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First-Time Homebuyers: Home Loans 101


Buying a home is a major milestone, and it can be an overwhelming process, especially when it comes to home loans. Our goal is to make the home-buying process easier for you. Understanding all your loan options is crucial when buying a house. In this blog, we’ll explain some typical home loan options, go over some basic things you should know before buying a house, and provide tips on budgeting for your first home.

What You Need to Know Before a Home Loan

Buying your first home is arguably one of the biggest financial decisions you’ll make. That’s why it’s important to understand the home-buying process. To streamline your first home-buying process, make sure you can answer the following questions:

  1. What’s your credit score?
  2. How much debt do you have?
  3. Do you have a budget?
  4. What are your loan options?
  5. What lender do you choose?

Know Your Credit Score

To begin your journey to homeownership, it’s best to start with your credit report. A credit report summarizes your credit history, your payment history, and how many credit accounts you have open.

Your credit score is a prediction of your credit behavior, like how likely you are to pay back a loan on time, based on the information in your credit report. A credit score shows lenders how to rate you as a borrower.

As you’re gearing up to obtain a home loan, put off opening any new credit accounts or lines of credit until your loan is closed. Sometimes, getting a new line of credit can hurt your chances of obtaining a mortgage. On the flip side, make sure you don’t close existing credit accounts either. Closing existing credit accounts before you apply for a home loan can negatively affect your credit score.

Calculate How Much Debt You Have

It’s easy to fall into debt these days, but lenders look at your debt-to-income ratio to make sure you can pay your mortgage payments. Your debt-to-income ratio tells lenders how much of your recurring debt payments (i.e. car loans or student loans) take up your monthly income.

Paying off your credit card debt is a great step to lower your debt-to-income ratio. Here are a few ways to start:

  • Pay more than the minimum
  • Pay more than once a month
  • Pay off your biggest debt first (debt avalanche)
  • Pay off your smallest debt first (debt snowball)

Budgeting for Your First Home

Before starting your home search, it’s important to determine a realistic budget that works for you. Consider the following steps:

  1. Assess your finances: Evaluate your income, expenses, and current debts. By sitting down and looking at your cash flow and finances, you can determine how much you can comfortably pay toward your mortgage each month while still meeting your other financial obligations.
  2. Calculate what you can afford: Use an online mortgage calculator to estimate your potential monthly payments based on different loan amounts, interest rates, and terms. This can give you a clearer picture of what you’re able to afford.
  3. Consider the extra costs: Remember to factor in other homeownership expenses like property taxes, insurance, maintenance, and utilities. Make sure to include a down payment and closing costs to your list of extra costs. The larger the down payment, the less you’ll need to borrow from a lender. Most closing costs are 3%-6% of the purchase price of the home. Check out our budgeting worksheet to help you get started on a comprehensive budget that includes these costs.

Research Your Home Loan Options

When it comes to home loans, there are several options available to choose from. Let’s take a closer look at the three most common types:

  1. Federal Housing Administration (FHA) Loans
  2. VA Loans
  3. Conventional Loans

Federal Housing Administration (FHA) Loans: These loans are popular among first-time homebuyers. FHA loans are backed by the government, allowing borrowers to secure financing for a house with a lower down payment (usually 3.5%). These types of loans are also more lenient on credit score requirements. However, FHA loans do require an Up Front Mortgage Insurance Premium and a mortgage insurance premium (MIP) to be paid.

VA Loans: Veterans, active-duty military personnel, and eligible surviving spouses have the benefit of VA loans. These loans are guaranteed by the Department of Veterans Affairs and offer several benefits: no down payment required, low-interest rates, limited closing costs, no need for Private Mortgage Insurance (PMI), and this loan is a lifetime benefit. If you qualify, a VA loan can be an excellent option.

Conventional Loans: Conventional loans are not backed by the government. They usually require a higher credit score and a larger down payment (usually 5% to 20%). However, conventional loans typically cost less and offer more flexibility in terms of the amount of the loan, property types, and mortgage insurance options.

Finding the Right Lender

When searching for a lender for your home loans, consider the following:

  • The lender’s available loan options
  • Lender rates and fees
  • The lender’s reputation, including customer satisfaction and customer service reputation

Once you find a lender you like, you’ll need to apply for initial approval. Your lender will expect you to submit necessary documents such as identification, income verification, tax returns, and bank statements. It’s necessary to obtain pre-approval from a lender before starting the search for your new home. To get pre-approved, your lender will look at your credit report and estimate how much money you’ll be able to borrow.

Borrowing Made Simple

Buying your first home can be an intimidating process, but you deserve a partner you can count on. At Highlands Community Bank, you’re more than just a number. We’re invested in our community and make local decisions you can count on. We personally review every loan with attention to detail and take the time to consider the whole person, not just the numbers on the application.

Highlands Community Bank offers competitive loans with flexible options for residents of Covington, Clifton Forge, Hot Springs, and the surrounding communities. Talk with one of our loan experts today and start your journey to homeownership.

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