For most people, buying a home is the biggest purchase they will ever make, and the majority of first-time buyers need to obtain financing in order to do so. With such a large number on the table, it’s important to choose financing that works for you in both the short- and long-term.
From down payments, to mortgage brokers and traditional lenders such as banks, we’ll explore what options are best for each financial situation and to help you to figure out where to start.
Should I Use a Mortgage Broker?
A mortgage broker is someone who provides you, the borrower, with financing options from various lenders. Think of them as a sort of mortgage middleman.
You provide them with financial details about yourself, such as your job history, credit report, down payment amount, etc., and they take your information to various private lenders to see what they can offer you for an interest rate and mortgage term.
There are many potential pros to using mortgage brokers, such as:
- Communicating between you and a lender.
- Lower interest rates.
- Flexibility for atypical borrowers.
As well as cons, that can include:
- Unguaranteed estimates.
- Obscure lenders.
- Inability to service your loan.
Mortgage brokers are able to present your information to multiple lenders, allowing for flexibility if you don’t meet the strict standards usually required by banks. Often, mortgage brokers are able to find options for those who are self-employed, who have poor credit history, or a short job history. But remember that those options may come with penalties, such as a higher interest rate or a larger down payment.
If you do choose to go with a broker, make sure that you choose someone who has a good reputation and a lot of experience.
Should I Use a Traditional Lender?
Traditional lenders, namely banks, provide mortgages to clients, allowing both parties to communicate directly. Often, first-time homebuyers with good credit, a down payment, and at least a year’s worth of job history will contact their bank first when seeking a mortgage.
Banks tend to have pre-designed mortgage options, which includes interest rates, terms, and so on.
The benefits of choosing a bank can include:
- Reliability, trust, and security.
- Potential savings for clients with multiple accounts.
- Faster approval.
While some negatives are:
- Less flexibility for buyers who are self-employed, or who have poor or little credit history.
- More rigorous requirements.
- Limited choices in terms of rates, length, and more.
When exploring the option of using a bank as your lender, remember that you don’t have to stick to the bank that you have other accounts with. Feel free to explore what other banks are offering. Some may offer bonuses for having checking or savings accounts with them, or based on the down payment that you will make.
If you do choose to go with a bank, be sure that it is a bank that you feel comfortable with and that you have them walk you through the terms of your mortgage so that you understand the ins and outs.
Should I Save for a Cash Sale?
Cash sales are probably the most desirable types of home purchases, since the buyer forgoes interest rates, mortgage terms, and the stress of finding a lender, but not many buyers are able to purchase a home using cash alone.
In smaller towns or less desirable areas, homes can go for reasonably low prices, which may allow you to save enough to buy one, but in areas with higher demand or in cities, home prices aren’t quite as affordable.
In order to save for a cheaper home it can take years to put away enough to make the purchase, but for even a moderately priced home it can take even longer, depending on your income and expenses.
Often, buyers who are able to purchase using cash benefited from an inheritance or something similar, but just because you have the cash to cover your house entirely doesn’t mean that you should use it all.
Before choosing to use all of your cash to secure a home, consider the following:
- If I use all of my savings to purchase a home, will I be left cash poor?
- What will the cost of renovations, repairs, or other fees outside of the mortgage be?
- Am I borrowing money from someone I will need to pay back?
- How long will it take me to save for a home, based on both my expenses and inflation?
How Should I Finance My Mortgage?
How you finance your mortgage, whether through a broker or a bank, using just enough cash to cover the down payment, or paying for your home entirely, depends on your financial situation, the property, and your goals not just for now, but down the road.
Not every lender is suitable for every buyer, and only you can decide which avenue makes you feel the most confident and comfortable. Take your time, shop around, and explore what is available to you. In educating yourself about your options, you can make the best choice for you and your finances.
How did you, or how do you plan to, finance your first home purchase?