How to Qualify for a First-Time Homebuyer Loan
To get started, you should first know how much of a home you can afford to buy. The amount you can safely afford is based on several factors, including the regular income you expect to receive, your ongoing monthly expenses and typically how much cash you currently have for a down payment. Your credit score health will also be considered
Consult a Home Loan Specialist
A mortgage lender can help you determine the price range you should stay within when shopping for a home. Today, the process of having a lender work with you on this is quick and simple.
It’s a good idea to know the maximum amount you should spend on a house before beginning your home search. It can save you time locating the perfect home that suits your needs and fits your budget. It can also eliminate any disappointment you might experience when you love a prospective home and later learn you can’t afford it.
A lender can work with you to determine if you can be prequalified for a loan amount before beginning your home search.
Getting Preapproved for a Home Loan
People who are not serious about buying a home typically won’t bother getting prequalified for a home loan . Having a mortgage preapproval letter demonstrates that you are a qualified, serious buyer. Home sellers and real estate agents are typically interested in only working with people who are serious about purchasing a home.
A mortgage loan specialist can help you apply for a home loan preapproval. A preapproval letter also indicates the maximum amount of money you can borrow on a home and possibly the interest rate you’ll have on the home loan if you decide to buy.
Limit Your Spending When You’re Considering Buying a Home
It is important to note that the preapproval is only valid for a specified amount of time—generally only a few months. If your financial circumstances substantially change between the time you’re preapproved and when you want to exercise the loan, the preapproval letter may no longer be valid.
That’s just one reason why it can be a bad idea to use too much credit or take on other loans if you’re seriously considering buying a home soon. Likewise, spending a lot of your savings before you look for a home may also reduce the amount of money you have for a down payment on your first home.
How Much of a Down Payment Will You Need?
Twenty percent of the actual purchase price is considered the ideal minimum down payment on a house . Of course, a lot of people don’t have 20% to put down on a home.
Don’t fret if you’re one of them. There are loan options available with lower down payments and government-guaranteed loans with zero down payments for those who qualify. State and local governments also have various programs that can help you with your down payment.
There are several loan options for first-time homebuyers . Let’s take a look at a few.
First-Time Homebuyer Loans
In 2020, a record 2.38 million people were first-time homebuyers in the United States, according to an Enact Mortgage Insurance Housing Insights report. The report attributes lower interest rates over the previous year as one factor that contributed to that rise.
Your home loan lender can lay out all of the mortgage options you may qualify for as a prospective first-time homebuyer. Following are some of the options that may be open to you.
FHA Loans
The Federal Housing Administration insures FHA loans , which enables the lender you choose to offer you a better deal. Some features of FHA loans include:
- Low down payment requirements: As low as 3.5% for first-time buyers
- Low closing costs: Fees you pay to your lender for processing the loan
- Possible lower interest rates: This may depend on your credit score
- Easier to qualify for FHA loans : Individuals may be eligible for FHA loans with a credit score as low as 500
Interest-Only and Adjustable-Rate Mortgages
These two loan types can help you as a first-time homebuyer if you expect your income to greatly increase during the duration of the loan. Both of these loans feature floating interest rates, meaning the rate changes once or more over the loan term.
On the other hand, fixed-rate loans are loans in which the interest rate is the same throughout the entire loan period.
Interest-Only Mortgage Loan
With an interest-only mortgage , you pay only the loan interest for a specific number of years. The loan principal—the original amount of the loan or the balance of what you owe—is paid by you at a specific, later date or in the form of payments after the initial period. The monthly interest due amount is typically much lower than the monthly principal payment amount.
Note that while interest-only mortgage s provide you with much lower payments for a time, there are a few downsides to an interest-only mortgage , according to Investopedia:
- Paying the principal in scheduled monthly mortgage payments is how you build equity—your ownership—in your home.
- When the established interest-only payments period is over, there will be a substantial increase in your monthly payments. This might work for you if your income has greatly increased since you originally took out the loan and you have the means to handle the increase.
VA Loans
VA loans are reserved for U.S. veterans and guaranteed by the U.S. Department of Veterans Affairs. VA loans are issued by traditional mortgage lenders, not the government. Veterans can obtain home loans with some of the best terms, often with no down payment.
They are usually easier to qualify for than conventional loans . Your lender can help guide you through the process of applying for this loan if you are a veteran.
Loans That Help Increase Homeownership in Certain Areas
Some organizations and state and local governments offer assistance programs that help you buy a home in specific areas. The goal is to increase homeownership in these areas, which are usually sparsely populated. Your loan specialist can provide details if you are interested in learning more.
Let Us Find You a First-Time Homebuyer Loan That’s Right For You
The Money Store® is a full-service mortgage banker licensed in 47 states. While most use technology in place of customer service, our philosophy is to use it to support our staff. In turn, our loan specialists can provide you with exceptional, personalized service. Get to know us today and learn how we can help you secure your first home.