It’s easy to feel “ready” for a house, especially if you’ve been renting for a while or are living in a less-than-ideal situation (like at Mom & Dad’s place). But before you take the leap, you should understand the current state of the market as well as other factors associated with buying a house that can save you time, money and headaches. That’s why we’ve put together this series of blogs to help guide you through the home buying process for first time home buyers. For this first one, let’s go over some of the terms associated with purchasing a house:
Adjustable Rate Mortgage (ARM): Not planning to stay in your home for long? ARMs have a lower interest rate compared to other loan types, which is fixed for a set number of years (often three to five). After that, the rate will increase or decrease based on the market.
Conventional Loan: Conventional loans are generally the best choice for well-qualified buyers. Advantages include low down-payments (as little as 3%) and no mortgage insurance (once a loan reaches 80% loan-to-value).
FHA Loan: Is your credit less-than-ideal? FHA loans are backed by the federal government through the Federal Housing Authority and may be the best solution if you’re in need of easier credit standards and lower down-payment requirements. However, there is a greater risk associated with FHA Loans due to the rates generally being higher.
Jumbo Loan: Jumbo loans are used to purchase homes and property that tend to be more expensive than average. This is a good option to consider if you’re buying a home in an area with a higher cost of living like San Francisco, Boston, or New York.
VA Loan: If you are an active duty military member or veteran, have you considered a VA loan ? VA loans generally do not require a down-payment* or private mortgage insurance (PMI), equating to huge savings! The catch? You must meet specific eligibility requirements based on service and lending qualifications in order to be approved. Talk to a NASB loan officer to find out if you qualify.
Pre-qualification: You supply a lender with information about your financial situation and they give you an idea of what you may qualify for.
Pre-approval: A more comprehensive process that involves completing a mortgage application and supplying the documentation necessary to complete a financial background check. Many sellers will only accept offers from buyers who have been pre-approved, so don’t skip this step!
Private Mortgage Insurance (PMI): Don’t have 20% to put down? Don’t worry. You can still purchase a home, but on conventional loans you’ll have to pay PMI until you reach 20% equity. PMI costs often make up a significant portion of the costs of a mortgage, so keep this in mind when looking at homes.
*VA requires a down payment if the borrower does not have sufficient entitlement, for Graduated Loan Payment loans or one where the loan amount exceeds the property value. Typically lenders, however, will also require a down payment of 25% (or more) for the loan amount in which the loan amount exceeds the conforming loan limit (‘Jumbo loans’)