It isn't very often that you get to choose your home. So once you arrive…
Supporting a happy family is part of everyone’s American Dream. To secure this vision, many Americans must apply for a mortgage to buy a home where their families can grow.
If you will be a first-time homebuyer with no idea where to start, we got you! In this article, we’ll help you by covering the basics of mortgage loan programs, focusing on the best option for you as a first-time buyer. Today, you’ll learn “what” Fannie Mae and Freddie Mac are. We’ll also help you get an idea on how to beef up your credit history so that you can qualify for the home loan that’s the best fit for you.
After all, first-time home buyers deserve all the help they can get!
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Indeed, mortgages are not for everyone, but it is the only option for the vast majority of people if they want to buy a home. So how do mortgages work exactly, and which of the loan types is best for a first-time homebuyer?
In the simplest of terms, a mortgage is a loan from a lender so you can finance your real estate. When you fail to make your monthly payments, you break the contract created when you availed of the loan. As a consequence, the mortgage lender has the right to foreclose your home to recoup their losses.
Even shorter-term mortgages cover a long period of time which is why your mortgage will most likely be a long-term commitment throughout your adult life. Choosing and buying a home are serious decisions, but the weight of managing mortgages is an even bigger deal first-time home buyers have to spend more time thinking about.
There are two main ways to categorize mortgages: depending on whether the federal government backs it or not.
When the government does not back mortgages, these are called conventional loans. We won’t go into as much detail on these because a first-time homebuyer would be better suited to a government-backed loan. But to give you a brief background on this loan type, a conventional loan is usually a mortgage with a fixed interest rate. This is not the mortgage type we would recommend upfront for first-time homebuyers because they can be harder to qualify for due to their stringent requirements. We understand that you cannot always be expected to hold a higher than average credit score when you are just starting. That’s just now that works. For most conventional mortgage offers, you will also need to shell out a more expensive down payment and funds for private mortgage insurance. This can be tough for first-time homebuyers but don’t worry, because later you’ll find out what kind of loans might be better for you.
Mortgage lenders who offer conventional loans comply with the loan limits defined by Fannie Mae and Freddie Mac. These are two entities chartered by the U.S. Congress so that there is always money returning to institutions that let people borrow money.
According to which department is responsible for approving this type of loan, three main mortgages are backed by the federal government. If you qualify for any of these, we recommend taking your pick from any one of them!
The U.S. Department of Agriculture is the government agency that oversees the handing out of loan programs to borrowers living in rural areas. If you do not appreciate the large down payment and mortgage insurance premiums required by conventional loans, we’ve got great news for you because a USDA loan will not ask for any of these. You do have to pay 1% of your home’s purchase price upfront. Compared to the huge fees on the other end, though, we’d rather sign up for this one instead!
You can check out this link to know if your location might allow you to qualify for a USDA loan.
For military service members and their dependents, the U.S. Department of Veterans Affairs can offer a VA loan that similarly has no down payment or required mortgage insurance. Borrowers need to settle a funding fee of about 1.25 to 2.4 percent of the home loan amount. Unlike the USDA mortgage program, however, there will be even fewer people qualified for this offer, which brings us to our next recommendation.
A Federal Housing Administration loan or FHA loan is a mortgage you can apply for via the U.S. Department of Housing and Urban Development. This is the home loan type best suited for a first-time homebuyer, no matter the profession or the area where the house will be purchased.
When you’re just newly married and starting a family, you would typically be in your early working years. Your credit score might do with a boost (which on-time mortgage payments can help you with), and your bank savings would understandably not be enough for buying a home. An FHA loan has easier requirements to comply with, and they are designed especially for first-time buyers with lower down payment and closing costs.
An FHA loan will still oblige you to pay a mortgage insurance premium due to the possibility that you default on your monthly mortgage payment or pass away before you reach the maximum number of years for payment. Regardless, if you are not qualified for a USDA or VA loan, an FHA loan will still be your best bet compared to a conventional loan. If you prefer to cancel your mortgage insurance, you have to make sure that you initially settle an at least 10% down payment when you take on this loan from the Department of Housing and Urban Development. Ten percent can be a pretty big amount of money for many people, but a bigger down payment can also mean more savings in the long run.
How to Qualify for FHA Loans
Since we have determined that an FHA loan is the best option for a first-time home buyer, let’s find out how we can get you to qualify for one.
First, here are the things you need before you apply.
- Credit scores are definitely still important, but to qualify for an FHA loan, the minimum credit score is just 500.
- Every month, part of your income will go towards the payment of different loans. This is your debt-to-income ratio. To qualify for an FHA loan, you must have a ratio not higher than 50 percent.
- The house you will be buying will become your primary residence, and it needs to meet the minimum property standards of the FHA.
- A deposit value is required depending on your credit score. If your credit score is at least 580, you only need a 3.5% down payment. If your credit score is below 580, you need at least a 10% down payment. (As mentioned in the previous section, you will also be allowed to cancel your mortgage insurance if you make a 10% deposit.)
Not all first-time homebuyers come from low-income brackets, but surely everyone can do with a little help to make sure that you qualify for the loan programs and interest rates you want.
Here are some things you can do to help you close in on that mortgage deal for your first time.
- Get a credit card. You need to establish a good credit history to show mortgage lenders that you can be trusted with money. The FHA, in particular, requires that you have at least two established lines of credit. Many people already have at least one through student loans, so for your second, you can do with a credit card that you can afford to pay off every month.
- Don’t go over 30. If you already have credit cards, make it a habit to keep your overall card usage below 30% of your cumulative credit line. Remember, you need to have a debt-to-income ratio of 50% or less. Maintaining a thirty percent (or below) credit card usage every month will keep your ratio low with enough wiggle room in case of emergency medical expenses.
- Check your credit report. Your credit report will contain most of the information that lenders will be perusing when you announce your intention of buying a home through a mortgage. You might as well know what yours says before they even get to read it. Don’t be surprised with the inaccuracies yours might contain. They’re actually pretty common! That’s why you better have these corrected before you apply for loans.
- Research payment assistance programs. Most, if not all, state and local governments have programs for a down payment, closing cost assistance, and similar, reserved for first-time homebuyers.
At the end of the day, you have to pay attention to how trustworthy you look on paper.
As a first-time homebuyer, it is important to establish that you have the capacity to maintain monthly payments as you have done for previous loans. Once you qualify for the mortgage you want, the application will be easier on your second mortgage. And if you never skip out on your monthly payments, you’ll increase your credit score in no time, leading to lower mortgage rates (interest rate and down payment) the next time you need to apply.
There’s no need to delay buying a home when your mortgage is within your reach! What are you waiting for?