Your Go-To Guide to the Homebuying Process & Choosing a Mortgage Lender

Why is it hard to buy a house?

After all, it’s simply a property purchase, right?

Not necessarily. Buying a house isn’t as simple as going to the grocery store to cross the food items off your shopping list. Your investment in those food items doesn't come with conditions, requirements, and long-term implications, so you probably won't face the same emotions as first-time homebuyers. If you buy a bad or spoiled item, for instance, it's safe to assume you'll recover quickly. You might not be so lucky when it comes to a house.

The stress of buying a house is very real, and it stems from the dizzying array of variables involved and how they can shift during the homebuying journey. And because the home lending process is riddled with surprises and sudden changes, the fear of buying a home can also be tied to a general fear of the unknown.

Despite this, purchasing a home shouldn't provoke fear or immense amounts of stress. Working with an experienced lender — usually a smaller, more specialized bank — is the best way to avoid a painful homebuying process.

Homebuying Fears and Misconceptions

If you’ve faced stress related to the homebuying process, you certainly aren’t alone. Nearly 40% of Americans polled in a recent survey admitted that buying a new home is the “most stressful event in modern life.” Besides this, 44% confessed that they were constantly nervous during the process, and around one-third of participants confessed to crying during the homebuying process.

So why is homebuying so stressful? If learning about the homebuying process was part of our standard curriculum, things might’ve turned out differently. However, not many high schools offer this kind of class. You might learn how to balance checkbooks in a personal finance course, but nobody will take you aside to chat about, say, variable home loans versus fixed-rate loans. Even if your parents purchased a home, you likely weren’t involved in the purchase process. Homebuying isn’t something you learn until you dive in headfirst.

This knowledge gap provides yet another reason why buying a house can be scary — and it’s the ideal environment for creating homebuying myths. For example, an inexperienced lender might tell you that a 30-year fixed mortgage is always the best type of mortgage loan. But if you only plan to keep the house for seven years before moving on, a seven-year fixed mortgage will likely provide a better interest rate. When you fix the rate for a longer term, the interest increases.

Another common misconception is that it’s always best to go with the lender offering the lowest mortgage rate. In fact, higher rates and fees can actually mean more attentive, reliable service from the lender. In such a competitive buying market, you want service providers who will go to bat for you and be there when you need them most. This doesn’t even mention that down payments, monthly payments, taxes, and insurance can also contribute to the fear of buying a home.

In this article, we’ll explore different factors that contribute to homebuying fears as well as other factors you should know about before you start the homebuying process. Read on to learn more about the different types of mortgage loans, the ins and outs of the homebuying process, and the banks that are most likely to provide the assurance and flexibility you need.

How to Know Whether You Can Afford a House

Before you can gauge expectations and figure out what you can afford, you should be aware of your credit.

Credit is one of the primary first-time homeowner loan requirements that lenders consider, and there’s much more to your actual credit than your credit score. Besides this, your score is probably not what you think it is. You aren’t able to view your true FICO scores provided by credit monitoring and credit card companies.

How does this score affect mortgage rates, then? Your true FICO credit score will influence your borrowing prospects in a general way, but that’s in combination with other credit factors. Medical bills, student loan payments, and assets affect your overall credit as liabilities against your net worth. You can calculate your net worth by subtracting your ongoing liabilities from the value of your owned assets.

Lending professionals will also want to know whether your income will continue to cover current obligations when house payments, taxes, and insurance are factored in. If you earn enough to afford all of these payments, it’s the right time for you to be in the market for a first-time homeowner loan.

Considering Your Loan Options

Your down payment is another factor that will affect your loan rate, so you’re probably wondering how much money down you’ll need to buy a house. As a rule of thumb, larger down payments lower the loan-to-value ratio. This lessens the lender’s risk and offers you more attractive interest rates.

You don’t always need to put 20% down to purchase a home; in fact, this hasn’t been true for decades. Your down payment is one factor you have some control over, and there are a variety of home loan down payment options and different types of mortgage loans available from both conventional lenders and government agencies. Here’s what you should know about them:

Home Loan Options

Conventional Loans

By definition, conventional loans include any loan that isn’t insured against default by a government agency. This means the lender assumes more risk and has flexibility and authority in setting the terms. In this case, providing a 20% down payment actually is best; it enables lower-cost mortgage rates and removes private mortgage insurance requirements. However, down payments as low as 3% are still possible in conventional lending.

If the established terms conform to guidelines established by one of the government-sponsored enterprises (GSEs) described below, the lender can drop the mortgage from its portfolio and sell it to one of those agencies later. These are conforming home loans. A nonconforming home loan from a conventional lender doesn’t adhere to the guidelines set forth by GSEs. In these cases, the mortgage can’t be sold to one of those agencies and remains a conventional home loan.

Fannie Mae and Freddie Mac Loans

The Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) — known as Fannie Mae and Freddie Mac — are government-sponsored enterprises that offer first-time homeowner loans with 3% down payments. These loans also allow a high degree of flexibility, from the ability to cancel private mortgage insurance to no geographic restrictions. In this way, FNMA and FHLMC loans can provide a solid option for eligible first-time homebuyers.

Federal Housing Administration Loans

The Federal Housing Administration (FHA) is a government agency that insures home loans against default for qualified buyers, which reduces the lender’s risk. The FHA’s home loan down-payment requirement is currently 3.5%. Even though the FHA itself insures against default, these loans require borrowers to purchase and maintain private mortgage insurance. There are some geographic restrictions as well.

Department of Veterans Affairs Loans

The Department of Veterans Affairs (VA) is a federal agency that provides a variety of services and resources to military veterans and their families. The VA loan program does not provide funding itself, but it connects eligible veterans with lenders to obtain 100% of home financing with no down payment. There are no insurance requirements, but there is a funding fee that must be paid to the VA.

Department of Agriculture Loans

The Department of Agriculture (USDA) guarantees no-down-payment home loans for qualified buyers in rural and suburban areas. You might imagine rolling fields, farms, and livestock, but 97% of the U.S. is considered geographically eligible for a USDA loan. These types of mortgage loans also include a guarantee fee that can be bundled with the loan amount.

Additional Costs of a Home Loan

A lower interest rate or down payment doesn’t necessarily signal the best type of mortgage loan for your situation. Your savings on one aspect of the loan can drive up the price of another, so it’s best to pay attention to how the numbers interact.

In American Bank of Missouri’s market, many people are aware of the USDA loan and its 100% coverage. However, they often don’t factor in closing costs and other expenses to the overall cost of the loan. Although they’re excited at the prospect of low-cost mortgage rates, they might not realize that the closing costs on USDA loans will run them an additional 3% to 5%.

In addition, there’s also homeowner’s insurance, appraisal, title work, and escrow for taxes and insurance to consider. All of these things cost money, and in our own mortgage lending process, we try to work them into the sales contract so clients aren’t hit with hidden fees.

We also make sure to educate our clients about private mortgage insurance (PMI). Many first-time homebuyers don’t realize that homeowner’s insurance and PMI are entirely separate expenses. The PMI is insurance against foreclosure that nearly all lending situations require as part of the loan.

Fixed Versus Floating Interest Rate Home Loans

It’s important to understand how loan rate structures work, especially when it comes to fixed versus floating interest rates.

The simple explanation is that fixed-rate home loans feature a static interest rate for the life of the loan, whereas floating (or variable) rates shift with the market. Since interest rates dropped back in 2010, we’ve had very few borrowers interested in variable loans. We find that because interest rates are still so low, it generally makes more sense for borrowers to choose a fixed-rate loan.

Despite this, an experienced borrower might opt for a variable home loan in certain situations. Let’s imagine that your work requires you to relocate every few years, but you still want to purchase homes in each location. When you buy a house, a variable rate might work out better for you. You can potentially buy a house that’s more expensive while enjoying lower payments due to your lower variable rate. When it’s time to relocate, you sell the house and move on. Hopefully, you made some money off the house due to your savvy borrowing.

Still, it’s worth remembering that fixed-rate loans are generally the better option. Most borrowers — especially first-time homebuyers — opt for fixed-rate home loans. They’re predictably priced for the duration of their terms, and so they make more sense than an adjustable-rate mortgage (ARM) loan from a budgeting standpoint. For that reason, almost everyone wants a fixed rate — and it’s why American Bank of Missouri places more of our focus on fixed-rate home loans.

Exploring Online Mortgage Loans

The advent of the internet makes it possible to do nearly anything online, including shopping for houses and browsing online mortgage brokers. Despite the hyperconvenience this kind of online shopping offers, buyers must exercise caution.

If you’re an experienced homebuyer who understands the finance side of purchasing property, has good credit, and can provide a 20% down payment, an online mortgage broker could be a good option — but this doesn’t represent the typical homebuyer’s profile. That inflexibility isn’t the only drawback of an online mortgage loan, though.

Naturally, large online lenders won’t have a good grasp of your local real estate market, so it’s difficult to find someone to answer your more specific questions. There’s a good chance you’ll get frustrated with online lenders when you can’t get anyone to walk you through the process. That’s why even though many people start their mortgage applications online, most complete the homebuying process with help from one-on-one meetings.

If you choose to partner with a local community bank for your homebuying journey, you’ll avoid many of these frustrating issues. One of the advantages of borrowing from a community bank is that we’re ready to support you every step of the way. Besides this, though, you can still quickly apply for a mortgage online using our portal. Normally, our clients answer half of the questions on the online application, and we call and help them finish the rest.

When you work with one of our dedicated mortgage loan officers, you also benefit from guidance from a person who understands local conditions and can answer any highly specific questions about those conditions (not to mention the homebuying process itself). That knowledge actually increases your chances of approval, too.

Advantages of Community Banks

Again, local mortgage banking is all about in-person connections — and local lenders like American Bank of Missouri certainly have an edge in that we can communicate more effectively with homebuyers. This is true even when our clients begin the homebuying process online.

If you’re new to the home loan process and you decide to work with our officers, you should be empowered. We want you to know as much about the home lending process as possible. When you understand the ins and outs of mortgages — from the different types of home loans to the steps involved in home mortgages — we’ll be able to get you to closing while avoiding any frustration or confusion. It’s nearly impossible to get that level of guidance from larger online mortgage brokers.

Besides this, small banks and mortgage lenders like American Bank of Missouri use our own money, so we have more control in the home mortgage process. If we sit down and chat with you today (and there are no issues with your application) we have full autonomy to get you through the home loan process and on the fast track toward approval.

When you combine that personal attention and specialization in first-time home loans, your odds of success in the home mortgage process go up considerably: Research shows that banks do 80% more lending than online nonbank business entities and loan about twice as much money.

How to Choose a Mortgage Lender

You’re interested in securing a loan to purchase your first home. So how should you get started?

One of the very first steps to buying a home, of course, is choosing a home lender. You’ll be shopping for the best mortgage rates based on your credit score and will want some flexibility with the down payment and mortgage insurance. Because of this, favorable rates and flexibility are certainly things to look for when choosing a mortgage lender.

Don’t forget that the opportunity to work with an experienced lender is something you should also consider. You want to work with someone who’s experienced in mortgage lending, as that person will give you honest feedback about your situation and guide you through the nuances of homebuying. So experience might be the first thing to shop for when choosing your mortgage lender.

At American Bank of Missouri, we take the homebuying process very seriously. There are no rookies in the office, and the entire department has many years of experience. But if you’re a newbie and this is your first time going through the homebuying process, we’re ready to walk you through everything. Even if you’re just considering a home mortgage and have yet to choose a mortgage lender, you’re always welcome to visit and chat with us. We’re part of your community, and education is part of how we serve our community.

We offer a variety of resources if you’re heading into the homebuying process. Reach out to us with your questions about the process of getting a home loan or apply for mortgage lending online. You’ll see why our experience eases those first-time homebuyer emotions.

Our Options

We serve homebuyers and those wanting to refinance an existing mortgage. American Bank wants to make your home loan experience as clear and simple as possible. Our Mortgage Loan Officers, in-house processing, and underwriting group have the experience, expertise, and knowledge to guide you through the paperwork while helping you bring your dreams to life. Our loans are processed and underwritten locally so that the process of taking out a mortgage is smooth.

To learn if American Bank is the right mortgage partner for you, click Our Online Application.

Completing an online application is not considered a loan approval and does not guarantee an interest rate. For detailed information on loan approvals and mortgage rates, please connect with Our Team.

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Reach out now to one of our local lenders to find solutions to your financing needs:

Dan S. Smith

NMLS 7743
Vice President
Residential Lending – Wright City

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Jacob J. Maier

NMLS 173602
Mortgage Loan Officer – ST. Louis Metro

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Sharon A. Colbert

NMLS 586142
Mortgage Loan Officer – Hannibal

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