When purchasing a first home, most buyers are not in a position to pay cash and will most likely finance the property with a mortgage. Since this transaction may be the largest purchase that you make, and the mortgage may be the largest loan you are responsible for, it is important that you take the time to prepare and do things the right way.
Read on for the basics about mortgages.
Because everyone's financial situation is unique and different, having customized home loan solutions is vital to our industry. Since deeper overall financial relationships are the foundation of traditional banks, there is an advantage to having a working relationship with a bank loan officer who can provide a wide array of specialized products and also assist with other aspects of your financial needs.
Buyers may also utilize mortgage brokers, who can place the mortgage with a variety of lenders but may also charge a fee or commission related to this service.
Mortgages are not a one-size fits all, so there are a variety of options available to meet your own unique needs while supporting access to and attainability of homeownership.
Mortgage interest rates frequently fluctuate depending on current market conditions, inventory, inflation and the Federal Reserve Board’s decisions. A year of relatively low rates might be followed by a period of inflated rates that make a monthly mortgage payment prohibitive. For that reason, homebuying, simply, can be a matter of timing — for buyers and sellers alike.
But there are other factors that play into getting the best possible interest rate — not the least of which is having a good credit score. A score from 700 to 799, generally, is considered “good,” while one that is 800 or more is “excellent.” (FNB's Knowledge Center also has free resources on understanding your credit score and credit report). If you’re in that range, you’re likely to receive a better rate than someone with a lower score or who lacks credit history altogether. Additionally, loan type, loan term and home price can impact your rate.
However, there remain several options for borrowers with less-than-perfect credit score or a thin credit history, including many government-backed options. There are also specialized solutions from lenders that may consider alternative trade lines for mortgage approval, such as rent or utility payments.
Your down payment can also greatly affect the mortgage and monthly payments. Putting more money down will decrease the amount financed and, often, the interest rate, while a smaller down payment will have the opposite effect.
The rule of thumb for most traditional mortgages is a 20 percent down payment. With that level of commitment from the buyer, lenders typically regard the loan as being lower risk. With a smaller down payment, a lender may require mortgage insurance as protection in case the borrower cannot make mortgage payments. However, there are many specialized mortgages that allow buyers to put less money down without penalizing them for it in an effort to reduce barriers to home ownership.
Something first-time homebuyers may overlook is their new home’s closing costs, which are the one-time fees and initial payments paid to the realtor, lender, title companies and other third parties, such as the appraiser and inspector. Closing costs are not explicitly part of a mortgage, but they may include fees to finalize the loan.
Sellers also pay closing costs, and sometimes, the parties in the transaction may negotiate who is responsible for how much of the costs. Negotiations can even include items like furniture, appliances or gym equipment that are already in the home, which can also impact the final cost and potential down payment.
Once you officially close on the home with financing in place, you might think you can shift your focus to other things, such as packing and hiring movers. Getting to that point, however, is rarely as simple as signing on the dotted line, so be sure to check out our other informative Knowledge Center articles and Financial Insights modules on homebuying.
