With over 45% of buyers purchasing a home for the first time, a big chunk of home buyers are newly experiencing the fierce complexities and challenges of buying a home. And financing is, without a doubt, an important factor for those looking to own. Most buyers (77%) obtain a mortgage to finance their home, according to the Zillow Group Consumer Housing Trends Report 2018. Before you take on the responsibility of a mortgage, take a look at what many first-time home buyers wish they knew about financing.
Down Payments & the Myth of 20%
Even though most buyers have get a mortgage to finance their home, they usually will also need a lump sum of cash to put towards a down payment — a hurdle that prevents many would-be buyers from making the leap to homeownership.
But just because you don’t have a huge down payment doesn’t mean you can’t buy. Despite common misconceptions about home financing, a 20% down payment is not a requirement for homeownership. Although buyers who don’t put down a full 20% typically have to pay a premium for the extra risk lenders take — private mortgage insurance (PMI) — they may still be in a situation that’s more financially advantageous than paying monthly rent payments.
Zillow’s report found less than a quarter (23%) of buyers put 20% down, while 52% put less than 20% down. So while down payments have once been seen as the biggest hurdle to homeownership, many first-time home buyers are finding ways around the 20% myth and landing their homes anyways.
Loans Aren’t One-Size-Fits-All
Just as homes come in various styles and at different price points, so do the ways you can finance them. There are a number of loan options to choose from, but deciding which kind is best for you requires a little bit of time and research.
Many home shoppers assume the best choice is the ever-popular 30-year fixed loan, which offers the advantage of a set interest rate, regardless of how the market rises or falls. But if you don’t plan on living in your home for 20 or 30 years, an adjustable rate mortgage (ARM) could be a choice to consider. This loan type allows you to get a lower initial interest rate compared to a fixed-rate mortgage, but it isn’t guaranteed to remain at that rate, so be sure you understand how much the interest rate could change before selecting that loan type.
If a low down payment or low credit score is your primary hurdle, a government-backed loan might be a good option. Federal Housing Administration (FHA) loans, VA loans or USDA loans offer unique financing options for people with lower credit scores, low down payments or people looking to live in rural areas.
Depending on your unique situation, a loan type that caters towards specific pain points might be more fitting for you than a traditional loan type. Explore more loans for unique scenarios.
Shopping Around for Lenders Can Save You Thousands
Even though buying a home is often the biggest investment a person makes in their lifetime, many buyers usually don’t shop around for a lender. Over half (54%) only ever consider a single lender to finance their home. But shopping around for a lender can prove to be beneficial to the buyer. That’s why the Consumer Financial Protection Bureau recommends talking to at least three lenders when shopping for a home loan.
By evaluating multiple lenders, you can compare rates and terms to get the best option for your situation. If you only ever choose the first quote you get, you may be missing out on a better rate from a different lender. You can use Zillow to find local lenders in your area to help you through the process or compare rates anonymously.
See more ways to potentially save thousands on your mortgage.
You Can (and Should) Get Pre-Approved Early
Pre-approval plays a big role in financing a home and can be a major barrier without it. The majority (80%) of buyers who finance their home with a mortgage get pre-approved first. And getting it done early can prove to be beneficial.
Getting pre-qualified or pre-approved early on in your home search can help you shop in your budget, which can avoid potential disappointment down the road. Your lender will review your financial information and give you an estimate of what they will allow you to borrow.
Another reason for doing it early is to catch any errors on your credit report, and to give you time to fix them. A lower credit score could mean a higher interest rate, which could mean tens of thousands of dollars in extra interest paid over the life of you loan.
Getting pre-approved or pre-qualified early may also prove to agents that you are a serious shopper who’s done their homework. Buyers who use an agent are more likely to obtain pre-approval than those who don’t work with an agent, indicating that pre-approval is either a prerequisite to securing an agent or highly recommended by their agent.
And remember, you are not obligated to work with the lender who pre-approved you, so it’s OK to shop around when you’re closer to getting ready to lock in a rate.
The Bottom Line
If you put in some upfront work and anticipate the challenges that may be ahead of you, you’ll be able to overcome some of the biggest hurdles buyers face and have a smoother, less stressful process. It’s valuable to shop around for lenders and research different loan types so you can guarantee you’re getting the best possible option for your unique situation. And if you’re worried about saving up enough money for a down payment, there are plenty of options out there that can help lessen that burden and get you into a home.