Author: Emily Andrews

When faced with a competitive housing market and limited inventory to go around, it’s not uncommon for many buyers to feel like their options are extremely limited. After all, finding the perfect home that fits your budget, your current needs, and your plans for the future is no small task, even in the best buyer’s markets.

If you’re in a similar situation, or if you already own a home that you’d like to improve (like the 55% of homeowners who renovated in 2021, according to one study), you may want to consider two often overlooked loan options: construction loans and renovation loans.

Unlike the conventional, long-term mortgages that typically come to mind when thinking about home loans, construction and renovation loans (renovation loans are typically 30-year fixed loans) are specialized options for building or renovating a home that could be just the right move for a buyer who’s feeling limited by what the current market has to offer.

Construction Loans: Building Your Dream Home

If you have your sights set on building a new home from scratch, construction loans can provide the investment capital you need to get the job done – including purchasing land, materials, labor, and more. These short-term loans are specifically designed to finance the construction of a new property. Typically, construction loans have a term of one year, and upon completion of the home, the borrower must secure a permanent home loan.

With a construction loan, you have the flexibility to shape your ideal living space according to your preferences and requirements. Working with First Home Mortgage means you can explore the right construction loan for you and then take out a mortgage with a lender you’ve already built a relationship with.

Renovation Loans: Transforming Your Existing Home

Maybe you’ve got an older home that’s due for some updates, or maybe you’ve found one to buy that would be just right if you could add that second bathroom, finished basement, or any of the most popular home improvement projects. Well, a renovation loan might be right for you.

Home renovations are popular and often expensive. According to the Joint Center for Housing Centers of Harvard University (JCHS), spending for home improvement projects increased from $328 billion in 2019 to $472 billion in 2022. It’s expected to climb even higher in 2023, due largely to inflation and supply chain shortages.

Renovation loans provide the necessary financial support for home repairs, renovations, and remodels. There are several options available for renovation loans, including FHA 203(k), FNMA HomeStyle®, and Freddie Mac CHOICERenovation® mortgages.

FHA 203(k) loans, offered by the Federal Housing Administration, enable borrowers to finance repairs within a single mortgage on their primary residence. These loans require a minimum down payment of 3.5% on a purchase and come in two types: Standard FHA 203(k) loans, which allow borrowers to finance rehabilitation costs starting at $5,000 without a maximum limit, and Limited FHA 203(k) loans, which provide renovation and repair financing for up to $35,000 in total renovation costs.

Alternatively, Fannie Mae HomeStyle® and Freddie Mac CHOICERenovation® mortgages,   empower you to purchase and renovate a primary residence, second home, or investment property. These loans require a minimum down payment of 3% or more, where applicable, and allow you to combine the cost of purchase and renovation into a single mortgage, up to the conforming loan limit for the county/district.

That’s a lot of numbers and acronyms, but the main takeaway is that you may have some options to consider. As always, consulting with an experienced loan officer can help you get a better understanding of what’s available for your unique circumstances.

Determining if a Construction or Renovation Loan is Right for You

If you’re considering building a home, evaluate whether your current financial situation favors building over buying. Assess your timeline for moving into a new home and factor in any time constraints, potential for delays, unexpected costs, and your overall level of comfort with taking on a major undertaking like this.

If you’re contemplating renovations, assess whether it’s the right time to proceed and if the renovations will significantly enhance your quality of life and the value of your home. There are many variables that impact the overall cost, and they should be carefully weighed against your short-term and long-term goals.

Obtaining a Construction or Renovation Loan

Once you’ve decided to pursue a construction or renovation loan, it’s essential to evaluate your current financial standing. Start by assessing your credit score, debt-to-income ratio, and overall financial health.

For both construction and renovation loans, obtaining pre-qualification is key. It provides a solid estimate of your borrowing capacity and helps you establish a realistic budget, enabling you to plan your project effectively. If you’re not already pre-qualified, you might be surprised to find how quick and easy it is – and without any impact on your credit score*.

If you’re ready to explore the construction and renovation loan options available at First Home Mortgage, connect with one of our loan officers today and start your search for the loan that will help you build or remodel your dream home.

HomeStyle® is a registered trademark of Fannie Mae. CHOICERenovation® is a registered trademark of Freddie Mac. *A soft pull will not affect your credit score however if you decide to proceed with a full mortgage loan application, a full credit report will be ordered.

Homebuying can be an exciting and rewarding experience. It can also be an extremely stressful and confusing one – especially if it’s your first time. As a first-time homebuyer, it’s perfectly natural to feel overwhelmed with questions about every step of the process. But don’t fret – we’ve got you covered! In this article, we’ll address some frequently asked questions to help you navigate your homebuying journey with confidence.

What should my mortgage budget be?

This is a crucial first step. Everyone’s financial circumstances are different, but you can form a loose estimate for yourself by factoring your monthly income, expenses, and debts. A common guideline is the 28/36 rule, which suggests a household should spend a maximum of 28% of its gross monthly income on total housing expenses, and no more than 36% on total debt service. Keep in mind that these are general guidelines, and it’s essential to factor in your individual circumstances.

How much money will I need for my down payment?

Your down payment depends on several factors, including loan type, lender requirements, and your financial situation. While a 20% down payment is considered ideal and often recommended to avoid paying private mortgage insurance (PMI), it’s certainly not required, and it’s also not as common as many buyers believe . There are various low-down-payment programs available, such as FHA loans, VA loans (for eligible veterans), and conventional loans with down payment assistance.

Additionally, many lenders offer incentive programs for first-time buyers, those who work in community service roles, and qualifying buyers within certain income levels, which may offer down payment assistance or provide discounted rates, fees, and closing costs that could make your initial investment more affordable. Speaking with a loan officer is a great way to explore what options may be available to you.

What exactly does a real estate agent do, and how do I select one?

A real estate agent should act as your guide and advocate, helping you better understand the market, find prospective homes, negotiate offers, and navigate the various steps of the homebuying journey. They have access to listing databases, market insights, and industry expertise to assist you in making informed decisions. Most importantly, a good agent will be looking out for your best interests throughout the process.

Partnering with the right agent can make a world of difference to your overall experience. It can be helpful to consult with friends and family for recommendations, or, you can research online and read reviews to find someone reputable. Consider speaking with multiple agents to select someone you feel comfortable working with who understands your specific needs – and don’t hesitate to make a change if you don’t feel things are working out!

What’s the difference between an inspection and an appraisal?

An inspection and an appraisal may seem similar, but they serve very different purposes.

• Home Inspection: A home inspection is conducted by a licensed inspector to assess the condition of the property after an offer is accepted but before a closing takes place. Inspectors thoroughly examine the home’s structure, systems, and components to identify any potential issues or repairs needed. The inspection helps you understand the property’s condition before making a purchase decision and creates an opportunity to negotiate repairs or reconsider your purchase altogether if major issues are discovered.
• Property Appraisal: An appraisal is performed by a certified appraiser to determine the property’s market value. The appraiser is a neutral third party, who represents neither the buyer, the seller, or the lender. To estimate the property value, the appraiser evaluates comparable properties, location, condition, and other factors to deliver an unbiased assessment of the home’s worth. Lenders require appraisals to ensure they are not lending more money than the property is worth and thereby protect their investment. This also provides peace of mind to buyers who are seeking to pay fair market value for their home.

How can I estimate property taxes and insurance costs?

Before putting in an offer, it’s important to anticipate what your property taxes might be. To estimate property taxes, you can typically find information on the local government’s website or contact the tax assessor’s office for the current tax rate and assessment value of the property. Multiply the assessed value by the tax rate to estimate your annual property tax.

Insurance costs vary depending on factors such as location, property type, coverage amount, and provider. You can obtain insurance quotes from different companies or consult with an insurance agent for more accurate estimates. Oftentimes, discounts are offered for bundling automotive and homeowners insurance policies together.

It is important to note that both property taxes and homeowners insurance rates can change over time. Expect your taxes to likely go up over the course of your homeownership and consider shopping around for insurance policies periodically.

What are closing costs, and how much should I expect them to be?

Closing costs are the fees and expenses associated with finalizing the home purchase. They typically include items like appraisal fees, loan origination fees, title search and insurance, attorney fees, and prepaid expenses like property taxes and homeowners insurance. Closing costs can range from 2% to 5% of the home’s purchase price. However, the exact amount varies depending on factors such as location, loan type, and specific transaction details.

Your lender will provide a Loan Estimate document that breaks down expected closing costs. Working with a loan officer can help you better understand and prepare for these costs.

A Final Word

The homebuying process can be intimidating for anyone, and that’s especially true for first-time buyers. This guide can help you understand the basics and give some food for thought on your purchase strategy, but each person’s homebuying journey is unique. It’s crucial to seek expert guidance tailored to your specific circumstances.

The information provided in this article is for general informational purposes only and does not constitute professional advice. For personalized guidance regarding your specific situation, consult with a loan officer at First Home Mortgage.

Happy house hunting!

It’s typically the first (and sometimes biggest) question prospective homebuyers find themselves asking before they enter the housing market. “How big does my down payment need to be?”

The down payment is a critical component of the homebuying process, as it determines the initial financial commitment and impacts important factors like loan approval and interest rate. While a 20% down payment is often considered the gold standard, there are various myths and misconceptions surrounding down payment amounts.

If you’re in the early stages of buying a home and wondering what your down payment should look like, you may want to start here. In this article, we’ll clear up some common misconceptions about down payments and explore options that may help buyers cover down payment costs or get a mortgage with smaller down payments.

Down Payments: Myth vs. Reality

Myth: You need at least 20% down to buy a home.

Reality: In a 2020 survey by the National Association of REALTORS®, 35% of consumers believed they needed 16% to 20% for a down payment, and 10% believed they needed more than 20%. In truth, the typical down payment for first-time buyers has ranged from just six to seven percent since 2018. In 2021, the average down payment was just 7% for first-time homebuyers and 17% for repeat buyers.

While a 20% down payment has long been considered the benchmark, it is far from the only option available. Numerous mortgage programs allow for smaller down payments, such as FHA loans that require as little as 3.5% down and conventional loans that may go as low as 3%. It’s important to explore the available options and find the best fit for your financial situation.

Myth: More is always better.

Reality: While a larger down payment can offer certain advantages, such as potentially securing a lower interest rate or avoiding private mortgage insurance (PMI), it doesn’t automatically guarantee a better mortgage deal. Other factors like credit history, income, and debt-to-income ratio also influence mortgage terms.

Also important to consider is that when buying a home (especially your first home), there are many upfront costs and unexpected expenses that may arise. Putting all your savings into a down payment could leave you in a challenging position in the event of a financial emergency. It’s essential to consider your overall financial profile and consult with a mortgage professional to determine the right down payment amount for you.

Myth: You should wait until you have a big down payment saved up before starting your search for a home.

Reality: Many prospective homebuyers believe that without a substantial down payment, homeownership is out of reach. However, there are several programs and initiatives that can assist buyers with down payment costs or provide benefits to those with smaller down payments. For example, VA loans are available to eligible veterans with no down payment requirement, and USDA loans offer zero-down payment options for buyers in rural areas.

For qualifying homebuyers with low to moderate income, First Home’s Dream Program offers $3,000 in down payment assistance. Other programs, like First Home Heroes, can provide fee credits to eligible buyers that lower closing costs, potentially freeing up funds for a larger down payment or other homebuying expenses.

Key Takeaways

The size of your down payment should be based on your financial circumstances and  available options – and you do have options. While a 20% down payment is often seen as ideal, it is not the only path to homeownership, nor is it as common as many believe. Various mortgage programs and assistance initiatives exist to help buyers with down payment costs or to accommodate smaller down payment amounts. Talk to a qualified loan officer to see which of these opportunities may be right for you.

By dispelling myths and understanding the facts, you can navigate the down payment puzzle and make informed decisions on your journey to becoming a homeowner.