7 Key Terms First Time Home Buyers Need to Know
When you decide to buy your first home, you'll likely be quickly overwhelmed with the sheer amount of different things that the loan process will involve. A big part of buying your home will be navigating the tricky world of mortgages, and this alone is enough to leave first time home buyers extremely confused.
Throughout the process you'll likely encounter a number of terms and concepts you don't' entirely understand at first. As such, learning more about things before you start shopping around for your home and your 1st time home loan is important.
Obviously you need to find a mortgage lender that provides competitive pricing and terms, but there are a few basic terms a first time home buying prospect must know before buying a house.
Here are 7 key terms you need to understand.
- Down Payment Requirements – Down payment requirements vary greatly, but essentially you'll need 5 to 10 percent of the total home price as a down payment if you want a traditional loan and have somewhat decent credit. Taking out FHA loans or making use of certain other loan options could mean that you need as little as 3.5% down, and some loans – VA and USDA loans in particular – may be available with no money down required.
- Mortgage Insurance – This is insurance that covers the risks a lender takes when extending you the loan, and can increase your interest rate by between .03 to 1.15 percent depending on the situation.
- Conventional or FHA Loans – A conventional loan is one extended to you through a traditional lender like Fannie Mae or Freddie Mac, and is often out of reach for many first time home buyers. FHA loans are backed by the federal government and are better for those with lower credit scores or first time home buyers. They have less stringent credit score requirements and lower down payment requirements.
- Closing Costs – Closing costs are a bundle of lender fees, attorney fees, and fees from other third parties like home inspectors that are all related to buying your home. Usually they'll run anywhere from 2 to 5 percent of the total cost of the home, but the exact number will vary.
- Appraisal – This is nothing more than an estimate that places a rough value on your home. This way the lender will know just what to give you in terms of the loan and what kind of down payment you might need.
- Credit Score – This is the one you've probably already heard, but it's important to understand that there's no hard limit on what your credit score should be. It's possible to get a home loan with a score of less than 600, despite what many people believe. A lot of other facts are at play that may be worth understanding.
- Pre-Qualified – This term is confusing since it's different than a preapproval. Prequalified essentially means that you're likely to be able to qualify for a loan of a certain amount. You should really only use it to start shopping around for a home since it will help you understand what's in your price range. Preapproval is essentially something telling you that you will actually be able to receive a certain amount in a loan – it's for when you're ready to buy your home.
Interest rates and lending standards for first time house buyers are subject to change without notice. Discuss your credit and eligibility with a licensed mortgage lender today.