Buying a home can be a complicated process. It can take time to find the right home at a good price, one that you can afford. However, that isn't always the hardest part. Finding the right loan can be even more complex. But with a little knowledge, you can find a mortgage that fits your needs.
Making sure you're ready
Before you even start to look at homes, you need to make sure you’re financially prepared to do so. There are a few questions you should consider first.
If you’re currently renting, what are your monthly payments? Can you easily afford this amount, or will it be a struggle to pay more each month for a home? Thinking about how much you can afford for a mortgage payment each month can help you decide if you’re financially ready to make the switch from renting to owning.
Are you prepared for some of the other costs of owning a home? Owning a home is more than a mortgage. Property taxes, home maintenance and repair costs are also important to consider. Inevitably, things are going to break and need to be replaced.
Do you have a down payment and money for closing costs saved? Though these may not be necessary, the truth is that the more money you can put down, the more options you’ll have when it comes to selecting a home loan since many of them require a 20% down payment.
Do you have a rainy day or emergency fund? More than ever, you’re going to need an emergency fund. What if you lose your job? What if you get sick and have to take a few days off of work unpaid? Could you afford to do so? Your emergency fund will even come in handy if your car breaks down or if you need to replace an appliance in your home. You don't want to rely on credit cards to get through tough times or you’ll find yourself in debt quicker than might imagine.
How good is your credit history and score?
Your credit history and score can affect your ability to get a good deal on a home loan. With a higher credit score, you may qualify for a lower interest rate, which can have a significant impact on the total cost of your home. In fact, even a tenth of a percent can make a big difference.
For this reason, it’s important to think about your credit score. Here are some things you can do that may improve it:
Work on paying off debt. By paying off your debts, you’re proving that you can handle the financial responsibility of paying off loans.
Pay everything on time. Even if you can't pay off your loans, it’s important that you pay as much as you can on time. Paying late can negatively impact your credit score.
Don't close any credit accounts. Though you may want to close accounts as they’re paid off, your credit score is partly determined by the percentage of your available credit you’re currently using — also called your credit utilization ratio. A higher ratio means a lower credit score. Aiming to keep your utilization at or below 30% is a good rule of thumb.
Terms you need to know
Loan term — The term of the loan is how long you’re expected to make payments. Most mortgages offer 15- or 30-year terms, though you may be able to find a shorter or longer term depending on your needs.
Interest rate — The interest rate is the cost you will pay each year to borrow money, expressed as a percentage of the principal. Interest rates are important because the lower your rate is, the less money you will pay over time.
Annual percentage rate (APR) — Whereas the interest rate tells you the cost of the loan expressed as a percentage, the APR also factors fees and other charges into the cost, such as private mortgage insurance, discount points or certain closing costs. Because fees can differ between lenders, looking at APR can give you a better way to compare the cost of different loans.
Fixed rates vs. adjustable rates
When it comes to home loans, there are two types of interest rates: fixed and adjustable.
Fixed rates are popular because you know exactly how much your payments will be for the life of your loan. Your mortgage payment won’t change as the market fluctuates.
Adjustable rates come with some risk because your rate fluctuates with the market. If rates increase, your monthly payment is going to increase. But if rates decrease, your monthly payment will decrease. Either way, you can't guarantee what you’re going to be paying every month.
Some adjustable-rate mortgages have a fixed rate for a set period of time at the start of your loan term. For example, an adjustable-rate mortgage may have a fixed rate for the first three, five or seven years of your loan term.
Some home buyers choose these types of loans because they may offer a lower initial rate than a standard fixed-term loan. Another reason a buyer may choose this type of mortgage is if they plan to move or refinance the loan before the fixed-rate period ends.
However, most buyers choose fixed-rate mortgages because they want to know what their payments are going to be every month. And they don't want their payments to increase significantly — or to the point that they can no longer afford them.
Types of home loans
There are multiple types of home loans available on the market, which can make it hard to decide which one is right for you. To make matters more confusing, they all come with their own loan terms, interest rates and interest rate types.
Conventional loans and Federal Housing Administration (FHA) loans are among the most common offered by banks and credit unions. However, FHA loans are insured by the federal government. Both types can be a good choice for first-time homebuyers, depending on your circumstances.
Conventional loans may require a down payment of 5% to 20% of the cost of the home. However, there are zero-down mortgage options available from some lenders. Similarly, FHA loans don't always require big down payments. And you may be eligible to receive an FHA loan even if your credit isn't perfect.
There are other loan types you may qualify for as well. For example, there are several government programs intended to help veterans buy homes. There are also programs available to help teachers and first responders.
If you’re not sure whether you qualify for one of these special mortgage programs, talk to your financial institution or a trusted lending advisor to learn what type of home loan might be right for you.
Getting a preapproval letter
It’s no secret, the housing market in Washington state is hot right now. Before you start attending open houses, be sure to go through the preapproval process. It isn't a loan, but if you’re approved, you’ll receive a note from your lender indicating how much they’re willing to loan you for a home. This can help you gain a competitive edge when you start looking at homes because sellers often favor offers from buyers who have already been preapproved.
Tips to find the right loan for you and your family
Get to know your debt-to-income ratio, or DTI. This is the percentage of your monthly income that goes toward paying debts. A high DTI could prevent you from qualifying for lower interest rates — or from getting approved for a loan altogether. If your DTI is above 36%, work on settling some debts first so you can improve your chances of getting approved and getting a good rate.
Don't be afraid to shop around. There are many different options when it comes to buying a home. You may want to visit your financial institution or check out the interest rates at some of your local credit unions.
Each loan is going to be different, so it’s important that you read everything. Know what your interest rate is, what the fees are and how much it’s going to cost every month. You also need to know when the loan is expected to close and how much money you'll need for closing costs.
Take a hard look at your finances. Just because you get preapproved for a certain amount, doesn't mean you should try to buy a home at that price. You don't want to be stuck in a home you can't afford, so make sure you can truly afford the monthly payment and enjoy life!
Get started today
Are you ready to buy your first home?
You can get started today. With low and zero-down payment financing options, WSECU can help you turn your dream of homeownership into a reality.