Shopping for and buying a new house is an exciting adventure. There’s something special about having a home to call your own. It provides a sense of permanence and stability. You can personalize it how you see fit, such as painting the walls, updating the kitchen, or adding a back deck. Not only that, but homeownership comes with some pretty great tax benefits, too. A major component of buying your first house is getting your first home mortgage. Let’s explore your loan options and review tips on how to get a loan that works for you.
Finding your mortgage loan fit starts with assessing your situation.
There's more than one type of home mortgage loan available. Understanding your options is vital for finding the best one for you.
Preapproval gives you a much better idea of how much you have to spend, which makes it easier to know how much you can afford.
Everyone’s financial situation is different, and a mortgage isn’t “one size fits all”. Knowing more about the different types of loans can help you understand your options when the time comes.
A conventional mortgage is any mortgage loan that isn’t backed by the government. Most government-backed loans, like those from the FHA and VA, require slightly higher down payments than a conventional mortgage (3% vs. 3.5%). The required credit score for these loans vary, but will most likely be 620 or above.
A FHA loan is one that’s backed by the Federal Housing Administration. One of the biggest advantages of these loans is borrowers unable to qualify for a conventional mortgage may be able to qualify for an FHA loan.
While a conventional loan may require a credit score of 620 or above, FHA loans have traditionally accepted scores in the 500s. (However, many lenders at the time of this writing require a 640 or higher.)
Down payment requirements are typically slightly higher for FHA loans than for conventional loans. For instance, a borrower with a credit score of 580 (640 at the time of this writing) will need to put 3.5% down when most conventional loans require a minimum of 3%.
Additionally, for FHA loans, you will be required to pay for mortgage insurance. It’s a monthly payment that lasts throughout the life of the loan, no matter how much equity you build up in the property. You can only get rid of it by refinancing to a conventional loan.
FHA loans do have more forgiving debt-to-income ratio requirements. Your DTI must be 57% or less to qualify. With conventional loans, lenders typically look for a DTI of 50% or less. There are also loan limits as well as stricter property requirements. If your credit score isn’t that great, however, an FHA mortgage may be a good option for you.
The requirements of an FHA loan are more cut-and-dry than a conventional loan, which can vary. If you’re unsure where you may stand or if you qualify for either an FHA or conventional loan, just get in touch.
A VA home loan is one that’s backed by the Department of Veteran’s Affairs. One of the major qualifications for this type of mortgage is that you must currently be serving in, or be a veteran of one of the branches of the U.S. military. Some spouses may also qualify. You also need to meet the lender’s requirements for borrowing, and the property must meet certain safety requirements.
A significant advantage of a VA home loan is that there is no minimum down payment required. You also don’t need to pay for private mortgage insurance, even if you put no money down when you buy. Interest rates are extremely competitive, and you have fewer closing costs.
While you don’t need to put any money down, you do need to pay a VA funding fee. The fee ranges from 1.4% to 3.6% of your mortgage. You can pay it up front or roll it into the cost of your loan. If you’re eligible and you don’t have a lot of money to put down on a home, this might be an ideal solution for you.
Once you decide your loan type, you’ll be able to choose the length of your loan and the flexibility of your rate—either fixed or adjustable.
A 30-year fixed loan is one of the most common conventional mortgage options. The interest of your loan never changes throughout the term. It also provides predictability. No matter what happens in the economy or how high interest rates climb, your payment never fluctuates.
30-year fixed loans mean lower monthly payments. While you’ll pay more in interest over the life of your loan (compared to a 15-year fixed), your payments will likely be much more manageable. Additionally, the interest on those mortgage payments are tax-deductible. In the early years of your mortgage, when most of your payments go toward the interest, you’ll get decent deductions at tax time.
On the other hand, 30-year fixed-interest loans often come with higher rates than their 15-year counterparts.
With a conventional adjustable-rate mortgage, you have a fixed interest rate for the first few years of the loan, and then it moves to a variable rate. Common types include 3/1, 5/1, 7/1, and 10/1. The first number refers to the number of years you pay a fixed rate. The "1" means that the interest rate will adjust once every year after that.
The initial rates for adjustable-rate loans are often fairly favorable. Once your rate does start fluctuating, there are caps on how much it can change each time. If interest rates happen to fall, your monthly payments also decrease.
On the flip side, if interest rates increase, your payments do, too. If something comes up and your payments increase, you may not be able to afford your home anymore.
Additionally, some lenders charge a prepayment penalty. If you sell your home or refinance the loan, this means you’ll have to pay a fee for doing so. If you do plan on selling before your fixed-rate period ends (which can be a benefit with the lower introductory rates), be sure you won’t be charged for paying off the balance before the end of the term.
Learning more about your loan options can help you better understand the mortgage process.
Now that you know a bit more about your loan options, there are a few things to note before you start home shopping.
Getting a preapproval letter before you start shopping for a home does two things for you—it tells you how much of a home you’re qualified to buy, and it shows your real estate agent (and home sellers) you’re a serious buyer.
By getting pre-approved, you’ll avoid disappointment of falling in love with a house above what you’re eligible to borrow.
Just because you receive preapproval for a certain amount doesn’t mean you have to look at homes at that price point. Rather, you should assess your finances and see what you can realistically—and comfortably—afford for a monthly payment. If you currently rent and are comfortable making that payment, consider looking at homes around that price. (Your loan advisor will help calculate your monthly payment for a specific home price.)
You want to make sure that you still have enough money left over at the end of each month in case an emergency arises.
When shopping for a mortgage, consider these few tips that can make the difference between getting approved and having to keep looking.
Your credit score plays a major factor in determining if you qualify for a mortgage and the rates you’ll get. You should avoid making any large purchases or applying for any new credit both before and during the mortgage application process.
Your credit gets pulled before you apply for your initial estimate, and it's pulled again before your mortgage is finalized. Any significant changes to your credit history can affect your rate, leaving you paying more than you expected. In some cases, these changes can even affect your eligibility, which means you could no longer qualify for the loan and miss out on the house.
Buying your first home is more than just finding it. Knowing where you stand, what your options are, and following the few key tips outlined in this article can make it easier to secure financing. Now that you have a basic understanding of mortgage loans, get in touch with our team here at Lower to get started!