Mortgage financing for First Time Home Buyers is really no different than it is for someone buying their second, third, or forth house. Actually a first time home buyer does have the advantage of tax rebates, but essentially real estate financing is approved in the same manner regardless of the number of times you have bought a home.
Mortgages, simply put, involve a lending institution such as a bank agreeing to put up a sum of money, which the customer will then pay back with interest charges each month for a set number of years until it is paid off fully. These guidelines give a basic run-down of how mortgaging works for interested first time home buyers.
There are two main types of mortgages, fixed-rate and adjustable-rate. A fixed-rate mortgage is usually drawn up for a 5 year term. That being said, there are always options to choose a term from anywhere between 6 months to 10 years, and sometimes longer. A fixed-rate means just that, an interest-rate which remains constant. The monthly payment amount of this type of loan remains the same for the term and will not change. Although it attracts a slightly higher interest rate, it’s a good choice for a first time home buyer who likes consistency and wants to think about things other than fluctuating mortgage payments.
An adjustable-rate mortgage (also known as a variable rate mortgage) has the potential to fluctuate throughout the term. The term options however, are often still the same as the fixed-rate mortgage. The rate will likely be adjusted either up or down depending on the current interest rate trends. Since the rates are initially lower, this option can save a first time buyer money and can help them more easily afford servicing their debt. Keep in mind that if the prime interest rate goes up substantially during your term, it may negate the savings over a fixed-rate mortgage. Those who can handle a bit of change in their monthly payments from time to time, and are comfortable budgeting for a potential increase, are well suited for this type of mortgage.
The process of securing a home loan has three stages. First is the application, in which potential first time home buyers apply to lending institution, either directly or through a Mortgage Broker, to see if they can get funding for their purchase. Second is the evaluation period, in which the application will be processed to determine if the applicants are eligible for a mortgage, and if so, for what amount. Lastly is the closing stage, which happens once the loan has been approved and the funds made available to the buyers.
Lending institutions take numerous factors into consideration when deciding whether or not to approve a mortgage. Some of these factors include the applicant’s credit history, work situation, personal assets, income-to-expense ratios, and the appraised value of the home he or she is interested in buying. Calculations are performed to determine what percentage of the person’s monthly gross income can reasonably be allocated towards housing. These calculations are known as gross-debt-service and total-debt-service ratios.
Debt service encompasses all recurring expenses pertaining to the ownership of the home. This includes the principal amount of the loan plus interest, property taxes, real estate taxes, and various forms of insurance which may be applicable. Lenders will put maximum limit on the percent of one’s monthly income (before taxes) that they feel can reasonably be allocated to these expenses.
When an application is approved by the lender and the loan is granted, the applicant is usually presented with an approval letter which states all important details such as the amount of the mortgage, interest rate, and any conditions which must be met. In the event the loan is not approved, a letter will also be provided, stating why it was declined, but sometimes a counteroffer is made for a lower amount or under different terms.
Closing is the final step in the process which involves the transfer of funds and the deed to the house. The lender releases funds to the lawyer handling the closing and the buyer signs the closing documents. The seller receives the money and in return gives the buyer title to the home. Now the first time home buyers are no longer that, and they can start planning for their next purchase – an investment property perhaps. 😉