Your First Home Purchase? Become an Informed Consumer
By Sharon Secor,
il-odm.org Staff Writer
Setting out to purchase your first home can be quite intimidating, considering the incredible variety of mortgage loan options that are available on the market today. However, arming yourself with good information at the outset of the home buying process can help you approach the task with confidence. Educating yourself on the many different types of loans and programs available for first time home buyers, and the details of the loan application and approval process is a great way to start, leaving you much less reliant on the advice of others as you make these important decisions about your future.
Purchasing a home is a financial commitment that can extend over thirty years of your life, making it crucial to research your options with an eye towards the long term implications. The first step in the process is a thorough evaluation of your financial situation. A clear picture of your credit standing and financial obligations, present and future, can help you decide what sort of monthly payments you can comfortably afford, as well as aid in determining the amount you can promise as a down payment on your new home. A current copy of your credit report is a must, eliminating the possibility of unpleasant surprises when your history is checked by potential lenders. Errors on credit reports are a fairly common occurrence, and are better handled before lenders are involved. This financial research will prepare you for the next step, which is finding the right mortgage loan to suit your needs, and getting pre-qualified for it so you can begin your search for a new home.
Common Home Loan Options for the First Time Buyer
Many home loans are available that are tailored for the needs of the first time home buyer. Among the most common of these programs is the traditional FHA loan. The Federal Housing Administration, an arm of the Department of Housing and Urban Development, was established specifically to assist first time home buyers, especially those of moderate or low income, in obtaining home loan funding. FHA loans are available from most banks and financial institutions and have the advantage of requiring only a 3 percent down payment, much less than the typical fixed rate home loan. FHA will also work with state and local housing programs that help with down payments and closing costs, and will allow your down payment to be made by a relative or assistance program, options that are not available with most conventional fixed rate loans. The approval process can also be less stringent than many other loan types, as repayment is guaranteed by the federal government.
Conventional fixed rate loans are another option, among the most commonly used financing alternatives for home buyers. 30 and 15 year terms are most common, but fixed rate loans are available with 40 to 50 year terms in some markets. With any fixed rate loan, the interest rate is locked in at the outset, and remains stable throughout the term of the loan regardless of changes in the market rate, keeping payments on principle and interest consistent from start to finish.
Adjustable rate mortgages, or ARMs, are another common type of home loan. These are available in a number of forms, all with interest rates that are raised or lowered at certain intervals according an index, keeping pace with changes in general market rates. Generally, interest rates are adjusted at intervals agreed upon in the original loan contract, and often there are caps placed on the amount the rate can be changed at each interval. Each adjustment made to the interest rate of the loan changes the monthly payment the borrower must meet, the payment rising as rates trend upwards or becoming more affordable as rates fall. Terms and features of ARMs vary with each lender, making careful research and comparison is necessary to ensure a loan that will be right for your financial situation.
Each of these types of home loans are offered by a variety of lenders, each one with its own terms and conditions. Comparison shopping and good information gathering are the keys to finding the loan that will best suit your needs. The loan with the lowest initial interest rate is not always the best or least expensive over the long run, so be sure to read the fine print and evaluate its implications over the term of your home loan before any contracts are signed. With time invested in research and comparison, you can find a home loan that will make your dreams of a new home a reality, giving your family peace of mind and financial security well into the future.
- FTC Real Estate Glossary (.pdf)
- Let FHA Loans Help You - HUD