First-Time Home Buyers Guide: Picking The Right Mortgage Program
Picking The Best Mortgage For Your Needs
First-time home buyers don’t have the experience that seasoned home buyers have, and have likely never applied for a mortgage let alone gone house shopping.
Among the most common questions first-time home buyers ask is “what is a mortgage?”
A mortgage is a loan given for the purchase of real estate. You can buy a home and use a mortgage. However, you wouldn’t use a mortgage to buy a car.
Mortgage loans aren’t all the same, either. They can be customized to meet your needs as a buyer. However, mortgages can be generally grouped into five main categories.
- Conventional mortgages
- FHA mortgages
- VA mortgages
- USDA mortgages
- Jumbo, portfolio, and “other” mortgages
Each category of loans has its benefits and a mortgage loan officer can help you choose between them. However, you can narrow your mortgage options based on your specific needs in a home loan.
This is a brief guide to help you choose the mortgage loan that is best for you.Verify your new rate (Jan 16th, 2019)
1. What Is The Size Of Your Down Payment?
The size of your down payment will affect the mortgage loans from which you can choose. The larger your down payment, the more options you will have.
It’s commonly believed that, in order to buy a home, a down payment of 20% is needed. This means that for every $100,000 in the cost of the home, you would have to bring $20,000 in cash to your closing.
The truth, though, is that you don’t need 20% down to buy a home. You can purchase a home with 3.5% down using an FHA mortgage; and with zero money down using a VA mortgage or a USDA mortgage.
The reason why so many people believe that a 20% down payment is necessary is because of a rule within the conventional mortgage category which states that, with less than twenty percent down, home buyers must pay monthly private mortgage insurance (PMI).
The size of your down payment will be a personal decision.
When you make a large down payment, you’ll need to borrow less money from the bank, which will reduce your monthly mortgage payment. This can be helpful if your household budget is somewhat tight.
However, when you make a large down payment, you risk depleting your bank accounts of their savings. This, too, can pose a risk — especially in the event of job loss or similar emergency.
Down payments are not easily recoverable. Your savings accounts, however, can be liquidated at a moment’s notice.
You don’t need 20% to purchase a home. You only need the minimum required by each category.Verify your new rate (Jan 16th, 2019)
2. What Is Your Credit Score?
As a mortgage borrower, your credit score is a primary qualifier for nearly every loan available. When you have high credit scores, you can access the complete list of loans. When your credit scores are low, your access is limited.
Therefore, your credit score will help determine which mortgage loan is best for your needs.
Credit scores range from 300-850, with 850 being the highest possible score. Scores over 740 are considered excellent.
With a credit score of 620, you can get access to most available mortgage loans. However, with conventional mortgages, borrowers with lower credit scores pay higher mortgage rates.
Therefore, borrowers with lower credit scores may be better suited for FHA, VA, and USDA loans — none of which penalize home buyers for having average or below-average credit scores.
If your credit scores are lower than what you expect (or want), the good news is that credit scores can be improved — sometimes rather quickly.
Note that mortgage lenders use a different credit scoring system than credit card companies and auto loan vendors, so if you haven’t seen your “mortgage credit score”, ask your mortgage lender to share it with you as part of your home loan application process.
3. What Are Your “Special” Qualifications?
As a home buyer, there is a wide selection of mortgage loans from which to choose. However, some program are restricted, based on borrower traits.
For example, the VA mortgage loan is backed by the Department of Veterans Affairs and available to military borrowers and surviving spouses, only.
If you have not served in the military, or have not been married to a person who served in the Armed Forces or National Guard or Reserves, you cannot use the VA mortgage loan for your upcoming home purchase.
As another example, the USDA loan, which is backed by the U.S. Department of Agriculture, is available in areas where populations aren’t dense; and, only to borrowers of modest means buying modest homes.
You cannot use the USDA loan to purchase a McMansion, for example; and, you cannot use the USDA loan if you’re considered wealthy, based on your annual income.
Another example of a “special qualification” loan is the HomeReady™ home loan, which is a part of the conventional mortgage program. HomeReady™ loans offer lower mortgage rates, discounted mortgage insurance, and relaxed approval standards.
HomeReady™ is available in low-income census tracts; to borrowers who earn 20% less than their typical neighbor; and, in areas which have been declared a federal disaster zone.
Via HomeReady™, home buyers in gentrifying districts can usually get access to a discounted mortgage rate, regardless of household income. The same is true for borrowers whose tax returns reflect a lower income than their neighbors.
What Are Today’s Mortgage Rates?
First-time home buyers have access to a wide range of mortgage products and it can be hard to know which loan is best. You can, however, begin to narrow your choices down.
Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Verify your new rate (Jan 16th, 2019)