The worst of the pandemic is over, the world is gradually going back to normal, and life seems to be getting back on track again. While financial uncertainty might have loomed over our property purchases in the last two years, all indications point to the fact that the economy and our salaries are on the up and up. If you are keen to put your homeownership plans back in motion, here are some ways to finance a new home.
Self-Assessment
The first thing to do before heading out to the bank is to take a good hard look at your circumstances. How is your job security? A mortgage is a financial commitment that usually lasts for a decade or more, and you will need access to a steady income. If you think there is a large chance you will get laid off or leave your job to pursue a lifestyle change, then perhaps buying a house is not a sensible option for now.
While some people purchase property purely for investment, most people do it to have a secure place to stay. How long are you prepared to live in your new home? Generally, it is best to remain in your home for several years until the property value appreciates and you can make a profit on selling the house. If you sell your home after owning it for less than two years, you will be subject to capital gains tax on the appreciated value.
What do your savings look like? The amount of down payment you can put down on your home can make a big difference to the final home price you can afford. While traditional advisors say that 20 percent is the ideal down payment, many mortgages these days only require a more realistic 3-5 percent down payment. That said, a huge down payment can lessen your monthly mortgage payments and help you save on private mortgage insurance.
Check Your Credit Score
Your credit score is vital to the homebuying process. Credit scores help lenders to estimate the risks associated with loan repayment, and individuals with superior credit scores often receive the best interest rates. While there are loans for those who have credit scores in the 500s, they will be subject to higher rates and larger down payments.
What if your credit score is too poor (or non-existent) to allow you to apply for a mortgage? This situation is more common than you think. Sadly, having bad credit is a huge obstacle in securing a mortgage. In such cases, it could help to enlist a co-signer with a decent credit score to secure the loan. You could also ask a family member to purchase the home first. Meanwhile, make sure you pay your bills on time and pay off your credit card balances promptly to build your credit rating.
Choose a Mortgage
There are a variety of mortgage loans that homebuyers can choose from with different rates, down payment requirements, and restrictions. While loans with smaller down payments may have higher interest rates, they can get you into a property sooner so that you can start to build equity.
FHA (Federal Housing Administration) loans aim to help first-time homebuyers and thus allow down payments as low as 3.5 percent. Because the loan is backed by the federal government, it accepts borrowers with lower credit scores and does not use credit scores to determine interest rates. It also provides more security than private financial institutions. The FHA has a strict disqualification period for borrowers with a history of bankruptcy and foreclosure.
VA (Veterans Affairs) loans are an outstanding option for veterans as they offer 100 percent financing with no down payment, no mortgage insurance, and competitive rates. In addition, there is no government-set minimum credit score as lenders are free to set their limits. To qualify, borrowers must be a veteran or an active-duty member of the military. In certain circumstances, the spouse of a veteran will be eligible to apply as well.
Conventional loans are the best bet for homebuyers who have more than a 10 percent down payment in the bank. Conventional loans are not operated by the government, but they are guaranteed by Fannie Mae and Freddie Mac, government-sponsored enterprises that reduce risk for lenders and investors. Conventional loans have stricter underwriting rules and credit score requirements at a minimum of about 620.
When choosing a loan, it is a good idea to experiment with various down payment amounts, interest rates, and loan terms. A loan calculator amortization tool can help you to effectively estimate your monthly commitments and possible maximum mortgage amount. You can clearly understand how the monthly repayments will change with differing interest rates, down payment sums, and loan terms.
There are many mortgage options to cater to people with different financial capabilities. Buying a new home can be a fantastic long-term investment or a source of financial stress. By being aware of your individual situation, you can ensure that you consider your options and choose the right loan to help you to finance your new home.