Understanding the different types of mortgages available for first-time home buyers can be a major advantage in the long run. With so many types available, talking to a professional mortgage broker can be a great first step.
First Step: Talk to a Loan Officer
The first step in determining if you can purchase a home is talking to a loan officer. This professional will help you determine your affordability, the different programs that might be available, how much cash would be involved in making the purchase, and how much your mortgage payment will be. The goal is to help the homeowner find the right payment that feels comfortable for them.
Downpayments: 20% or Bust?
One of the biggest misconceptions about buying a home is that you need 20% down to purchase a home. But there are a lot of programs out there, particularly for first-time buyers, that don’t require such a large down payment.
FHA: A First-Time Home Buyer Solution
FHA (Federal Housing Administration) loans are a great option for first-time home buyers. These loans require a much lower down payment (3.5%) and usually have a lower interest rate than conventional mortgages. On top of those benefits, FHAs also have a lower credit score threshold, making loans available to more buyers.
But FHAs Aren’t for Everyone
Unfortunately, FHAs aren’t available for every type of home. Condos and townhomes (attached dwellings) usually aren’t approved for FHA loans. If a home buyer is FHA-approved, these types of homes are typically not the best options to start looking.
Renovation Loans are Available, too
Housing affordability has been an issue, so many first-time home buyers look to older homes in need of renovations. A renovation loan can be taken out, which includes the cost of the home plus the cost of the renovations, calculated by a contractor. The overall loan amount will be higher because it includes the cost of the renovation, but these loans can give first-time home buyers a chance to purchase a less expensive home and renovate it to work for them.
Other Loan Types
Other loan types exist as well, including:
- VA loans: VA (Veterans Affairs) loans are available for active and retired military veterans. They have low interest rates, very low (or no) down payments, and don’t require mortgage insurance
- Conventional mortgage: A standard mortgage for those with a large down payment and a higher credit score. They often include flexible loan lengths and interest types.