Of course, purchasing your first home can be confusing, nerve-wracking, and exciting all at the same time. The multitude of funding options available or accessible for first-time homebuyers can, without a doubt, seem enormous and immense.
However, researching and learning the basics and fundamentals of property funding can save you lots of money and time. Knowing the market where the house or building is situated and whether it stimulates greater output to lenders might mean more financial advantages for you.
Take the time to study and scrutinize your finances to make certain that you are acquiring the mortgage that best fits your needs. For a little help, we will walk you through the financing basics for first-time property buyers. Read on!
Types of Loan
The following are some of the loan types you can avail:
- Traditional Loans: These loans are mortgages that aren’t guaranteed or insured by the federal government. Typically, they’re fixed-rate mortgages.
Even though their loan requirements are more stringent such as a more considerable down payment, lower-income to debt ratios, higher credit score, and they are more likely to require private mortgage insurance which makes them the hardest and most challenging type of mortgage to qualify for, traditional loans are less expensive compared to guaranteed mortgages. This type of loan is either non-conforming or conforming loans.
The latter follow guidelines set by the GSEs (government-sponsored enterprises), while portfolio lenders set guidelines for non-conforming loans.
- Veterans Affairs Loans: VA loans are guaranteed by the U.S. Department of Veterans Affairs. The Veterans Affairs doesn’t make loans itself but underwrites mortgages created by qualified lenders. These underwritings enable service people and veterans to acquire home loans with better terms, often without a down payment.
This type of loan is simpler to qualify for compared to conventional loans. Creditors usually restrict the maximum loan to traditional mortgage loan limits. Before you can apply for a VA loan, you must ask for eligibility from the Veterans Affairs. If you’re qualified, the VA will give you an eligibility certification that you can utilize to apply for a VA loan.
- Federal Housing Administration Loans: Part of the U.S. Department of Housing and Urban Development, the Federal Housing Administration, offers different mortgage loan options. FHA loans have relatively low down payment demands and are much simpler to qualify for compared to traditional loans. This type of loan is ideal for first-time homebuyers since you can, for the most part, make as low as 3.5 percent down payment.
Income And Equity Requirements
The pricing of a home mortgage loan is decided and regulated by the lender. It is determined in two ways. However, both methods are founded on how worthy the borrower is for the loan. Aside from examining your FICO score from the leading credit bureaus, creditors will compute the debt-service coverage ratio and loan-to-value ratio to determine the loan price.
The loan-to-value (LTV) ratio is the amount of implied or actual equity that’s available in the security for repayment of a loan. LTV is determined, for home purchases, by splitting the loan amount by the home’s purchase price.
Creditors presume that the more cash you’re putting as a down payment, the less probability you will default on the debt. The higher the loan-to-value ratio, the greater the odds of default. Thus, creditors will charge more.
Furthermore, LTV decides whether you’ll be needing to buy private mortgage insurance. PMI protects the creditors from default by sending a loan’s risk portion to a mortgage insurer. Generally, try to steer clear from PMI since it’s an expense that has no leverage to you.
You can avoid it by not borrowing more than 80 percent of the property value when buying a home. Or you can utilize home equity to put at least 20 percent down payment. The debt-service coverage ration (DSCR) decides your capability to pay the mortgage.
Creditors split your monthly income by the costs of the mortgage to determine the likelihood that you’ll default on the loan. Most creditors will demand at least one debt-service coverage ratio. The higher the ratio, the higher the likelihood that you’ll be able to pay the borrowing costs. Also, the lender takes less risk.
Therefore, add any kind of qualifying income when talking with a mortgage lender. Oftentimes, other income-generating activities or part-time jobs can make the difference between not qualifying or qualifying for a loan.
Floating Versus. Fixed-Rate Mortgages
Another financing basic for first-time property buyers is whether to get a floating-rate or fixed-rate mortgage. In a floating-rate loan, you’re allowed to get lower opening rates through the first few years of the loan, enabling you to qualify for a more considerable loan.
On the other hand, in fixed-rate loans, the rate doesn’t change during the whole period of the mortgage. The main advantage of this loan is that you’ll be aware of the monthly loan costs.
If it’s your first time looking for a home mortgage, you might find it hard to sift through all the available funding options. Also, there are plenty of online platforms such as Credit Ninja to add to your options. Thus, take the time to research your options and determine what amount you can undoubtedly afford. A mortgage banker or broker can help you sort through your options.
Tiffany is currently taking a degree in Investment Management Analysis in her junior year in college. In the context of decision making and business strategy, she focuses on finance and information interpretation.