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Types of Mortgage Loans for First Time Buyers

Types of Mortgage Loans for First Time Buyers

There are many financial considerations you have to assess when buying a home for the first time, but some of the questions that you should ask yourself are: are you ready to buy a house as an individual? Is a mortgage a good option for you to purchase your dream house? What are the advantages and disadvantages of availing of home mortgages, and can you really afford it? Which is better: getting a loan or mortgage?

A mortgage is a type of loan term via a bank that you can use to finance or buying a home. In buying a house, you have to have money. Do you have a sufficient amount of cash to purchase your house or even settle a down payment of 20% of the price of the house you want? You must meet certain requirements to qualified in loaning depending on the type of loan you wish to avail. Here are some of them:

  • Source of Income – Lenders often check your cash flow because they want to make sure that you have the money to pay back the loan and interest. This means that you should have a stable source of income.
  • Proof of Income and Employment – Lenders make sure that you provide the required documented proof of income that you claim to have before they grant you the loan you are requesting. There might also be a chance that the lender will conduct a background check, calling your employer, for example, to verify that you have a job. If a source of income can’t be verified, it can affect your mortgage application with the lender.
  • Debt-to-income-Ratio – This is a standard generally used by the Federal Housing Administration (FHA) as a guideline in approving mortgages. The debt-to-income ratio is computed by adding up all your monthly obligations and dividing them by your gross income. This ratio is used to determine if the borrower can pay their dues each month.
  • A Good Credit Score  – A credit score is determined based on your borrowing history, which considers the available credit you’ve used. The mix of the different types of credit you have and even the age of your credit history makes up your total credit score.
  • Down Payment – A down payment ensures that you have equity (ownership stake of the house) and ensures that you have a sufficient amount of cash to pay up-front for the house you want.

Now that we’ve covered the basics let us know the different types of mortgages you can use. 

Types of mortgages loan

  • VA Loans – Guaranteed by the United States Department of Veterans Affairs. These programs are for the military members who are currently serving in the U.S. Army. This funding does not require any down payment; however, it has a funding fee charge equivalent to a loan fee percentage.
  • Federal housing administration (FHA Loans) – This is a go-to program for buyers with weaker credit.  This type of loan requires borrowers to pay a one-time up-front mortgage insurance premium equal to 1.75% of the home loan.
  • Conventional loans – This type of home buyer loan is not offered or secured by a government entity. These are available through private lenders such as banks, credit unions, and mortgage companies. For this type of loan, most lenders would require you to pay a 20% down payment.
  • Fannie Mae or Freddie Mac is a conventional loan, which only requires 3% down of the loan. It is best for a buyer who has a strong credit but a minimal down payment.
  • FHA Section 230(K) loan – This is a construction loan that finances both the purchases and repairs of a home. This allows individuals to buy a home and renovate it under one fixed or adjustable-rate mortgage.
  • State local and first-time homebuyer program – In some states, home authorities combine closing cost and down payment assistance specifically for residents.
  • Good Neighbor Next door – To qualify in this program, you have to be a law enforcer officer, Firefighter, teacher employed (full time), or an emergency medical technician.
  • Home Renovation Loan – With one loan, you can renovate your purchased home.
  • Dollar Homes – Single-family homes acquired by the FHA are part of HUD as a result of foreclosure actions.

A mortgage lender is a financial institution or mortgage bank that offers and underwrites home loans. They set the terms, interest rate, repayment schedule, and other key aspects of your mortgage.

Is it better to get a loan or a mortgage loan?

A loan is a relationship between buyer and lender, while a mortgage loan is secured with a real estate agent or personal property. It is better to have a fixed-rate mortgage charged with a set rate of interest that does not change throughout the loan’s life.

The disadvantage of a mortgage loan is that your new house will be the collateral, and if you don’t pay on time, the bank can take possession of your home. You can lose all the money you paid, and the house will also lose its value over time.

An advantage of a mortgage loan is a fixed rate. The interest rate does not change. You can get a deal in 5 years to be paying the same amount as you are paying now, even if the properties in your neighbourhood have gone up. It is also easy to repay depending on your monthly spending and depending on interest rates. Instead of putting money in lenders’ pockets, you can put it in the bank to pay your mortgages. Monthly mortgage payments are the size and term of the loan. It is the amount of money you borrow and the length of time you have to pay it back. If you get a house in prime real estate, be confident because the property’s appraisal value will get higher than your purchase price, and in the future, you can sell your house at a high amount.

A home equity loan is also known as consumer debt. This is the “second mortgage.” It allows homeowners to borrow against the equity in their residence.

The most common program is called 80-80-10 mortgage; it is called the piggyback loan first and second mortgages obtain simultaneously. It covers 80% purchase of the house, and the buyer puts 10%.

Here are some of the things you want to know before getting a mortgage loan:

  • Fixed-Rate
  • Interest Rate
  • Monthly mortgage payment
  • Loan Tenure
  • Private Mortgage Insurance (PMI)

You can pay for your home faster if you can afford a higher monthly payment.

Interest Rate

It is the lenders’ compensation for letting you use their money to purchase the property.

Credit Scores is a key factor influencing approval and terms for both personal loan and credit card.
Monthly mortgage payment

The longer your term, the lower you have to pay back. Also, if you have property taxes, your lender will deposit them in your escrow account.

Loan Tenure

Both personal loan and mortgages loan offers long tenures.  Some take up to 5-20 years, other banks allowing 25 years.

Private mortgage insurance company (PMI)

It protects the lender and not you. If you fail to pay your monthly payment, there is a chance that you will lose your home.

Insurance premiums – The amount paid periodically to the insurer by the insured for covering his risk. It covers health, homeowners, life, auto, renters, and disabilities.

Here are some tips and things to look for:

Reasonable down payment

It would be best if you had enough capital because there are many expenses to consider when buying a house. It is less likely to find a mortgage nowadays without a downpayment because the lenders want to avoid the risk of borrowers defaulting.

Affordable interest rate

There’s an excellent chance that you’ll pay tens of thousands of dollars in interest alone over the life of your mortgage. That’s why it’s so important to find a loan with a low-interest rate. This can save you thousands of dollars in the long-term.

Make sure to shop around and widen your options. Do not sign with the first bank or mortgage broker you see. Do your research and look at online reviews.

Acceptable minimum credit score requirement

Your credit history and credit report are important information any lender needs. But there’s one thing that rises from the rest, your credit score. It reflects your ability to pay your mortgage. Maxed out credit cards and debt does not look good to lenders. Choose a mortgage that accepts your credit score.

In Summary:

Once you’ve considered all the factors in owning a house, you can then answer your question, “Am I ready to buy a house?” If you have cash and can afford it, go ahead and purchase that dream house you want; however, remember that purchasing is not as simple as what you have in your bank account. A lender or other financial consideration should be taken into account and consideration when you do your calculations. 


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