What’s the Best Mortgage for First Time Buyers?
Unless you have the cash you need to purchase a home outright, obtaining a mortgage loan is necessary when you want to buy a home. You’ll discover that there are numerous types of mortgage loans that you can apply for, which include everything from conventional loans to FHA loans. If you want to make sure that your investment is a sound one, you should learn the basics about every type of mortgage available to you and what’s best for you. The following is an in-depth guide on which mortgage is best for first-time buyers.
Approval Requirements for First-time Buyers
In order for your mortgage loan to be approved, there are numerous requirements that you must meet. Keep in mind that every type of mortgage comes with different requirements. As a first-time buyer, you must meet the definition associated with first-time buyers, which is relatively broad. A first-time buyer is an individual who:
- Hasn’t owned a home for at least three years
- Is single and has only owned a home with a spouse
- Has owned a property but not one that was in compliance with local building codes
- Has owned a residence that wasn’t permanently set on a foundation
You must also provide proof of income for at least two years that show you’re able to afford a mortgage. Your down payment needs to be at least 3.5%. Make sure that your credit score is higher than 620 before you apply as a first-time buyer. Keep in mind that there are some programs around for first-time buyers that allow you to purchase a home with $0 down, low credit scores of 500, and low income.
Best Mortgages for First-time Buyers
There are several types of mortgages that you should consider applying for as a first-time buyer. The type of mortgage that’s best for you depends on which loans you qualify for.
A conventional loan is a type of mortgage that isn’t directly insured by the federal government. These loans usually come with fixed interest rates. Because of the level of security that a fixed interest rate provides, these loans can be difficult to qualify for. You’ll be tasked with making a sizable down payment, having a high credit score, and having a relatively low debt-to-income ratio.
You may also need to pay for private mortgage insurance if you don’t make a down payment of at least 20%. It’s possible for conventional loans to be nonconforming or conforming loans. A conforming loan is one that adheres to guidelines that are set forth by Freddie Mac and Fannie Mae. It’s common for conforming loans to be packed together before being sold as securities via the secondary market.
The loan limit for a conforming loan in 2022 is $647,200. People who want to purchase a home in a high-cost area may have access to loans with higher limits. If a loan is made above the loan limit, it’s referred to as a jumbo loan.
Most jumbo loans have somewhat higher interest rates since they have more risk and are less appealing to investors on the secondary market. As for nonconforming loans, lending institutions set their own guidelines, which means that these loans can’t be sold via the secondary market.
VA loans are backed by the U.S. Department of Veterans Affairs and are available through qualified lenders. These loans are available specifically to veterans as well as currently active service members and surviving spouses. This type of loan is designed to help veterans obtain mortgages with more favorable terms. In fact, it’s possible to receive this loan without needing to make a down payment. You’ll be tasked with requesting eligibility from the VA before applying for this loan.
An FHA loan is backed by the Federal Housing Administration. This type of loan comes with lower down payment requirements while also being considerably easier to qualify for when compared to conventional loans. FHA loans are ideal for first-time buyers since the down payment requirements are just 3.5%, credit requirements are less strict, and closing costs are lower. Keep in mind that FHA borrowers need to pay mortgage insurance premiums.
As a first-time buyer, all of these mortgages give you the opportunity to own a home. Before applying, make sure that you consider all of the programs at your disposal that are designed to help first-time buyers purchase a home. With this assistance, finding the right home to invest in should be even more straightforward.