It isn't very often that you get to choose your home. So once you arrive…
Everybody needs a space they can call their home, but not everyone can find themselves financially set to start talking to a real estate agent even when they’ve decided to settle down. This is why many people, especially first-time home buyers, opt to apply for a mortgage to finance their dream houses.
A mortgage is a home loan that puts your house up for collateral if you stop making payments. It’s usually a much preferable option, especially to those people who want to maintain their liquidity in case of emergency / medical expenses. Through loans, even if you do have the cash to pay for the house upfront, you’ll be able to free up money for putting in other investments, like home improvement or even a small business.
Even if you are not yet planning on buying a home just yet, this article is for you. As a would-be first-time homebuyer, it is important to learn about how to prepare for one of the biggest transactions you’ll ever make in your life. We will also discuss different loan programs and talk about what these programs can offer first-time homebuyers.
There’s no need to stress yourself about the insurance premium, interest rate, or closing costs just yet! You might still discover the world of options available for a first-time buyer.
How do you get approved for a first-time homebuyer loan?
A mortgage is a money contract. You borrow money from a mortgage lender and promise to make monthly payments. And to get approved for this loan, the mortgage lender needs to review your application and consider it according to their set qualifications.
Although the U.S. government has ensured lots of home equity opportunities for everyone, there will always be some people who could do with a little credit history boost. Below are some of the surefire ways you can take good care of yourself financially, so you won’t have a hard time getting approved for that home mortgage that you want.
1 – Make it a habit to always pay on time.
Never missing out on payment deadlines is a great habit to have. You can save on interest and late payment fees. But more importantly, this shows to lenders that you are a responsible borrower, not a risky investment. One of the main qualifications for a mortgage is your credit score, and lenders usually set a specific number that you need to meet. When you are always careful to pay before your payment deadlines, you keep your credit score high. The higher your credit score, the more loan opportunities will become available to you.
2 – Stay below 30% utilization.
Did you know that 30% of your FICO score relies on the total amount of money you owe across all lenders you have a relationship with? This is much easier to monitor when you have credit cards. With a credit card, you get a preset usage limit so that you can be made aware of how much ‘credit’ is left in your account anytime you want. If you plan to get a mortgage shortly, take note that you shouldn’t go over 30% of your card utilization as much as possible. This is because 30% of your credit score is computed based on how much your finances are spread through your accounts. A bigger spending percentage every month might reflect poorly on your behavior as a borrower.
3 – Read your credit report.
Think of it as your financial resume. This is the official report on you that mortgage lenders will need to review to approve or reject your application. And this is why as much as possible, it has to be 100% accurate. Unfortunately, there have been many instances of erroneous entries in people’s credit reports that the Federal Trade Commission has a dedicated page to let you know of the steps to take should you notice one in yours.
4 – Save before you spend.
Have you ever heard of the saying, “Pay yourself first”? This strategy sees you putting money aside for savings first before allocating funds for spending whenever you receive your salary.
Why save? You might ask. After all, am I not already getting a mortgage for the reason that I (am not able to or) don’t want to pay in cash?
Even if you borrow money, you still need buying power when you decide to take on a mortgage. Some mortgage options require mortgage insurance. Not to mention that mortgage loans come with down payment and closing costs, origination fees, and other expenses. If you hire a mortgage broker, you might have to pay for their services as well.
Which loan is best for first-time homebuyers?
To find out the ideal loan program for you, you must learn about all the kinds of loans there are out there. Let’s take a look at them below.
Mortgage Loan Types
The first type of mortgage we’ll discuss is the one that the government does not insure. Conventional loans are mortgages from private mortgage lenders, and these usually have some of the strictest requirements. There are lenders for conventional loans who can accept a minimum credit score of 620, but you will still be bound to get better benefits with a credit score of at least 740. Fannie Mae and Freddie Mac set loan limits for conventional loans. (As of 2021, the loan limit set by Fannie Mae and Freddie Mac is at $548,250.)
Private Mortgage Insurance
A detail unique to conventional loans is private mortgage insurance. Since the federal government does not back this loan program, you’ll have to pay for private mortgage insurance premiums if you make a down payment below 20 percent.
Among all government-backed loan programs out there, the mortgage insured by the U.S. Department of Veterans Affairs has one of the best deals. Unfortunately, you have to be a military service member or spouse of one to get approved for VA loans. Aside from this prerequisite, you’ll also need to have a credit score of at least 580. Once you qualify for these requirements, you get to take advantage of the following benefits: zero down payment and competitive interest rates.
Last year, there was a big boost in VA loan applications after the passage of the Blue Water Navy Vietnam Veterans Act of 2019, which took effect on the first day of 2020.
If you plan to buy a home in a rural area, you may also be qualified for a USDA loan from the U.S. Department of Agriculture. This is another zero down payment mortgage you can avail of regardless of your profession. Still, you do need to make sure you will be occupying this property as your primary residence. USDA loans can give a more streamlined loan application process to those with credit scores starting at 640. Applicants whose credit scores do not reach this number might have to go through a deeper credit review through nontraditional credit references.
FHA loans are probably the most attractive home loan option for first-time homebuyers because these were particularly written up for the benefit of these individuals. The Federal Housing Administration insures FHA loans under the U.S Department of Housing and Urban Development. And in case you were wondering, this is how they identify who is a first-time homebuyer.
First-time Home Owner Loan Qualifications
- A first-time homebuyer is someone who was not named the owner of a residence in the immediate three-year period preceding the new home’s date of purchase.
- A first-time homebuyer is someone who was not named as the owner of a residence during a marriage, even if the spouse was a homeowner. This includes people who are still in a marriage, single parents, and displaced homemakers.
- A first-time homebuyer is someone who has only owned property that is not compliant with state and local building codes or property that is not attached to any permanent structures such as mobile homes.
Although FHA loans present great opportunities for first-time homebuyers through first-time homebuyers assistance programs and the like, even those who are already applying for their second mortgage are still qualified as long as they satisfy the minimum credit score 500. With this score, you can buy a home as long as you have funds for a 10% down payment. If your score is at least 580, you can also buy a home for just a 3.5% down payment. Take note that FHA loans do not require you to get your down payment funds from your own savings. You may be allowed to use cash gifts or grants to pay for your initial home equity. Basically, you can borrow a loan amount of up to 96.5% of the home’s purchase price at just a credit score of 580.
You can also choose between 15 and 30 for the number of years you are allowed to make mortgage payments for your FHA loan.
At this point, we hope to have given you a better idea of the loan programs available for a first-time homebuyer. As you can see, sometimes, the ideal home loan for you will depend on your own set of circumstances.
If you are a veteran or military service member, you might want to apply for a VA loan, while if you’re buying real estate in a rural country, you might consider a USDA loan as the next best option. Choosing between FHA loans and conventional mortgages will come down to the following factors. First, you need to consider your credit score, which, for first-time buyers, might not be the most stellar part of your financial portfolio. Second, you might want to consider how much your dream home will cost because FHA loans tend to have a lower loan amount limit compared to conventional mortgage programs. Finally, you have to consider the interest rate and how long you’ll be paying. (Take note that the interest rate for government-backed loans tends to be lower than the interest prescribed for conventional mortgages.)
Whichever loans you qualify for, make sure that you compare and contrast mortgage rates to avoid being one of the 47% of borrowers who go with the first lender they talk to. Do your best to research homeowners insurance, first-time homebuyer assistance programs, down payment assistance programs, and closing cost assistance programs in your area. (Be informed that there are income limits when applying for state or local governments’ assistance.)
Do all of the above to focus more on making monthly mortgage payments once you have moved into your dream home.