Buying your first home can be challenging, especially when it comes to understanding the importance of a good credit score and how much cash you should offer up for a down payment. Here are six tips that offer a crash course on the basics to help you get up to speed.
1. What do I need to get a mortgage?
Before loaning you money, your lender will ask to see proof that you’re reliable when it comes to paying off past debts. That means you’ll need to begin establishing credit by obtaining a credit card and paying it on time. The lender also will take into account past payments on utility and cell phone bills, rent, and car and student loans.
2. If I have bad credit, how can I improve it?
Many borrowers think they have bad credit, but they actually are doing better than they realize. Always check your credit report. It’s free to download one copy a year, and you could be pleasantly surprised by what you find. If the news is bad, however, there’s still hope. If you have less-than-stellar credit, there could be an old collection, medical bill or something else you weren’t aware of. These types of errors can be fixed, boosting your credit score fairly quickly. If you do have some bad marks and late payments, be sure to begin paying on time and your score will gradually improve.
3. What’s the difference between a mortgage pre-approval and a pre-qualification?
A pre-qualification does not hold the same weight as a pre-approval. A pre-approval letter—involving lenders fully checking your finances in a verifiable way—takes more time and effort, which is exactly why it carries much more weight. If you’re serious about buying a home, get pre-approved to show you mean business.
4. How much down payment do I need for a mortgage?
The standard down payment for a mortgage is 20 percent. So, if a home is priced at $200,000, you’d ideally have to spend $40,000 of your own money to get the loan. But don’t worry if you don’t have that much. You can put down less, but that means you’ll have to pay private mortgage insurance (or PMI). This extra monthly fee is required to mitigate the risk that you might default on your loan.
5. What kind of down payment assistance is available?
If you’re looking for help with a down payment, try asking your parents to pitch in. Gifted money can help many people qualify for a loan, although you must tell your lender that the money was a gift. There also are more than 2,000 down payment assistance programs nationwide that can help if you meet the income and credit eligibility requirements. Your PERL loan officer can tell you about programs in your area that will help you become a homeowner, and also would be happy to recommend a local Realtor for your needs.
6. What types of home loans are available?
Loan types vary widely, but the most widely used are adjustable rate (meaning the interest rate could change over time), and fixed or term rates (meaning the rate will stay the same for the length of the borrowing period). Term- or fixed-rate loans are more common and considered the safer option, but it all depends on your circumstances, including how long you plan to stay in the home.
And, as always, don’t hesitate to discuss these and other first-time home purchase issues with your personal PERL loan officer.