Tips for first-time homeowners before getting a home loan

Apprehensive about applying for your first home loan? Whether you are anxious about the interest rate or closing costs, applying for loan grants can get a bit stressful, especially when you feel that your most recent credit history has been less than ideal. But the desire to settle into a space you can call your own can hit anyone no matter what age.

The good news is, now, although your credit history might not be able to afford you a mortgage with optimum benefits, the federal government does help people who are looking into home buying. Even if you are not, strictly speaking, going to be a new homeowner, the Department of Housing and Urban Development (HUD) has set definite parameters in which a first-time home buyer can be identified.

Today, let’s find out if you fall under any of these conditions. Later, we’ll also talk about the best first home mortgage options that can help secure you a home loan.

First-Time Home Buyer

When it comes to mortgages, to be called a first-time home buyer can open doors for you to assistance and incredible benefits. You might be allowed to make a lower down payment, and you can also be assisted with other costs associated with home loans. Knowing this, it’s reasonable to expect that the phrase first-time homebuyer refers to someone who has never bought a house in the past.

Definition

According to the HUD, this is their official definition of a first-time homebuyer:

• A person who did not possess a principal residence during the three years before a primary residence is purchased.
• For married couples, even if one has been able to buy a home in the past, the spouse who has never bought a home is still considered a first-time homebuyer.
• A single parent can be a qualified first-time homebuyer if he or she only owned a primary residence together with the ex-spouse during the marriage.
• A displaced homemaker (someone who provided unpaid services for the household) who only owned a primary residence together with a partner.
• A person whose previous or current primary residence was not permanently attached to a particular structure complies with existing ordinances.

First-Time Home Loan

If you do fall under the government’s parameters of who a first-time homebuyer is, what, then, are your options?

It truly depends. Mortgages are really one of those financial products where one size does not always fit everyone. Loan programs that may be great for other first-time homeowners may still not exactly be the best fit for you. To understand this, it is necessary to learn about some of the most common mortgage programs being offered.

Conventional Loans

If the government does not insure your mortgage, you will be getting a conventional loan. This is usually preferred by those who need a higher loan amount because compared to government-backed loans with lower loan limits, you can borrow way more than $400,000. (Take note that loan limits change annually, and Fannie Mae and Freddie Mac set these.) There’s a caveat, though: the interest rate for conventional loan programs also tends to be higher.

It will also be better to afford at least a 20% down payment because getting less than this percentage will oblige you to pay private mortgage insurance premiums. Conventional loans are also a bit stricter with credit requirements and usually ask for a score of at least 680.

Government-Backed Loans

VA Loans

This is the first government-backed loan we will discuss today, which the U.S. Department of Veterans Affairs insures. VA loans are one of those mortgage types called a zero-down payment home loan, and this is a hard-earned benefit exclusively for veterans, active-duty members, and their spouses. With a VA loan, you can get access to the lowest average fixed interest rate on the loans market, making it an even better option than the federal government’s other zero-down payment home loan. To qualify for a VA loan, you need a minimum credit score of 580.

USDA Loans

The U.S. Department of Agriculture backs this next mortgage option, and this is another zero-down payment mortgage insured by the federal government. The main requirement to qualify for one is a primary residence purchase in a rural area and a credit score starting at 640. You can also get the benefit of rolling closing costs into your monthly mortgage payments.

FHA Loans

Finally, you can also secure a loan through the Federal Housing Administration who offers a mortgage program that particularly eyes first-time homebuyers. With an FHA loan, you can borrow money to buy a home with a credit score of just 500. When your credit score is at least 580, you can also be allowed to make a down payment as low as 3.5% of the home’s purchase price. This down payment also does not have to come from your own savings. Up to 100% of your down payment is allowed to be taken from cash gifts or grants.

Why FHA loans are ideal

For many reasons, an FHA loan is truly better suited for first-time homebuyers. The interest rate is usually lower than the interest rate offered for conventional loans. You are still likely to qualify as well, even with a low income. Due to the low credit score requirement, even someone who is just starting in their profession can get the opportunity to buy a home. And due to the looser qualifications set by the HUD to identify first-time homebuyers, those who might not have ample savings in the bank can also get help from first-time buyers’ assistance programs. FHA loans are a great option if you currently cannot qualify for more traditional loans.

Tips

Regardless of how many opportunities are out there, there will always be some people who might not be able to afford the real estate they want or the loan programs they need to get closer to their dreams.

Some first-time homebuyers may still not be able to qualify for an FHA loan. And there will also be those who will have no option but to aim for a conventional loan if they really need a higher loan amount.

Here are some tips so you can qualify for more mortgage programs in case you experience a roadblock in your home-buying process.

Credit Score

Needless to say, credit scores are critical when it comes time to apply for a mortgage. Even if the particular government-backed loan prescribes a minimum credit score, each mortgage lender has its own set of qualifications. Some look more on income, while others value borrowing history more. You have to make sure that you are watching out for your financial health, so you don’t hurt your mortgage chances in the future.

What to do

Before you even start thinking of buying a home, make sure to make monthly payments for various debts on time. Late payments can really take a lot of points from your score. Accumulating too much debt across your credit cards is also not advisable, and it is recommended that you keep to maximum usage of 30% of your card limits.

You might also want to check your credit report yourself to determine if there is any erroneous reporting that will need to get corrected. After all, this will serve as your resume to mortgage lenders, so it should at least have accurate information.

Savings

It is also paramount that you save as much as you can. In fact, each time you get your salary, set aside money for your savings before you even divide it up for your monthly payments.

Mortgage Insurance and Other Fees

Remember, although a mortgage is a loan that you will be paying for over a long period, there will be origination fees, down payment, and closing costs, according to your chosen mortgage type. You might also have to pay for a mortgage insurance premium which is different from homeowners’ insurance. It is really for the protection of mortgage lenders in case you default on your home loan. You might be able to find first-time home buyers’ and closing cost assistance programs, but such programs have grown fewer since the 2008 Mortgage Crisis.

If it will be in any way possible for you to increase your income, do your best to do so because more buying power can also translate to more savings on your mortgage costs. You might even be able to skip mortgage insurance altogether.

Shop Around

A 2013 Consumer Finance Protection Bureau survey found that most buyers ultimately fail to compare mortgage programs. Don’t be one of these borrowers! It is all the more important for a first-time buyer to compare and contrast available mortgage rates and lenders. This can stretch your options and give you leverage if you find a lender nearer to you who offers slightly fewer benefits than rivals.

Get Pre-approval

Finally, regardless of the money you have saved up, different lenders can also approve different loan amounts. It might be better if you know just how much money you may be allowed to borrow on your current income. This is called a mortgage pre-approval, and this can be a good bargaining chip once you find yourself talking to the real estate agent of your dream home. It is an assurance to the seller that you are already qualified to take on a loan, and it gives you a better idea of your target purchase is within your budget. Pre-approvals are not part of everyone’s mortgage process, but they can give you a better chance when you find the time to make it part of yours.