by Barbara Moore, Lennar Homes, NEFBA President
Congratulations! You’ve made the decision to purchase your first home. Buying a home is more than just finding a place to call your own; for most people, it’s the biggest investment they will ever make.
For first-time homebuyers, the experience can be particularly overwhelming and confusing, especially with all the mortgage jargon. FHA, ARM, USDA—what does it all mean?
Here are four financing tips that may help you during the process:
• Know your limits: Pre-qualifying or getting pre-approved for a mortgage shows you’re a serious buyer; it can also save valuable time if you find a home you’re interested in purchasing. To pre-qualify, simply speak with a lender about your financial situation and they will determine your buying power. Better yet, to get pre-approved, submit a mortgage loan application so the lender can look at your income, debts, available cash and credit history. It’s OK to “shop around” with different lenders, but remember that each time a credit check is run, it affects your score.
• Down Payment Is Key: Obviously the more cash you put toward the purchase of your home, the less money you’ll have to borrow. But the size of your down payment may affect a variety of factors, from the interest rate you qualify for to the type of loan that is ideal. Your down payment can also affect your overall borrowing cost by determining whether you’ll be required to carry Private Mortgage Insurance (PMI), which some lenders require borrowers to pay extra for each month until the homeowner’s equity exceeds 20 percent of the home’s value.
• Comparing Loans: There are a number of factors that go into determining what type of loan may be right for you. An adjustable-rate mortgage (ARM) is subject to changes in interest rate at pre-determined intervals, but the change is usually subject to a cap. This type of mortgage features lower rates and payments early on, but the potential for an interest rate spike could be more costly in the long run. A fixed-rate mortgage remains constant for the life of the loan, though many homeowners choose to refinance to take advantage of falling rates. Length of the loan can also impact your interest rate, your monthly payment, and the total amount you’ll pay over the life of the loan. To find the right loan for you, talk with your lender not just about your financial situation, but also about your home ownership plans. If you’re only planning to live in the house a few years, you may need a very different loan than if you plan to stay there 40 years.
• Government Loan Programs: To make home ownership more accessible, the federal government manages a number of special lending programs. A Federal Housing Administration (FHA) loan helps lenders cover most losses when a borrower defaults, allowing homebuyers to enjoy lower down payments (as low as 3.5 percent), low closing costs and relaxed credit requirements. A Veterans Affairs (VA) loan provides similar advantages to eligible American veterans or their surviving spouses. In addition, the U.S. Department of Agriculture (USDA) provides loans to homebuyers interested in purchasing a home in rural areas. These loans feature zero down payment and upfront mortgage insurance along with a minimal monthly fee. There are income restrictions for this loan—your income must not exceed the median income of the area in which you live. If you think you qualify for any of these government loan programs, be sure to talk to your lender.
Barbara Moore currently serves as president of the Northeast Florida Builders Association. In 1997, she was named Jacksonville Division President of Lennar, which now offers great homes at an outstanding value in 12 First Coast communities.