Many homeowners don’t know what mortgage really is, let alone the right type they need to get for their first home financing. So for the purpose of education, we lay out this simple and concise guide to help you navigate through the complex albeit navigable arena of home purchase.
A mortgage is a type of loan lent to a borrower for the sole purpose of purchasing a real estate property. If you plan to buy a home but don’t have the cash to pay it in full, you can go to the bank or a lending institution and apply for a mortgage.
Mortgages differ according to the dispensing institution, the loan term, and the size. Let’s take a look at each in detail:
Fixed-rate mortgages (FRM).These are mortgages that sustain the same interest rate and thus, the same payment amount throughout the entire life of the loan. Amortization terms can be 10, 15, or 30 years.
Adjustable-rate mortgages (ARM).These loans change interest rates after a certain period. They usually have higher initial interest rates compared to FRMs to compensate for the risk should rates bounce to unpredictable extremes in the future.
Government-insured mortgages.These mortgages are insured by the federal government. That means the government takes the liability when the borrower defaults on his/her mortgage payments.
VA– funded by the United States Veterans Affairs, VA Home Loans are designed to help military veterans and their families. VA loans offer full financing without the need for the borrower to put in any money either for premiums or down payment.
FHA– FHA loans are funded by the Federal Housing Administration and cater to borrowers with credit scores 580 or higher. Those whose credit ratings fall between the 500-579 range are required to pay 10 percent of the loan while those who have credit scores below this threshold are considered ineligible. The borrowers are also required to put in 3.5 percent as down payment. On the upside, it has more flexible eligibility requirements compared to conventional loans.
USDA– funded by the United States Department of Agriculture and managed by the Housing Rural Service, USDA or RD loans also offer 100 percent financing although borrowers are required to pay a reduced mortgage insurance premium.
Conventional mortgages.These are mortgages offered by private lenders, financing companies, and banking institutions. Conventional mortgages could be fixed-rate or adjustable rate. They have stricter eligibility requirements compared to loans insured by the government.
Conforming loans.These are home loans that have passed Freddie Mac and Fannie Mae’s underwriting criteria on loan size.
Jumbo loans.These are mortgages that go beyond the standard loan size set by both Fannie Mae and Freddie Mac. Jumbo loans have stricter eligibility requirements owing to the size of financing involved.
Take note that these categories aren’t separate in themselves. A government-insured loan could be fixed-rate or adjustable, for example, and some conventional loans might be considered jumbo loans.
When buying your first home, rushing is an absolute no-no, or you risk making an expensive (or regrettable) mistake. Here are the details you need to look into first before you forward that application:
Check your credit profile
The first thing a lender checks when you apply for a home loan is your potential to repay the money that you will owe. Your credit score reflects that. Having good credit is your key towards the best interest rates. A good interest rate (a low one, that is) could save you money. That is why it is important to have stellar credit when applying for a risky loan such as a mortgage.
A credit score of 740 and above is considered excellent. Take note that the lower your score is, the lesser your access to good interest rates. So if you plan to save but your credit has been damaged due to some previous missed payments or financial difficulty, you can opt to wait a little longer to build good credit.
If you are in immediate need of funding, however, and don’t have the luxury of time, you can look into some government-backed mortgage options which have less stringent eligibility requirements.
Determine the size of the down payment required
You might have heard about the common myth that you need to put in a good 20 percent of the total amount of the home as down payment. That is just wrong. There are many loan programs today that do not require you to make a 20 percent input. The FHA only requires 3.5 percent while USDA and VA loans require zero down payment.
Still, you need to determine how much money you can initially invest in the purchase of your home. This is because a down payment will affect the interest rate you will get and the bigger the amount you put into it, the lesser you will have to ask from the bank or financing institution. That could significantly affect your savings on interest as well as the length of the time you need to pay it off.
You do not need to empty your savings just for the down payment, however. You cannot cash it out in case some emergency happens. Balance your priorities and make sure there is still money you can tap intoshould a financial need arise. Else, you risk defaulting on your mortgage too.
Know which mortgage types you qualify for
Are you a veteran? Then you might qualify for government-backed VA loans. Live in a rural area? See if you can get an RD loan. Have poor credit and can’t afford a large down payment? Then FHA loans might be worth looking into.
There are a diverse variety of loan choices that you can take advantage of if you are patient and persistent enough to mull over the details.
Home buying for the first time sure isn’t a piece of cake. But it’s not hard either to do it right if you are well-prepared to take on the challenge.
More importantly, it pays to have the guided knowledge of a professional. Talk to one of our expertstoday to learn more about first time home purchase.Click to See the Latest Mortgage Rates»