If you consider buying your first home, you may be overwhelmed by the variety of financing options available. But, by researching all options properly and understanding the basics of property financing, you can save time and money. As a first-time homeowner, you need to consider the location of your property. Do you have incentive to buy at the specific area? Is the market attractive? Is the area going to be developed? More importantly, you should consider the level of mortgage you need based on your current financial situation.
Mortgage loan basics
First, you need to understand terminology. What is the loan term? Do you qualify for discount points? What about the interest rate?
* Interest rate is the percentage of the mortgage you will be charged for borrowing money to buy your first home. Typically, lenders charge interest rates that are based on current market situations, but also on your credit score and the type of mortgage you choose.
* Loan term is the amount of time you are required to pay off your mortgage. Typically, the shorter the loan term, the higher the monthly payments. So make sure, you select a loan term that corresponds to payments you can afford to make.
* Discount points are discounts offered by your lender to lower your interest rate. Typically, each discount point paid on a 30-year mortgage lowers the interest rate by 0.125 percent. The cost of each point is equal to 1% of the loan amount. So, if your mortgage is $200,000 one discount point equals $2,000.
Types of mortgage loans for first-time homeowners
After you familiarize yourself with the mortgage basics, you need to research the types of mortgage loans for first-time homeowners. However, to decide which one suits best your needs, you have to know how each one works and what needs it addresses.
a) First-Time Home Buyer Loans
First Time Home Buyer Loans provide general financial aid to qualified homeowners. Although they vary depending on the location of the property, they generally help qualified borrowers to deal with the money hurdle. Before deciding to sign up for this type of mortgage you should consider requirements such as steady employment, timely mortgage payments, good credit history and mortgage down-payment. In general, First-Time Home Buyer Loans offer low or no down-payment, deferred payments, limited fees and subsidized interest costs.
b) FHA Loans
The Federal Housing Administration (FHA) offers mortgage loans with lending limits to qualifying borrowers based on the property type and location. The FHA provides insurance on FHA-approved lenders to protect them against losses from potential default on mortgage payments. Generally, FHA loans have low down-payments (as low as 3% of the mortgage) and looser credit requirements for first-time home buyers. This can significantly facilitate your effort to finance your first property.
c) Conventional Loans
Conventional Mortgage loans are offered at fixed-rate interest and are the most difficult to obtain due to tight credit requirements that involve good credit score, high income and higher down-payment. Also known as conforming loans, conventional loans typically comply with the guidelines laid out by Freddie Mac and/or Fannie Mae. Both lending institutions set loan limits and sell securities on these mortgages in the secondary market. So, if the loan limit for a single family home is $417,000, the down-payment will be higher and the credit requirements will be tighter. If your mortgage is higher than the loan limit, also known as jumbo loan, the interest rate will be slightly higher as typically the demand for jumbo loans is lower. Non-conforming loans are driven by guideline laid out by the particular lender that underwrites the mortgage.
d) VA Loans
VA mortgage loans are offered by the U.S. Department of Veterans Affairs (VA) that guarantees mortgages for qualified borrowers. If you are a military borrower, you may qualify to obtain a VA loan with lower down-payment than conventional loans and get home financing up to $417,000 of your total mortgage. Basically, VA loans are addressing the liquidity restrain that most military borrowers are facing and make it easier to obtain a mortgage without requiring at least 20% down-payment as most mortgage loans do.
Knowing what to expect when financing your first home can help you make the right decision. Your decision to buy your first home entails the opportunity to build home equity out of every mortgage payment you make. You can have tax benefits because mortgage interest and real estate property taxes are tax deductible. Also, if you make timely mortgage payments, you can create and maintain a strong credit record that will allow you to refinance your mortgage at lower interest rates. But, first you need to know what you’re buying into.