By: Brittany Foster | July 17, 2014
Buying your first home is a big decision, and it can be a confusing process. Not only do you need to consider your personal finances, but you also need to understand what a mortgage is, what types of lenders there are, and what could improve your chances of getting the loan you want at the rate you can afford.
In this guide, we’ll give an overview of what you should look into before starting your adventure as a first-time home buyer.
1) What is a Mortgage?
A mortgage is a loan given from a creditor (bank) to a debtor (buyer) to purchase personal real estate, such as a home.
The creditor lends the debtor the mortgage with a term-specific interest rate (for example, 1 year at 2.5%) which can be renegotiated once the term expires.
A mortgage term is made up of how long you have to stay with the same lender at the same interest rate.
Mortgage amortization is how long it will take you to pay off your mortgage in full. Usually, mortgages last between 15-25 years but can be longer or shorter depending on your terms.
2) Can I get a Mortgage?
There’s no way to know for certain if you can get a mortgage or not until you apply for one, but there are certain things that will improve your chances.
Securing your own financial situation prior to applying will assist you in getting the loan that you need at a reasonable interest rate.
Banks generally take the following into account when determining your eligibility:
Your credit rating. If you have a good credit score, and your credit history is clear of late payments and bad debts, you have a better chance of being considered as a candidate for a mortgage.
Tip: To polish your credit score prior to applying for a mortgage, talk to your bank about your options. Do your best to get up-to-date on any late payments, and inquire about the best ways to either build or repair your rating.
How much you make. The lender will want to ensure that you can cover your monthly living costs as well as your mortgage. If you have sporadic income, or don’t make enough to cover the mortgage payments on the loan you would like, you may receive less than you had hoped for.
If you don’t currently make enough, but will in the near future, or you are confident that you can make your payments on your current income, you may also want to consider enlisting a co-signer, who will act as a guarantor should you be unable to make a payment.
Assets and liabilities. If you have great credit, and good income, but you owe a significant amount of money to other lenders, you may be affected negatively. Banks will generally take into account what type of debt you have, how much you owe, and compare your current assets to previous debt in order to complete an evaluation.
Down payment. The bank won’t be the only one handing over money, you’ll also need to save up a down payment for your home. Typically, a down payment will be anywhere from 5-15% of the purchase price of the home. The down payment will be credited towards the price of the home.
Job History: Typically, lenders like to see that you have worked for one employer for at least 3 months. Longer job history is preferred, but not essential. The lender wants to ensure that you will be able to meet payment deadlines, so having stable employment shows that you have continued income.
3) Should I Get a Mortgage Through a Bank or a Broker?
Banks are the most obvious lenders when it comes to getting a mortgage. Many first-time buyers feel more comfortable going with a bank because they are well-known, easily identifiable, and it’s easy to find out if they have a good reputation as a lender or not.
Mortgage Brokers are freelancers who have contacts with many different lenders. Some of these lenders are very small, and others are quite large. Brokers will take your application and show it to a variety of financial institutions, and then will come back to you with a number of different offers.
Which do I choose?
There are pros and cons to both banks and mortgage brokers. Where banks are established institutions, brokers may bring you flexible offers and interest rates from small lenders.
On the other hand, if you’ve been a customer with a bank for a long time, they may give you the best rate. Or perhaps your credit still isn’t quite where it should be and a smaller lender is willing to overlook it. There are pros and cons to each option and your choice really depends on your circumstances.
If possible, explore both options and decide which will provide you with better results. Talking to a broker or bank about a mortgage won’t enter you into a contract, so shop around and find the solution that best suits your personal situation.
4) Should I Have a Real Estate Agent?
When you’re ready to start looking for a home, you’ll need to figure out if you’d prefer to have a real estate agent, or if you’d like to handle the transaction yourself, also called For Sale By Owner (FSBO).
A real estate agent is someone who guides you through the home buying process. They take you to viewings, negotiate offers, and assist with closing the deal.
A real estate agent deals with the seller (or the seller’s agent) so that you don’t have to. They also ensure that your offer includes the correct terms so that you can back out of the deal if a home inspection unearths some unknown issues.
They do charge a fee, but it doesn’t come directly out of your pocket. Generally, real estate agents will take their fee from the sale of the house. The fees are usually based on a percentage of the selling price.
You do have the option to represent yourself, but doing so will take a lot of time and research. If you’d like to complete negotiations and do your own research, you’ll learn a lot of valuable information, but you’ll have to be careful to make sure that you understand the process and all of its inclusions.
Either way, you should still do some research on your own so that you can be a part of the negotiations and understand what is happening during each step of the way. The more that you know, the more comfortable you will feel about making the big decisions.
Buying your first home doesn’t need to be overwhelming. With the right information you can make decisions specific to your situation that will help to make the process easier, stress-free, and uncomplicated.
What was your first home buying experience like and what would you change about it?