When you're new to the home-buying process, it can be very overwhelming -- especially in today's housing market, where inventory is limited and home prices are inflated. If you're a first-time buyer, here are some important tips to keep in mind courtesy of Gavin Brady, SVP of Originations for Mr. Cooper.
1. Know whether it’s the right time to buy
Buying a home at the wrong time could have consequences. First, you may be denied a mortgage if your credit score isn't in good shape. Or, you may get approved for a home loan, but at a higher interest rate than you want.
As Brady explains, "Your credit score is crucial as a primary factor lenders consider when reviewing you for a home loan. It’s important not to make any big purchases or take any loans out, such as buying furniture, before applying for a mortgage as it could negatively affect your credit score."
2. Know your mortgage types and options
Not all mortgages are created equal. If you take out a 30-year mortgage, you'll have lower monthly payments than you would with a shorter-length loan because you'll have more time to pay it off. But you'll also be looking at a higher interest rate than you would with a 15- or 20-year loan. You'll need to think about which loan term is right for you.
But that's not all. As Brady explains, "One of the most common questions to ask as a first-time home buyer is whether to get a fixed rate or an adjustable-rate mortgage."
With a fixed loan, you're guaranteed the same interest rate throughout your repayment period. With an adjustable-rate mortgage, you may start out with a lower rate, but that rate has the potential to climb over time. That said, it's possible for the rate on an adjustable-rate mortgage to adjust downward in time based on market conditions.
If you're buying a starter home, an adjustable-rate mortgage could be a good bet, because chances are, you'll end up moving by the time your rate starts changing. But if you're buying your forever home, you may want to lock in a fixed loan, especially since today's rates are so competitive.
Either way, read the fine print if you'll be taking out an adjustable-rate mortgage. As Brady points out, "Some adjustable-rate loans may also carry prepayment penalties that could come into play when you sell or refinance."
3. Know your fees and costs
When you take out a mortgage, it's not just your down payment you'll need to come up with. You'll also be charged closing costs, which are a series of fees that are part of the process of finalizing a mortgage. Some of those fees are negotiable, while others aren't. But it pays to compare closing costs among different mortgage lenders to make sure you're not being overcharged.
You may have to cover other fees as well. For example, private mortgage insurance applies when you don't put down 20% of your home's purchase price on a conventional loan. Brady highly recommends researching these fees ahead of time so there are no unpleasant surprises at closing.
Buying a home is a huge undertaking, and when you're new to it, it can be overwhelming. The more information you arm yourself with, the easier the process should be from start to finish.
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