Being a First Time Home Buyer can increase the difficulty in the process of obtaining financing, not only due to the lack of credit history but because of the inexperience and lack of knowledge on the field. Following, you will find some tips to help you get started.
The Down Payment Issue
A down payment in the range of 10% to 20% is usually required for obtaining a home loan to buy a house. There are also closing costs that you will need to pay in order to secure the loan.
If you add up these two factors, very few can afford putting down this much money. The financial industry, however, has found a solution to this problem and offers a different financial option.
Zero down mortgage loans are meant for those who cannot put away enough money for a down payment. With these loans you can finance 100% of the property value.
Moreover, for those who cannot even raise the money for closing costs, there are lenders offering 103% or 105% finance home loans.
The extra percentage is used for covering the closing costs which will then be included in the overall debt that you will have to repay in monthly installments.
Drawbacks of Lack of Down Payment
Zero down mortgage loans sound tempting but though not having to put money down in order to purchase a house can seem to be a fabulous waiver, it has many drawbacks and unless strictly necessary, it should be avoided by all means possible.
A down payment has not only direct positive financial consequences but it also can be a positive factor when the lender has to decide whether to approve your loan or not and on what terms.
When the lender has to consider your application, a down payment tells him that if you were able to save enough money to make a considerable down payment, you will probably be able to meet your monthly payments without any difficulty.
A down payment will also imply that you have the ability to obtain finance elsewhere and so, the lender will try to offer you a more tempting loan proposal in order to keep you as a client.
Those who can offer a down payment always get a considerably lower interest rate than those who cannot. As you can see, a down payment reduces dramatically the risk implied for the lender in the financial transaction, and thus, you will be able to get a better deal on your loan.
A down payment will not only reduce the interest rate you pay; it will also lessen all the other loan requirements and will turn the loan terms more flexible. You will be able to get stretchy monthly payments and larger loan lengths too.
Home Equity Loans
If you wanted to use that money for making home improvements or for other expenses, you do not need to worry. Once the deal is closed, the amount you had to put down will become home equity and you will be able to request a home equity loan for the difference between your home value and the amount owed on the mortgage.
These loans are secured and carry low interests; they are the perfect solution if you ever need the money you used for the down payment.
