortgage insurance (PMI), which will add to your monthly payment.
VA (Veterans Affairs) loans are also government-backed loans that allow servicemen and veterans to help achieve their goal of homeownership during or after their service to the country. These loans can require as little as no down payment, and many vendors will help you even if your credit is less than perfect. These loans will need to have the PMI as well, so be sure to account for that in your monthly payment.
How Much Money Will You Need to Buy a Home?
When planning for your home purchase, there are many essential items you will need to save for. One of the most important, and often the largest portion, will be the down payment. If applying for a conventional loan, you will most likely want to save enough for about 15 percent to 30 percent of the value of the home price you are looking for.
Aside from the down payment, you will need to set aside money for closing costs. These amounts can vary widely from loan type to loan type, as well as state to state, but typically amount to two percent to five percent of the purchase price of your home. Closing costs will include fees such as appraisals, inspections, title transfer, agent fees, escrow and others that can go into the processing and underwriting of your loan.
When planning for your first home purchase, be sure to do your research to avoid as many surprises as possible.
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