Buying a house is both exciting and overwhelming. You can’t wait to begin this new phase of your life, but you are also concerned about financing. Well, I definitely was! This article contains everything you need to know to make home financing affordable and convenient.
Pre-Ownership: Prepare Your Finances
Before you explore loan types and look into mortgage lenders, prepare your finances. Do the following things:
Assess your situation
Consider your income, existing debts, and savings to have a clear understanding of your financial situation. Factor in all sources of income, including wages, freelance income, and investment returns. Then, consider how much you’re currently paying on debt repayments every month.
Improve credit score
Acquiring a home loan with a poor credit score is extremely challenging. You might only be offered high-interest options. A higher credit score (ideally 720 or more) can help you qualify for a better interest rate. Make sure to pay bills on time, keep credit card balances low, and avoid opening new accounts before applying for a mortgage.
Save for a down payment
Yes, you can get a loan to make homeownership accessible. But you still need funds for a down payment. This typically ranges from 3% to 20% of the home price. If possible, pay at least 20% as a down payment, otherwise, Private Mortgage Insurance (PMI) would become mandatory.
Explore Loan Options
This is where the real struggle begins. Here are some common loan options and what they entail:
Conventional loans
These are offered by private lenders and require down payments as low as 3%. That said, you are obligated to acquire PMI if you put down less than 20%.
FHA loans
These are insured by the Federal Housing Administration (FHA) and are more flexible. FHA loans provide a pathway to homeownership for borrowers who may not meet the stricter requirements of conventional loans. In simple terms, you can get a home loan even with a low credit score and a small down payment (3.5% in most cases). You can get an FHA loan from a reputable private lender like SoFi.
VA loans
These are guaranteed by the Department of Veterans Affairs for eligible service members, veterans, and surviving spouses. VA loans often do not require a down payment or a super-high credit score.
Choose Between Fixed-Rate and Adjustable-Rate Mortgages
Home loans can also be classified by the interest rates applied.
When you acquire a fixed-rate mortgage, the interest rate remains the same throughout the life of the loan. This means predictable monthly payments and better money management.
In contrast, an adjustable-rate mortgage (ARM) means the initial interest rate is fixed for a period (e.g., 5 years) and then adjusts periodically based on market changes.
Consider your financial situation and future housing needs to make an informed decision.
Choose a Reliable Loan Lender
Not all mortgage lenders are the same. This is why it’s important to shop around and get quotes from multiple lenders. Look for the following features:
- A wide range of loan products and options
- Competitive interest rates
- Low down payment requirements
- Strong reputation and reviews
If you would like to see more articles related to the family home, check out my home section.
