Purchasing your first home can be super exciting, but once you begin getting into the legal side of things, you may find yourself getting discouraged because there is simply so much information out there. This guide will help you narrow it down so you can focus on what really matters to first-time homebuyers like yourself. As a first-time homebuyer, there are five primary types of loans available to you.
An FHA loan is a loan backed by the Federal Housing Administration. As a government-backed loan, lenders are more likely to approve you because, in the case that you default, the FHA will pay them on your behalf. This is great for getting approved in the case that you don't have good credit. Additionally, you can purchase a home with as little as 3.5% down through an FHA loan, which is also great if you don't have a lot of savings.
While the interest rate of an FHA loan will usually be lower than with other methods, your monthly payment will be a bit higher. That's because you'll have to pay a fixed rate mortgage insurance premium, both up-front at the time of closing and on a monthly basis. It will be factored into your monthly payment. Additionally, your county will have a set limit of how much you can borrow through an FHA loan, which is something you'll want to consider.
If you’re a veteran, you could qualify for a loan through the U.S. Department of Veterans Affairs, called the VA loan. This means benefiting from a no-downpayment option, allowing you to purchase a home with no savings at all. The requirements for a VA loan vary, and you'll want to get in touch with them directly to see if you qualify. However, if you do qualify, then this is probably the best loan option available to you due to the low interest rate and no-downpayment option.
If you're looking for a conventional loan, you should know what you're looking at first. A conventional loan is a mortgage offered by a lender, and it isn’t backed by any government authority. This means, if you default, the bank will be taking on a risk because there is no one there to pay them for the lost money. For this reason, conventional loans require a better credit history to qualify for.
However, conventional loans allow you to purchase all sorts of home types and they don't necessarily have to meet the strict requirements that are set by FHA loans and the like. For instance, with an FHA loan, an appraiser will have to come out and say that the home you're looking at is worth the money, in good condition, and safe to reside in. While it's harder to qualify for a mortgage on a house that doesn't meet these requirements, it is possible with a conventional home loan.
With a conventional home loan, you may be expected to put up to 20% down. However, you won't have to pay an up-front mortgage insurance premium and, in fact, you may not have to pay mortgage insurance at all if you put enough money down up-front. Plus, conventional mortgages have mortgage insurance that's sensitive to your credit, and it will decrease as you pay down your mortgage. Thus saving you money over the life of your loan.
While balloon loans can be difficult to qualify for, and scary for first-time homebuyers, it might be the right option for you. A balloon loan will finance the price of your home over a short period of time, amortizing only a portion of the loan (meaning you don't have to pay interest on the full amount). At the end of the loan term, the remaining balance--which could be tens or hundreds of thousands--will be due in full. For this reason, this is not the right option for most homebuyers.
However, it can be if you have a two-step mortgage with a balloon payment. A two-step mortgage means that part of the home's price will be financed into a short-term loan with a balloon payment due at the end. However, when your loan term ends, the balloon payment can be financed into a new loan package (usually at a new interest rate, based on market conditions). The thing to consider is that, if your home has decreased in value or your financial situation has changed, the bank can choose not to refinance the remaining balance and, instead, you'll have to make a lump sum payment.
Adjustable Rate Mortgage
An Adjustable Rate Mortgage, or ARM, is different than a balloon loan entirely, although many new homebuyers get them confused. An adjustable rate mortgage gives you an introductory interest rate for the first 3-5 years, and then that interest rate will change to one that can fluctuate on a monthly or yearly basis depending on a chosen index and pre-set margin. This can mean an introductory rate of 2%, and then after 5 years, your rate adjusts. It can adjust to be higher or lower, and that will depend on the market conditions and the index your mortgage is tied to.