Buying a home is almost synonymous with fulfilling the American Dream for many individuals and families. But it can become more than just a dream, it can become a reality with the proper planning. Two key factors in purchasing your first home are understanding how much of a down payment you will need to save up for and preparing to qualify for a home loan.
Home loans are also called mortgages. According to Wikipedia, “the word mortgage is derived from a law French term used in Britain in the Middle Ages meaning ‘death pledge’ and refers to the pledge ending (dying) when either the obligation is fulfilled, or the property is taken through foreclosure.
That doesn’t sound too comforting. Sure, your home will probably be the biggest purchase of your life. But with the right information and planning, you can remove the fear and doubt and become confident about the possibility of moving into your first home.
Getting a mortgage starts with getting prequalified at a bank or with a mortgage broker. Getting prequalified is the first step that should be taken before seeing a real estate agent to help you look for a home. The lender will ask you for 5 items:
- Social Security number and date of birth, which allows them to get
- Your most recent credit report; and
- Your most recent credit score.
- Your last two years’ tax returns filed with the IRS.
- Your last two paystubs.
- Your recent bank statements to see how much you have saved for a down payment.
- If you are self-employed, your most recent business financial statements.
This information will allow the lender to determine how much you can afford to spend to purchase a home and the types of loans for which you can qualify. The lender doesn’t want you to get in over your head, and they want you to be able to make your monthly principal and interest payments comfortably.
Remember, owning is different than renting. When you purchase a home, you will also be responsible for paying property taxes, homeowner’s insurance, maybe homeowner’s association dues, maybe private mortgage insurance (if your down payment is less than 20% of the purchase price of the home) and the occasional repair.
Once the bank reviews your financial situation, the bank will give you a prequalification letter to give to your real estate agent to help you determine the home you can purchase. The prequalification letter will also give comfort to the home seller that you can afford to purchase their home before they get into a sales/purchase contract with you.
Once you have found the home that you want to purchase and the seller accepts your offer, you will go back to the bank or mortgage lender to get your first mortgage to purchase your home.
The typical mortgage for most Americans starting out is a 30-year fixed mortgage or an adjustable-rate mortgage (ARM) that usually has a fixed rate for 5, 7 or 10 years and then converts to a variable rate that typically adjusts annually. ARMs tend to have lower interest rates than 30-year fixed loans, but, unlike a fixed loan, an ARM's interest rate may increase after the fixed term ends. A quick reminder for your decision-making: shorter mortgage terms, whether fixed or adjustable, require larger monthly payments, but have lower interest rates.
Your first home will be one of the biggest purchases of your life and likely won’t be the last home you purchase. Take your time, learn more about mortgages (including FHA mortgage loans), and shop around for the best loan you can find. Websites such as www.bankrate.com or www.nerdwallet.com can help you find a lender. Additionally, working with a CFP® professional can help ensure your finances are on track to take on a mortgage.