5 Things First-Time Home Buyers Should Know About Lending

Buying a first home can certainly be an exciting experience. No doubt it is a lot of fun to browse listings online, look at photos, and check out neighborhoods. That says nothing of actually seeing houses in person. But don’t forget mortgage lending. It is a part of the equation that gives many first-time buyers trouble.

Getting a mortgage is not as easy as it seems. Sure, you can get quick preapproval with just a little information about your job and income. But preapproval doesn’t equal a guarantee. More than one first-time buyer has learned that the hard way.

If you are looking to buy your first home, here are important things you should know, compliments of Mortgage Maestro:

1. Applications Must Go Through Underwriting

Sticking with the idea of preapproval not being any guarantee, first-time buyers should understand that all loan applications must go through the underwriting process. It is a long and complicated process that could end in denial at any stage. No home mortgages are guaranteed until buyers are actually signing the papers.

2. Banks Are Not the Only Option

First-time home buyers are quick to run to their local banks and credit unions for funding. Traditional financial institutions do offer home loans, but buyers have other options as well. Take Mortgage Maestro. As a Colorado mortgage broker, they have access to a wide variety of alternative lenders.

First-time buyers should also be aware that there are different types of mortgage brokers. Some are fully independent, which means they can represent an unlimited number of lenders as they see fit. Other brokers represent just two or three lenders while still others work for a single lender. It is important to ask going in.

3. Downpayments Play an Important Role

Many first-time home buyers don’t understand just how important their downpayments are. Downpayments play a vital role in determining rates, terms, and whether buyers need to purchase private mortgage insurance (PMI). We’ll talk more about PMI in the next section.

As a general rule, going in with a 20% down payment puts a buyer in a good position. Some lenders require less, but lower downpayments usually translate into higher interest rates. Less favorable terms are also pretty common with lower amounts.

4. PMI Should Be a Consideration

Going in with less than 20% as a down payment will probably result in the buyer having to purchase PMI. PMI is an insurance product intended to protect the lender against default. Monthly premiums are rolled into mortgage payments and continue until the buyer’s equity reaches 20%. In some cases, buyers need to make a request to cancel PMI when the time comes. Lenders don’t always make the suggestion.

5. Shorter Terms Save Money

The biggest cost of borrowing for a mortgage is interest. Unfortunately, first-time home buyers don’t tend to think in terms of how much they will pay to get a mortgage. They focus only on monthly mortgage payments they can afford. Here is a dirty little secret: a shorter-term saves money even if monthly payments are higher.

Lenders make money by collecting interest payments over many years. The fewer years you pay interest, the less money you actually pay over the life of a loan. Therefore, it is in a buyer’s best interests to get the shortest term possible.

Mortgage lending is tricky for any home buyer. But for first-time buyers, it can be overwhelming. Education is the key to understanding it all. Before any first-time buyer signs on the dotted line, it’s important to obtain a working knowledge of mortgage lending and its many details.

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