Buying your first home is exciting. It can also be one of the most stressful times of your life. Mortgage options for first-time homebuyers can be confusing. Unless you have hundreds of thousands of dollars in the bank, you’ll probably need a mortgage to fund your home buy. Knowing some basics about mortgage option can help you navigate your options and guide your search for a home in your budget.
What is a Mortgage?
Put simply, a mortgage is a long-term loan provided by lenders to buyers seeking home financing. They follow the same basic principles as any other loan. You borrow the starting amount and then pay back the amount in monthly installments. If you miss payments, however, the lender can take back your property.
You are also charged interest on the loan. The interest rate is determined based on your credit score, first-time buying status, current market rates, and other factors.
There are several grants and financial assistance programs and other mortgage options for first-time homebuyers. Some of the programs are available through the federal government, and some are through your specific state. These programs can provide part of the down payment or reduce interest rates.
An FHA loan is a mortgage overseen by the Federal Housing Administration (FHA). These types of loans are great for people with subprime credit and very little savings for a downpayment. With an FHA loan, you can pay as little as a 3.5% down payment. The loan type also allows for lower homeowner’s insurance. However, the loan does come with higher mortgage insurance costs.
These loans can only be received through FHA-approved lenders. There are plenty of lenders that are FHA-approved, but it also does depend on your area. A key with any type of loan is to make sure that you will be able to make the monthly payments. You can use an FHA Loan Calculator to ensure that the FHA loan will work for you and the home you want to buy.
Credit Union Loan
Some credit unions, both state and federal, offer mortgage options for first-time homebuyers with no money down. Similar to FHA loans, these loans are usually available to people with low credit scores. They also tend to have lower interest rates. There can be some restrictions to joining the credit union itself, but those are usually not prohibitive.
Credit unions also tend to provide better customer service than other lenders, so if you have an issue you need to resolve, it will be a less painful process.
If you or your spouse served in the military, a VA loan is a great option for you. The U.S. Department of Veterans Affairs (VA) offers many benefits to veterans, including low-interest mortgages. You also will not need a downpayment and will not have to pay mortgage insurance.
There are some stricter safety standards the house will have to meet in order for the home to qualify for the VA loan. You will have to pay VA funding fees in order to get the loan, and a VA loan cannot be used to purchase a rental property.
Dollar Homes are single-family homes acquired by the Federal Housing Administration through foreclosure. The FHA is part of the U.S. Department of Housing and Urban Development (HUD), which sells houses worth $25,000 market value for a dollar if they don’t sell for six months.
The FHA program is designed to help families purchase homes and fix them up so that the neighborhood can be revitalized. By setting the purchase price so low, the buyer has the money to fix up the home after purchase.
The program's major downside is that it can be difficult to find the right home in the right area. You have to continually check HUD’s website to see if there is a home in your area that will work for you and your family.
While it may seem odd, the U.S. Department of Agriculture (USDA) offers very generous mortgages to first-time homebuyers, and they don’t only apply to farms. USDA loans are typically available for lower-income buyers and buyers with lower credit scores. You may be able to finance the entire purchase and not need a downpayment. You can also factor repairs and closing costs into the loan.
You may have to purchase a home in a more rural area. You also have to meet some specific income requirements based on your area, so that is something to keep in mind.
Know Your Mortgage Options
Home financing can be very confusing. It can also be difficult to navigate the various mortgage options you have for your purchase. By doing some research ahead of time, you figure out what you’ll probably qualify for and can make the financing decision that works best for you.