Getting a mortgage loan is an important step in the process of purchasing your first house. There are a few different options out there for first-time home buyers, and it’s up to you and your lender to decide which is best for you. The options can seem overwhelming, especially because the process is new to you.
8 Financing Options for First Time Homebuyers
Whether you are looking for a bigger space and bedroom for your baby, or looking to downsize and save some money, homeownership is a big step. Taking the time to learn about the options available for financing your home can save you both time and money. Here are the different types of loans for first-time buyers.
1. Conventional Loans
Conventional loans are the most common type of mortgage. They are fixed-rate home loans which are typically more difficult to qualify for because of their extensive requirements, which include:
- A significant down payment of 20% of the price of the home
- Higher credit score
- Lower income-to-debt ratio
- Potential private mortgage insurance (PMI) requirement.
The benefit of a conventional mortgage is they are less costly than other types of home loans.
2. Federal Housing Administration (FHA) loans
As part of the US Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) provides a variety of mortgage programs in the United States. An FHA loan has a lower down payment requirement and is easier to qualify for than a conventional loan.
FHA loans are a good choice for first-time homebuyers because they require lower upfront costs and have less restrictive requirements. You can make a down payment as low as 3.5%. Unfortunately, FHA loans require you to have private mortgage insurance (PMI), which means you’ll pay more monthly with this type of loan than you would a conventional loan.
3. VA Loans
Va loans are guaranteed by the US Department of Veterans Affairs. The VA Department does not make these loans themselves, but they work with qualified mortgage lenders to guarantee the mortgage loans. VA loans allow veterans and active duty service members to obtain loans with better terms than a conventional loan.
In most cases, VA loans are easier to qualify for than other types of loans, but you will have to do some extra leg work to make sure you qualify for the loan. Before applying for a loan, you’ll need to request eligibility from the VA Department. Once accepted, they will issue a certificate you can use to apply for the loan.
4. Jumbo Loan
Jumbo home loans are a type of conventional mortgage that has non-conforming limits. Non-conforming loans mean the price of the home exceeds federal loan limits. Jumbo loans are common in higher-cost areas and require in-debt documentation for qualification.
With jumbo loans, borrowers can borrow more money to buy a home in an expensive area with competitive interest rates. However, these mortgages require a down payment of at least 10% and a high credit score.
Jumbo loans might be the right option for affluent first-time homebuyers who want to purchase an expensive home.
5. USDA Loans
USDA loans are a great option for moderate to low-income borrowers who want to purchase a home in a rural area. The rural area must be USDA- eligible, and borrowers must meet income limits to qualify. The benefit of USDA loans is some do not require any down payment, depending on your income. A USDA loan can help you finance a home purchase when you don’t qualify for a conventional loan. Credit requirements are also more relaxed for borrowers. Unfortunately, you can expect to have to provide more documentation to prove your eligibility.
6. Asset-based Loans
An asset-based loan is a type of non-qualified (non-QM) mortgage loan that uses your assets as income verification instead of your tax return or pay stubs. Types of assets that can be included are checking accounts, savings accounts, CDs, stocks and bonds, and retirement accounts.
To be eligible for an asset-based loan, you must own liquid assets to demonstrate your ability to repay your mortgage loan. These types of loans might be right for a first-time homebuyer who has liquid assets but isn’t able to show proof of income.
7. Bank Statement Loan
A bank statement loan is another type of non-QM home loan. Rather than showing the lender pay stubs or tax returns, borrowers show them bank statements to demonstrate their ability to repay the loan. These loans are ideal for first-time homebuyers who don’t have a regular 9-5 job. Examples of these individuals may be small business owners or self-employed.
These loans are becoming more common as more borrowers join the gig economy and leave their desk jobs behind. To be eligible for a bank statement loan, a borrower must provide the lender with up to 24 months of bank statements that show regular deposits.
The advantages of a bank statement loan are the lender won’t need to verify your income using tax documents or pay stubs, a potentially lower down payment, and a higher debt to income ratio.
8. Fixed-Rate vs. Adjustable Rate Mortgages
The two primary types of mortgages are fixed-rate and adjustable-rate.
With a fixed-rate mortgage, borrowers are charged a set interest rate that won’t change throughout the life of the loan, even though the principal and interest paid month to month might vary. The advantage of a fixed-rate loan is you will be protected from significant increases in your monthly payments if rates happen to rise. The downside is if interest rates are high, then qualifying for the loan can be more difficult.
Adjustable-rate mortgages have an interest rate that changes. These types of mortgages have a fixed time in which the initial interest rate will be constant. After that period, the interest rate will adjust.
The most significant advantage of an adjustable-rate mortgage loan is it’s cheaper than a fixed-rate mortgage for at least a few years. They also offer lower initial payments that will allow you to qualify for a larger loan amount. The drawback of an adjustable-rate mortgage is your monthly payment changes frequently, which could put you in hot water when interest rates rise.
Which Financing Option is Right for You?
When you’re ready to buy a house, contact a trusted mortgage lender or bank that can help you understand the process for getting preapproved. During these initial discussions, your lender can help you determine which loan is right for you based on your unique circumstances. Lastly, it is always important to take note of other expenses, such as testing equipment, hiring and even remodeling expenses.
About the Guest Author – Matt Casadona
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, traveling, and music.