Buying a home is incredibly exciting—after all, there’s arguably no larger purchase you can make or accomplishment you can achieve in mastering your personal finance. It takes a tremendous amount of hard work and determination to get to the point of being financially stable enough to even think about being able to afford a home, and that’s worthy of congratulations in and of itself.
That being said, there are a number of considerations you will need to keep in mind as you embark on your journey to homeownership. Getting too excited or carried away can cause huge financial consequences, so be sure to take your time and give the following three items the careful consideration they deserve.
The Importance of Your Realtor
Some experienced buyers might go at it without a realtor in their corner, but since this is your first purchase, it’s wise to enlist the help of a seasoned professional. You can’t just go with the top name on your Google search or the distant friend who became recently licensed—you need to pick the right realtor in order to avoid pitfalls like double-ended deals.
Ask all the proper questions necessary to make a fully informed decision. Not sure how to conduct a phone interview? Here are the inquiries you should prioritize in your search:
- How long have you been a realtor?
- Can you provide at least three references?
- How readily accessible are you?
- How will you get me the best deal on the purchasing price?
- Once my offer is accepted, will you attend the inspection?
The Structure of Your Mortgage Plan
There are a few different mortgage plans you should consider before jumping into a one-size-fits-all loan agreement. Your realtor should be able to walk you through each, but here are some of the noteworthy differences to be aware of:
Conventional Mortgages – These mortgages are not insured by the government, but they do conform to the government standards known as Freddie Mac and Fannie Mae. One thing to note about a conventional mortgage is that they require mortgage insurance unless you can put down at least 20%; once the loan’s principal balance drops below 78% of the home’s value, you no longer have to pay mortgage insurance.
- Qualifying credit: 620-740
- Interest rates: 3% +
- Loan terms: 15 or 30 years
FHA Loans – An FHA loan is insured by the Federal Housing Administration, who guarantees a portion of the loan should the borrower default. This minimizes the lender’s risk and allows them to expand their borrowing parameters to the benefit of first-time homebuyers who might not have large savings or strong credit. Keep in mind that closing costs will be much higher for this type of mortgage and the home must meet rigorous appraisal standards.
- Qualifying credit: 580 – 620
- Interest rates: 3.5% +
- Loan terms: 15 or 30 years
VA Loans – If you are an active duty military personnel (or veteran in California and Hawaii), you may be eligible for this mortgage plan backed by the Dept. of Veteran Affairs. Income and credit requirements are significantly lower than other loans, making the approval process much easier, but be prepared to face longer closing periods than you would experience through a private lender.
- Qualifying credit: 550+
- Interest rates: 3.25% +
- Loan terms: 30 years
The Lender’s Pre-Approval
Once you and your realtor determine the best mortgage plan for you, you’ll be able to narrow down your list of lenders, since FHA and VA loans will require a specific lender who is government approved. It’s important to get pre-qualified for the loan amount you are eligible to borrow for two reasons:
- It limits your house-hunting to properties within your budget, saving you time and frustration.
- It shows buyers you are serious, qualified, and capable of closing quickly.
Contrary to common money myths, borrowing money isn’t always bad; it’s a common part of living. Just be prepared for what a lender will look at during your mortgage application:
- Outstanding debt
- Credit background
- Employment history
- Income level
- Monthly expenses
With these three things in place, you can begin your real estate search—informed by your realtor and lender—and hunt down the home that may very well become your happily ever after!