Buying a home is one of the most fun and exciting times in a person’s life, particularly if you’re doing it for the first time. Many people feel naturally stressed and overwhelmed during this process, but it certainly doesn’t have to be that way — at least, not with the right partner by your side.
In an effort to help you finally achieve the you’ve always seen for yourself in the easiest and most carefree way possible, we’ve compiled a list of the top 10 things you need to know BEFORE you get that mortgage.
1. Know Your Loan Types
One of the most important things to understand is that “mortgage” is usually a catch-all term that can mean a number of different things, depending on who is doing the talking. All told, there are a few major types of loans for you to choose from based on your needs, including:
- FHA Loans. These loans are guaranteed by the Federal Housing Administration (hence the name). Not only do they come with built-in mortgage insurance, but the required down payment to get one of these loans is usually smaller than other types.
- USDA Loans. These loans come with rates that are usually lower than conventional loans for the same period of time. To get one, you need to prove that you have a stable and dependable income, and you’ll need a credit score of at least 580.
- Conventional Loans. These are exactly what they sound like — a fairly traditional loan in which the monthly payment will never change over the life of your mortgage however more and more of your payment will go towards the principal on your mortgage over time. They’re available in terms ranging from 10 years all the way up to 40, but 15 and 30 are usually the most common.
- VA Loans. These are loans that are specifically designed to make it easier for veterans of the United States Armed Forces (and their spouses) to buy the home of their dreams. These do NOT require down payments, because they’re guaranteed by the Department of the VA.
- Jumbo Loans. This is a loan that is actually far too big for the federal government to guarantee — meaning that it’s above FHFA limits. The downside here is that you may have a slightly higher interest rate than you would have with a smaller loan, since more risk is involved. Contact us to find out what your rate may be.
2. The Breakdown of Principal and Interest
Although mortgages are not too dissimilar from other types of loans in many ways, they’re still far larger — meaning that this is one point that is certainly worth repeating.
- The principal of your loan is the amount you’re borrowing AFTER you make your down payment.
- The interest rate is the extra money you’ll pay on top of that amount you originally borrowed.
So if you make a $2,000 mortgage payment and your principal balance only goes down by $1500, don’t freak out — that’s what is supposed to happen. Some of that payment went to your principal, and the rest went to your interest.
Don’t worry. You’ll get used to it.
3. The Art of Fixed-Rate Mortgages
At their core, fixed-rate mortgages are exactly what they sound like — loans with interest rates that stay the same over time. If you’re paying 5 percent today, you’ll be paying that same 5 percent in 30 years.
The potential downside of this is that if interest rates fall, you don’t get to enjoy those savings unless you refinance. But if they rise, you’re also protected — regardless of what the economy is doing.
4. The Benefits of Adjustable-Rate Mortgages
ARMs, on the contrary, are loans with an interest rate that will fluctuate over time, depending on what the market is doing. So while the interest rate will likely fall at times, it will probably rise, too.
The benefit here is that you’ll probably have a lower interest rate… at least at first. This is a decision you’re going to have to make before you get your mortgage, which is why it’s so important to have professionals like ours here at Southwest Funding by your side.
5. Mortgage Prequalification
This is a term used to describe a very simple, common step that happens early on in the mortgage process. You provide some basic financial data to your agent, and, without a hard check of your credit report, they find you the best loan rate they can and essentially “save” it for you until you properly apply for it.
6. Mortgage Preapproval
This is a bit more extensive, and it involves lenders going over your financial history with a fine-toothed comb to verify the type of loan you CAN receive and the best possible interest rate you’ll qualify for.
So by the end of this process, you’ll likely know what your mortgage is going to look like BEFORE you’ve had a chance to apply for it. Note that this doesn’t guarantee you’ll get approved for the loan in question, but it’s definitely a step in the right direction.
7. Private Mortgage Insurance
Another key thing to understand is PMI, or “private mortgage insurance.” This is extra money you pay in insurance to make sure that your lender gets paid even in the unfortunate event that you default on your loan. Most lenders usually require this if you’re putting less than 20 percent down on your new home.
8. The Other Fees You Might Have to Pay
Of course, there are other fees involved in the mortgage process, too, such as any surcharges or commissions due to your real estate broker or agent. Closing costs are typically be between 2 and 5 percent of your home’s purchase price according to some surveys.
9. What Actually Happens at Closing
Speaking of closing costs, this is going to be a busy couple of days in your life, so it’s in your best interest to understand what is really going on. Closing is when:
- The proceeds from the sale finally make their way to the seller.
- All the fees like commissions, title insurance, pro-rated property taxes and others are paid.
- You sign your mortgage note.
- Finally, you get your keys to your new home (and the home’s title) and now you can start moving in.
10. Prepare Your Financing BEFORE Looking For A Home
If a lot of these points sound like they’re dependent on your finances, well… that’s because they are. That’s why the most important tip of all is the following: Prepare your financing and get everything in order BEFORE you go house-hunting.
There’s nothing worse than finding your perfect home and then realizing there’s a problem on the calculated side of the experience. So handle financing first and go looking for the home of your dreams second.
A Bold New Chapter in Your Life Is About to Begin
At Southwest Funding, we’ve been in this business for over 25 years, and we’ve helped countless people buy their homes across the United States. In addition to conventional loans, we also handle VA, FHA, USDA, Jumbo and other types of specialty loan products. But more than that, we also offer a significant number of down payment assistance products as a mortgage loan lender, too, which means that your dream of owning the perfect home is a lot closer to reality than you probably think.
So if you’d like to learn more about all the things you need to be aware of before you get a mortgage, or if you just have any additional questions you’d like to discuss with a friendly expert in a bit more detail, please don’t delay — contact Southwest Funding today.
Southwest Funding, LP | Southwest Funding, Limited Partnership (NMLS #32139) is an equal housing lender. This is not a commitment to lend or extend credit. Programs, rates, terms and conditions are subject to change without notice. Terms and conditions apply. All rights reserved. Contact us for details. Consult your accountant about tax deductions.