*Article contributed by Sasha Belopoljanski.
Buying your first home is a momentous occasion. After all, having a place that you can call your own is one of life’s greatest achievements. But it’s not something that happens overnight and with little in the way of effort. With the real estate market approaching pre-recession highs, it can be tough to purchase a home without taking a substantial loan to help cover the costs.
First-time buyers in particular may find the act of navigating the various home loan options out there quite challenging. So let’s take a closer look at the three most common loan types and see which one fits best for your situation:
How to Get a Home Loan If You Are a First Time Buyer
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Conventional loans
Mortgages that are not insured or guaranteed by the federal government fall under the umbrella of conventional loans. These typically have stricter requirements including bigger down payments, higher credit scores and lower income-to-debt ratios, but usually come with the benefit of smaller interest rates. There are two main types of conventional loans: conforming and non-conforming. The former comply with guidelines set forth by government enterprises like Fannie Mae and Freddie Mac, while the latter are based off the lending institutions rules and regulations.
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FHA Loans
Since the Federal Housing Administration seeks to promote home ownership, first-time home buyers qualify for special FHA loans. These have the benefit of requiring a smaller down payment, sometimes as low as 3.5%. Coupled with their less stringent credit requirements, FHA loans are an attractive proposition for first-time home buyers, but they also come with certain restrictions, including safeguards against house flipping to prevent abuse and profiteering.
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VA Loans
If you’ve served your country in some capacity or live with someone who has, you may qualify for special loans guaranteed by the US Department of Veterans Affairs. These guarantees allow eligible participants to obtain home loans on extremely favorable terms, oftentimes without the need of a down payment. In order to kick-start this procedure, you must first request proof of eligibility from the VA.
Now that you’ve become accustomed with all the different loan types available for first-time home buyers, it’s important to also shed some light on the conditions you’ll need to meet in order to be granted a loan. As you probably know by now, banks employ a somewhat labyrinthine system that can be hard to understand at first glance. Fortunately, there’s a right way to go about things, one that can dramatically improve your odds of receiving the loan you covet. Read on to find out which aspects you’ll need to concentrate on when applying for a home loan:
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The down payment
In most circumstances, prospective home buyers will need to put forward a certain amount of money as a down payment in order to be granted eligibility for a loan. This can be as much as 20%, but through special programs aimed at first-time buyers it can be reduced to as little as 3.5%. Even though they require a greater initial effort, larger down payments are typically better as they result in smaller installments over time. Still, the most important factor here remains the cost of the home itself – pricier properties are much harder to buy if they have a substantial down payment requirement in place.
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Maintaining a good credit score
Credit scores are numerical representations that attest to your trustworthiness as a potential debtor. The larger the score, the better you look in the eyes of banks and other lenders. That said, people who are just starting out in life usually tend to have middling credit scores, a fact that is taken into account by FHA mortgages, which typically require lower than average scores. Even if you have no credit history whatsoever, a lender may take you on as long as the other conditions for lending are met.
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A good employment status
Speaking of other conditions, having a good place of employment is paramount when seeking a home loan. The two-year rule usually applies, which states that lenders will chiefly consider your last two years of employment as being essential to your current status. People who have secured long-term employment in a stable company will tend to do best here, but even those engaged in non-traditional employment can score highly if they have a good track record. Be wary of switching jobs too often or you might not scan as a reliable person in the eyes of your creditors.
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Looking for state and local assistance programs
Before you commit to any particular lending solution, be sure that you’ve exhausted all potential assistance programs. These typically come with reduced interest rates and discounts on down payments. Aside from the well-known programs functioning at the federal level, there is a plethora of state and local assistance options to take into consideration. For starters, use this handy tool to find the appropriate program for your state of residence.
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Exploring mortgage options
Once you’ve narrowed down your mortgage options, it’s time to play around with different timelines and see which one works best for you. Some people can handle the higher monthly installments that come with a 15-year plan, while others prefer the slow-but-steady rhythm of a 30-year plan. Luckily, the Internet is filled with easy-to-use mortgage calculators that let you simulate different scenarios prior to making your decision.
As you can see, there are plenty of things to consider when maximizing your odds at obtaining a home loan. Bottom line – you’re going to want to go through all the financing options available before deciding on an optimum route. While a certain amount of research and legwork are necessary in order to get the best deals, fortunately, there is no shortage of information available online to aid you in this process. The good news is that once everything is taken care of you can look forward to the fun parts of home ownership, including but not limited to decorating and arranging your future nest. That should definitely help you power through the entire process, and will hopefully also guide you in making the best choices for you and your loved ones.
*Article contributed by Sasha Belopoljanski.