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Mortgage 101: Financing Your New Home

Whether you’re buying your first home or it’s your second time around, the journey to homeownership can be exciting and challenging. Homeownership is an important personal and financial long-term commitment. For most people, financing a home is one of the largest investments you’ll make in your lifetime. There are many components to the home buying process and if you’re unprepared, the experience can take away the excitement and leave you feeling overwhelmed.

Do you know how much you can afford to pay for a new home? Do you know how you’re going to finance it? Do you have all the required documents needed for the loan process? To help reduce the stress of purchasing a new home, you may want to start by knowing the answers to these questions; especially, in today’s market with limited homes for sale and strong competition with other buyers. You’ll want to be familiar with the home buying process (from start to finish) and be ready to compete to find your dream home.

We’ve provided information to help you get started with the most important part of the process, financing your home.

Determine What You Can Afford

Preparing your finances and determining how much you can afford comfortably before purchasing a new home are crucial steps in financing your home. A part of the lender’s decision to approve a mortgage is based on if you can afford to pay it. The one thing you don’t want to happen is finding your dream home only to realize it’s one you can’t afford. Here are a few things to consider when preparing your finances.

Create a budget.

Creating a budget (and sticking with it) is the first step to determining how much you can afford. When reviewing your budget, you should factor in the possibility of increased expenses for utilities, water, homeowners association fees, water, etc., especially if you’re upgrading to a larger home. You’ll also want to prepare for additional costs associated with the home buying process such as down payment, closing costs, inspections, new furniture, etc.

After you purchase a home, there's also a chance your homeowner's insurance and property taxes could increase. In many cases, the lender will add the cost of your homeowner's insurance premium and property taxes to your monthly mortgage payment (setting the funds aside in an escrow account until the bill comes due). If these costs increase annually, your monthly insurance and property tax costs included with your mortgage payment could also increase.

Review your credit report.

Have you checked your credit report lately? Do you know your credit score? Now is a good time to review your credit report from each credit reporting agency (TransUnion ®, Equifax ®, and Experian™) to know your score and to dispute any errors and discrepancies that may appear on your report. If there are errors on the report or accounts you didn’t open, contact the creditor and credit reporting agencies to dispute them.

Pay down or pay off debt.

Paying down or paying off your debt will help you to look more favorable with the lender. It helps to reduce your debt ratio and improve your credit score. The type of debt you’ll want to focus on paying off or paying down is a credit card or line of credit. It’s important to keep credit card spending under control. How you manage your credit cards is a big part of your credit score. Also, most lenders recommend not making any credit splurges, opening new accounts, or loans during this time because it can lower your credit score.

Research Financing Options

After you’ve determined how much you can afford, now it's a good time to research your financing options. Currently, mortgage rates are historically low. Whether you’re buying your first home or refinancing your current mortgage, there are many options available to help you find the interest rate and program that best fits your needs and saves you money. Here are the most common types of financing options available.

Fixed-Rate Mortgage

A fixed-rate mortgage offers the security of your interest rate remaining the same for the life of the loan. The most common types of fixed-rate terms are 30, 15, or 10 Year Fixed-Rate Mortgages. The interest rate on these terms won’t change based on what’s going on in the market. This mortgage loan may be a good option to consider if you’ve found your forever home. Additional benefits of a fixed-rate mortgage may include, lower monthly payments, flexibility to make extra payments, and payments that are the same each month.

Adjusted Rate Mortgage

With an adjustable-rate mortgage (ARM), the interest rate is locked in for a certain period of time before it could change. The ARM may fluctuate (increase or decrease) based on the market. This type of mortgage may be a good option if you know you’ll be relocating or paying off your mortgage in a few years. Additional benefits of the ARM may include limits or caps on the number of times a rate can change and a maximum number of rate changes throughout the life of the loan. You also have the option to change the loan term by refinancing your mortgage before the ARM expires.

There are various ARM terms available based on the financial institution. They’re not all made the same. For example, we offer a 5/5 ARM that gives you an exceptionally low rate for the first five years and reduced closing costs.

Other cost-saving programs

Most financial institutions offer additional cost-saving programs you may be eligible for to help you get your home with little to no down payment such as First Time Buyers Program and No Down Payment Options.

Get pre-approved

Once you’ve done your research and found the best interest rate and loan term that’s right for you, you’ll want to get pre-approved. A pre-approval lets you know how much you can borrow and it shows the real estate agent know you’re serious about purchasing a home.

Gather Your Documents

Last but not least, start gathering your documents. Most financial institutions will require you to provide documentation such as bank statements, two years of tax returns, personal identification, and additional proof of income as soon as your lender requests them. Delays can happen when a buyer doesn't provide the required documents that the lender needs. 

Homeownership is a significant financial commitment for most people, and you’ll want to take the necessary steps to ensure you can maintain a comfortable lifestyle in your new home. Knowing how much you can afford, doing the research to find the best financing option, and gathering documents is the beginning of a successful homebuying journey.

Are you wondering what to do next in the home buying process? Download our Homebuyer’s Checklist to learn more about the things you need to do to prepare for purchasing a home.

Have more questions or ready to see if you qualify? Request more information or contact our mortgage team at 803-828-5876.

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