Buying your first home is more overwhelming than exciting. Between all the paperwork, numerous mortgage types, and hundreds of terms you’ve never heard of, it is quite natural to feel lost.
Remember that buying your first home or acquiring a mortgage is one of the biggest financial decisions of your life, so you need all the information you can get. The good news? Asking the right questions can make the process a lot less stressful.
Let’s answer four questions every first-time homebuyer has.
1. How Much of a Down Payment Do I Need?
A down payment is the single largest out-of-pocket expense you make when buying a house. It is a percentage of your home’s total price and is paid as a lump sum.
Many first-time homebuyers hear about the 20% down payment “rule” and are immediately disappointed. Yes, putting down 20% of your home’s total price as a down payment protects you from Private Mortgage Insurance (PMI), but it isn’t necessary.
Conventional fixed-rate mortgages allow you to put down as little as 3%. Similarly, a Federal Housing Administration (FHA) loan requires only 3.5% of the home’s total value as the down payment.
A down payment should not strain your emergency funds or savings accounts. So, consider your financial situation and long-term goals to determine the right percentage.
2. Should I Get Pre-Approved?
First-time loan borrowers also wonder if getting pre-approved will do them any good. The answer? Yes!
Getting pre-approved shows lenders that you’re a serious buyer, which influences them to offer low interest rates. This is especially true if you have a good credit score.
When you apply for mortgage pre-approval, a lender will run a thorough check of your financial situation and offer a potential borrowing amount. This will give you a clear idea of how much house you can afford. Lastly, having a pre-approval letter will fast-track the process of acquiring a loan once you’ve found a house.
3. Is My Credit Score Good?
As hinted earlier, lenders pay close attention to your credit score to determine the interest rate and loan terms. If your credit score is above 700, you can easily qualify for favorable interest rates. If not, you might have to work a little hard to find a lender who won’t bury you in debt.
Consider checking your credit score before you officially apply for a mortgage. If it needs work, don’t panic and look into effective strategies to increase it. This includes paying off credit card bills and balancing accounts.
4. Can I Borrow Against My Home’s Equity?
Many homebuyers wonder what happens once you’ve paid down your mortgage and built equity in your home. Here, you have a chance to borrow against your home’s equity and put that money to good use. This could be a much-needed home improvement project, your child’s college tuition, or a medical expense.
This is often done through a Home Equity Loan or a Home Equity Line of Credit (HELOC). In HELOC vs home equity loan, the main difference is interest rate. HELOCs offer varying interest rates, whereas home equity loans come with fixed interest rates. Reliable mortgage lenders like AmeriSave will explain everything to you so you can make an informed decision.
