If you are looking for your first home, simply knowing where to begin can be daunting. It is a good idea to start off the entire process by getting approved. Once you’ve finished a simple application, you’ll have a ballpark of how much you can borrow. This helps you know what houses are in your budget when searching for a new house. Before you start applying for your first home loan, it is important to do your research and decide what options are best for your financial situation.
First-time home buyers often have better luck starting with a government-backed mortgage. These loans include:
- FHA – Federal Housing Association, open to all borrowers
- VA – Veteran’s Administration, available to active duty or retired service people, and
- USDA – United States Department of Agriculture, generally only allowed in rural areas
There are restrictions and benefits available with each of these loan types. You can get these loans even if your credit rating is under 600. You will need to demonstrate that the loan amount won’t take too much of your monthly income. The home you intend to buy will need to qualify. For example, the home you plan to buy will likely need to be within a particular price range for the neighborhood, so you don’t own a house that can’t be sold to recoup the amount of the loan.
If you qualify for a government-backed loan, you’ll likely have to pay private mortgage insurance (PMI) until the amount of the remaining principal is less than 80% of the value of the home. If you can pay ahead each month on the principal, do so. Additionally, the majority of these loans come with a locked rate and term. Even with a low interest rate, you’ll pay less in interest over the life of the loan if you can qualify for a 15 year mortgage as opposed to a 30.
A conventional loan doesn’t have government backing. To qualify for a conventional loan, you’ll need a higher credit score. However, you’ll have more flexibility on the home you buy.
If your credit score is 620 or above, check to see if your bank offers conventional mortgages. The qualification process will be easier. Be aware that you will need a larger down payment than with many government-backed home loan programs.
Conventional loans are a good plan for fixer-uppers. It should be noted here that a fixer-upper is a good investment if you have the skills to actually do the repairs. There are many people who want to be able to fix up their own home but lack the skills. If you want a fixer-upper, make sure you start small. There’s no point in trying to hang drywall if you’ve never painted sheetrock. Start small and learn as you go.
Most government-backed loans are either 15 or 30 year mortgages at a fixed rate. Once you’re pre-qualified, you can lock in your rate and shop within your price range. Conventional loans come with more creative options. You’ll need to monitor the terms on these loans to make sure that you get the best deal.
Conventional loan options include conforming vs. non-conforming loans. There’s nothing wrong with a non-conforming loan, but these are generally large or jumbo mortgages. If you need to borrow more than $$483,350 dollars, you will need a non-conforming loan.
Adjustable rate mortgages, including balloon loans, are also available from conventional lenders. The interest rates on adjustable rate mortgages change at the end of specified term to match the interest rate of the market.
A balloon loan starts off with a small payment, often interest only, for the first five years. At the end of that term, you’ll need to refinance the remaining balance. If you qualify for a balloon loan, it’s critical that you lock in the price of the home and spend those five years preparing to get a great rate on the remainder of the mortgage. Balloon loans can turn into terrible deals if you’re not prepared.
For your first mortgage, do your research and find out what type of loan is right for you. Shop carefully to find a home that won’t take more than 28% of your gross monthly income. The home buying process can be hectic, but once you are in the perfect home for your needs, it will be worth it.
Abby Drexler is a contributing writer and media specialist. She regularly produces content for a variety of moving blogs.