If you are considering buying your first home, you may be overwhelmed by the number of options available in financing for first-time home buyers. If potential homeowners take enough time to learn about the basics of mortgages and home finance, they will be better prepared to make one of the biggest decisions of their lives. Don’t rush through learning about all the financing options available to you.
The types of mortgage loans are separated by how they are structured and how they are secured.
A conventional loan is a fixed interest rate mortgage that is not guaranteed, or insured, by the federal government. Conventional loans have the strictest qualifications for buyers of any home loan, but their interest rates are usually lower than those of other mortgages. The requirements for qualifying include credit score, income, and down payment. If you meet these criteria, a conventional loan is one of the best choices in financing for first-time home buyers.
Conventional loans come in two types, conforming loans or non-conforming loans. A conforming loan must comply with guidelines established by either Fannie Mae or Freddie Mac. One of these guidelines is limits on how much you can borrow. A non-conforming loan exceeds these limits.
The Federal Housing Administration, or FHA, is a subsidiary of the Department of Housing and Urban Development. The home loans provided by the FHA are guaranteed by the federal government, so they have more lenient qualifications for buyers. Qualifying credit scores are lower for FHA loans, and the minimum down payment required is only 3%. Like other home loans, FHA loans must be within certain limits, and these limits depend on the location of the home. FHA loans can be a smart choice in financing for first-time home buyers, because of their eligibility requirements.
If you are a military veteran, you also have the option of a VA loan. VA loans are guaranteed by the U.S. Department of Veterans Affairs. The Department itself does not provide the loans, but it guarantees the loans made by qualifying lenders. VA loans are easy to qualify for in comparison to conventional loans, and usually do not require a down payment. Like previously mentioned home loans, VA loans have limits. Those interested in this type of financing for first-time home buyers must first apply for a certificate of eligibility from the VA.
The other division between types of mortgages is whether they are fixed rate or variable rate loans.
Fixed Rate Loans
In a fixed rate loan, the interest rate will not change during the lifetime of the loan. Borrowers obviously benefit from this, because their monthly payments will not change, no matter how high interest rates get. A fixed rate mortgage is the safest type of financing for first-time home buyers.
Floating Rate Loans
Variable, or “floating” rate loans have low introductory interest rates, which then go up over time. This type of mortgage is very risky, especially if your income does not increase as expected, due to economic or other factors. Another disadvantage is that there is no way of predicting how much or how fast market interest rates will rise. Many people decide that this kind of financing for first-time home buyers is too dangerous.
Adjustable Rate Mortgages
The most popular types of Adjustable Rate Mortgages, called ARMs, are the one, five, and seven year varieties. The years indicate how long the interest rate is fixed before it can rise. After the fixed rate period, interest rises to the market rate at that time. This time of loan may end up being more expensive than a fixed rate loan.
Interest Only Loans
An interest only loan is a type of Adjustable Rate Mortgage which includes a period in which borrowers only pay interest on their loans. A buyer may qualify for a much larger loan with this type of mortgage, but he or she may end up unable to make the full payments after the interest only period ends. Potential borrowers should carefully consider this possibility if they choose an interest only mortgage. These loans are a very tempting choice for financing first-time home buyers, because they allow for such large loans.
First-time home buyers have so many options today for financing their purchase. Take your time sifting through all of your financing options, and make a careful consideration of your budget and down payment before making your choice. Would-be buyers with a large down payment will have the most options for financing their mortgages. A mortgage broker can sit down with you and answer any questions you may have. He or she can give you wise advice about every option in financing for first-time home buyers, but the decision is ultimately yours. Don’t feel like you need to rush into anything, and don’t agree to any mortgage terms until you know all the facts.