An Introduction to Down Payments for First Time Homebuyers

Buying a home is one of the biggest financial milestones you’ll reach in your life. If you’re a first-time homebuyer, it can be scary to take the plunge and make a down payment on your first home.

Down payments are one element that makes up the factors which determine your monthly mortgage payments, and in turn, how much you’ll be paying toward your home in total. So, it’s important to understand just how much to save for a down payment.

In this article, we’ll talk about down payments, why they matter, and your options for saving up for a down payment.

Why down payments matter

A down payment is simply the amount of money a buyer pays at the time of closing on the house. Down payments help assure lenders that you will make your monthly mortgage payments because you have invested a substantial amount of money into the house and therefore risk losing your down payment if you fail to pay the mortgage and your house is foreclosed on.

If you’re eager to buy your first home, you may want to make the smallest down payment possible so you can move in sooner. However, a smaller down payment typically means a larger monthly mortgage payment. That’s because your mortgage payment depends on several factors.

When a lender determines how much they will lend you towards your home and how much your monthly mortgage payments will be, their formula takes into account your down payment, your credit score, and the value of the property. The higher your credit score and the higher your down payment is, the less your monthly payments will be.

Mortgage types and down payments

Many first time home buyers cannot afford large down payments on their first home (20% or more). As a result, there are loan types insured by the Federal Housing Administration that are offered for as low as 3.5% of the mortgage amount.

If you aren’t approved for an FHA loan but plan on making a down payment of less than 20%, you can still buy a home with private mortgage insurance (PMI). With PMI you pay a monthly premium for your insurance in addition to your monthly mortgage payments.

How long and how much to save

So, how much should you save? The short answer is as much as possible. However, if you need to move soon because of life circumstances, it isn’t always an option to hold off on moving for long periods of time.

If you’re currently renting each month at high prices, it might make more sense to put that money towards your first home, an asset which will likely increase in value, rather than spend it on rent which you get no return on.  

One of the best ways to save for a down payment is to set up a new cash savings account that will automatically deposit a portion of your paycheck each week. Having an off-limits account is a great way to save without the temptation of spending it on luxuries if the money would normally be sitting in your checking account.

Another option is to start investing. If you’re in no rush to buy a home and have the financial resources, investing pays off much more than a savings account does when it comes to increasing assets.

Regardless of how you choose to save, the most important takeaway is that you take action now to start saving and you don’t deviate from your savings plan for any reason.

Prequalified vs Preapproved: Tips On Securing a Mortgage Before Buying a Home

If you’re a first-time homebuyer, odds are you’ve thrown the words “prequalified” and “preapproved” interchangeably. However, when it comes to home loans, there are some very important differences between the two.

For buyers hoping to purchase a home with a few missteps and misunderstandings as possible, it’s vital to understand the procedures involved in acquiring financing for a home.

Today, we’ll break down these two real estate jargon terms so that you can go into the mortgage approval process armed with the knowledge to help you succeed in securing a home loan.

Mortgage prequalification

Let’s start with the easy part–mortgage prequalification. Getting prequalified helps borrowers find out what kind and what size mortgage they can likely secure financing for. It also helps lenders establish a relationship with potential customers, which is why you will often see so many ads for mortgage prequalification around the web.

Prequalification is a relatively simple process. You’ll be asked to provide an overview of your finances, which your lender will plug into a formula and then report back to you whether or not you’re likely to get approved based on your current circumstances.

The lender will ask you for general information about your income, assets, debt, and credit. You won’t need to provide exact documents for these things at this phase in the process, since you have not yet technically applied for a mortgage.

Prequalification exists to give you a broad picture of what you can expect. You can use this information to plan for the future, or you can seek out other lenders for a second opinion. But, before you start shopping for homes, you’ll want to make sure you’re preapproved, not prequalified.

Mortgage preapproval

After you’ve prequalified, you can start thinking about preapproval. If you’re serious about buying a home in the near future, getting preapproved will simplify your buying process. It will also make sellers more likely to take you seriously, since you already have your financing partially secured.

Mortgage preapproval requires you to provide the lender with income documentation. They will also perform a credit inquiry to receive your FICO score.

Mortgage applications and credit scores

Before we talk about the rest of the preapproval process, we need to address one common issue that buyers face when applying for a mortgage. There are two types of credit inquiries that lenders can perform to view your credit history–hard inquiries and soft inquiries.

A soft inquiry won’t affect your credit score. But a hard inquiry can lower your score by a few points for a period of 1 to 2 months. So, when getting preapproved, you should expect your credit score to drop temporarily.

After preapproval

Once you’re preapproved for a mortgage, you can safely begin looking at homes. If you decide to make an offer on a home and your offer is accepted, your preapproval will make it easier to move forward in closing on the home.

Once the lender checks off on the house you’re making an offer on, they will send you a loan commitment letter, enabling you to move forward with closing on the home.

Prepare a Mortgage Application

Filling out a mortgage application may prove to be a long, arduous process, particularly for those who are buying a house for the first time. Lucky for you, we’re here to help you dot the I’s and cross the T’s on your mortgage application to ensure you can quickly and effortlessly acquire your dream house.

Now, let’s take a look at three tips to help you prepare your mortgage application.

1. Be Diligent

A mortgage application may appear daunting at first. The application may include several pages of questions, and you may have only a limited amount of time to finalize your submission.

When it comes to completing a mortgage application, it generally pays to be diligent. If you answer each mortgage application question to the best of your ability, you likely will have no trouble moving forward with your home purchase.

2. Avoid Guessing

If you’re uncertain about how to respond to certain mortgage application questions, there is no need to guess. Instead, search for the information that you need to provide a comprehensive response. This will help reduce the risk of encountering potential problems down the line that otherwise could slow down your home acquisition.

Remember, guessing on a mortgage application probably won’t do you or your lender any favors. But if you allocate the necessary time and resources to understand mortgage application questions and provide thoughtful responses, you can minimize the risk of application errors.

3. Ask Questions

Completing a mortgage application sometimes can be tricky. Fortunately, a lender employs mortgage specialists who are happy to respond to your application concerns or questions at any time.

If you’re unsure about information that is requested on a mortgage application, don’t hesitate to reach out to a lender’s mortgage specialists for help. These specialists possess extensive mortgage expertise and can help you complete a mortgage application.

Furthermore, mortgage specialists can offer insights into a wide array of mortgage options. These specialists can explain the differences between fixed- and adjustable-rate mortgages and enable you to select the right mortgage option based on your financial situation.

As you prepare to buy a house, you may want to consult with a real estate agent as well. In fact, with a real estate agent at your side, you can seamlessly navigate the homebuying process.

A real estate agent understands exactly what it takes to acquire a house, regardless of the finances at your disposal. This housing market professional can set up home showings, help you submit offers on houses and ensure you can purchase a residence that matches or exceeds your expectations. And if you need help getting a mortgage, a real estate agent may even be able to connect you with the top lenders in your city or town.

Ready to move forward in the homebuying journey? Use the aforementioned tips, and you can finalize a mortgage application and secure the financing that you need to acquire your ideal residence.

Mortgage Refinancing Options

If you are thinking of refinancing your mortgage, there are so many options available to you that address your needs. Whether you want to do some home improvement projects or provide a down payment for another property refinancing can be a good option for you. There are many different options when it comes to home loans and refinancing. Below, you’ll find some of the most popular choices and what they mean for your mortgage and your finances. 

Standard Refinance

A standard refinances requires that you have a certain amount of equity in your home. If you want to avoid Private Mortgage Insurance (PMI on the refinance, you need 20% equity in the home. Different lenders have different requirements for the amount of equity that you need in order to do this primary refinancing of your home loan. Keep in mind that a good credit score is also a requirement to do this type of loan.

Refinancing With Cash Out

This option is great when you need to take some of the equity out of your home. This way, you can get some of the equity out of your home without selling the house. This way, you’re able to refinance the mortgage, get a good loan term that’s affordable, and borrow a part of the equity you have built up in your home.

You can use the cash that you take out for just about anything you need including college, home renovations, business start-up costs, or to consolidate other debt you have. The only drawback is that you’re not able to borrow 100% of your equity. Usually, the highest percentage you’re eligible to borrow is 80%. The amount is based on both the equity you have built up in your home along with your income. Also, keep in mind that after you take out one of these loans, the amount of equity you have in your home decreases.  

Short Refinance

Short refinances may not be offered by all lenders. If you don’t qualify for a HARP loan or standard, refinance this could be a good option for you. If you hope to avoid foreclosure and are struggling to pay your mortgage each month, your lender may agree to the terms of this type of loan. The loan is in effect is a combination of a short sale and a refinance. The lender agrees to pay the existing mortgage off. The loan s replaced with a new mortgage. Beware that if you choose this option, your credit score may go down significantly. If you’re able to keep up with the new mortgage payments, you’ll be able to repair your credit score over time.