Home ownership is one of the greatest financial investments of a lifetime and requires careful consideration before entering into this commitment. To assist first-time buyers and those in special circumstances on this journey, many government agencies provide mortgage products with favorable terms.
Assess your current financial standing to begin planning. Review your credit report, address any discrepancies and create a budget that includes both mortgage payments and closing costs.
1. FHA Loans
FHA mortgage loans provide first-time buyers with more access to homeownership thanks to low down payments and less restrictive qualification standards, including an flexible credit score minimum requirement.
FHA loans also allow borrowers to include non-traditional credit in their borrower profile and feature lower debt-to-income (DTI) ratios than conventional loan options, making this ideal for individuals struggling to build credit following past financial challenges such as bankruptcy or foreclosure.
As part of their application for an FHA loan, applicants should be prepared to present recent paystubs and two years’ W-2s or tax returns that demonstrate stable income. Borrowers should also become aware of any local down payment assistance (DPA) programs which may help with both down payments and closing costs.
2. VA Loans
Since 1944, millions of veterans and active service members have used VA loans to make home ownership more accessible and affordable. Because these mortgages are backed by the government, VA loans typically have more flexible income requirements than conventional mortgages; plus they don’t require PMI (private mortgage insurance) like FHA loans do.
Prior to beginning your home search, it’s advisable to meet with mortgage lenders and determine what you qualify for. A Certificate of Eligibility should prove that you can borrow enough for the house you desire.
Save carefully for a down payment and closing costs – typically anywhere from 3%-20% of the purchase price of your property – as well as conducting extensive research into neighborhood amenities, safety features and potential for growth.
3. Conventional Loans
Conventional loans, unlike their government-backed counterparts, do not come with guaranteed backing and typically require stronger credit scores, higher down payments and reduced debt-to-income ratios to qualify. They may be an attractive choice for first-time homebuyers who do not meet other program’s eligibility requirements but still want access to mortgage financing options.
Conventional loans tend to offer competitive interest rates, with lenders often rewarding those with excellent credit by offering more favorable terms. Furthermore, conventional loans come with 15-year loan terms, providing those looking for quicker debt elimination an alternative way of financing their mortgage debt faster than 30 year loans would allow.
Prior to applying for a mortgage loan, prospective borrowers should conduct a complete financial review and compare estimates from multiple lenders in order to gain an accurate picture of what their budget allows and the best choices to help them purchase their first home.
4. USDA Loans
The USDA loan can be an attractive choice for first-time homebuyers looking for financing on rural properties with zero down payments and competitive interest rates. Like FHA and VA loans, USDA financing requires its borrowers to participate in homeownership education as part of its loan application process.
Be mindful that USDA loans may not be suitable for everyone – this program caps debt-to-income ratios at 41% compared to more relaxed standards such as FHA or conventional loans.
Additionally, the USDA charges a guarantee fee that will increase monthly payments but can help expand homeownership access for a wider group of people. Borrowers will need to meet specific geographic criteria in order to be eligible for USDA funding.
5. Jumbo Loans
If you are seeking to purchase an expensive home or live in an expensive region, jumbo loans could be right for you. With higher standards than standard mortgages and typically tailored towards those who earn significant incomes or possess substantial assets.
Lenders typically require extensive verification of income and may want to see two years worth of tax documents. They also impose more stringent guidelines regarding loan-to-value (LTV) ratio and credit score requirements.
Due to their size, jumbo loans often require manual underwriting and may take longer to close than conventional loans. Furthermore, lenders typically require a minimum down payment of 20%; some have relaxed requirements for those with strong incomes and credit scores.