As a first-time homebuyer, it can be difficult to know which mortgage option is right for you. With so many types of mortgages available, it can be hard to determine which one offers the best terms and most favorable interest rates. To help you, here are five of the most popular mortgage options you could consider so that you can make an informed decision regarding your first home.
1. Conventional Mortgages
Most first-time homebuyers automatically think of getting a conventional loan to finance their home since they are the most popular type of mortgage. This is a good choice for most people since it gives them flexibility, and can be used to purchase almost any type of home, such as new or existing, single-family, and condominium.
Conventional loans can be traditional fixed-rate mortgages with a set rate that will stay the same for the term of the loan, or they can be adjustable-rate mortgages in which the interest rate is fixed for an initial period, such as five years, and after the term of the initial fixed-rate is up, it can change with market conditions.
However, the catch with conventional loans is that you’ll need to have a 620 to 640 credit score to get a conforming loan. This is because traditional financial institutions like banks and credit unions will only loan money to those with a nearly perfect score. So if you don’t have a great score, you should consider another option.
2. Veterans Affairs (VA) Mortgages
If you are a veteran who served during wartime, you need to check out the VA loan. This is one of the most popular types of home financing for veterans since they are known to provide competitive interest rates with no down payment required.
What’s more, VA loans are assumable, meaning that if you sell your home to another buyer, they can take over payments on the loan even if it has a balloon payment remaining, so long as the buyer meets VA qualifications.
However, there are some downsides to VA financing. You need to have a decent credit score — generally close to the national average — since these loans are not guaranteed by the government, which means that if you have a lower score, your interest rate may be noticeably higher.
3. Federal Housing Administration (FHA) Mortgages
FHA loans are a great mortgage option for first-time homebuyers who have lower credit scores and cannot afford a large down payment. This is because these loans are available to individuals with a minimum of a 580 credit score.
Another reason why this is a good financing option is that buyers are only required to pay a 3.5% down payment. That means you can get into a home with as little as $5,000 if you meet the minimum credit score. However, FHA loans typically have a slightly higher interest rate than traditional financing which can make carrying costs more expensive over time.
One more downside to consider is that these loans have a maximum amount that the borrower can finance. The FHA determines this figure based on the area’s median income, which means that you can’t go over the limit. But this is not usually an issue unless you are purchasing a very expensive home.
4. US Department of Agriculture (USDA) Mortgages
Just like USDA foods, USDA loans are great options for first-time homebuyers. USDA financing is only available to those who want to purchase a home in an area that has been deemed rural by the US Department of Agriculture. The loan is known to be a good financing choice since it does not require a down payment and has low closing costs, making it even more affordable.
This is beneficial for first-time homebuyers since they can get a house with as little as $1,000 at closing. Plus you only need to put down 1% on the purchase of your home, or sometimes none at all, which makes this a smart option for leaner budgets.
The downside to these loans is that they have more stringent rules than other mortgages do. For instance, you are required to have an area’s median income below the limit of the county for this specific type of financing to be available.
5. Jumbo Mortgages
Last but not least, jumbo mortgages are a great option for first-time buyers who have bigger budgets and want to borrow more than the amount of a conforming loan. But the downside is that these have higher interest rates than other loans do, which means you could end up paying more in the long run.
The reason for this is that the loan is not guaranteed by the government, so lenders have to charge a risk premium for this type of financing. You’ll also need to have a stellar credit score to get approved for a jumbo loan, as well as a very low debt-to-income ratio.
At the end of the day, it’s important to weigh your options before choosing a mortgage. Make sure you are aware of all the pros and cons before signing on the dotted line so that you can have a financially sound home purchase.