Buying your first home should be a straightforward affair, shouldn’t it? Unfortunately, it is not and first-time homebuyers soon discover this. Without guidance, newbie home buyers often end up with rejected loan applications. Or they acquire loans that put them in bad financial shape for the coming years, warns Blue Mountain Management in Colorado Springs.

This short guide will ensure that this does not happen to you. It will help you understand the basic things you should know before applying for your first home loan.

Before you apply for a home loan

When buying a first home, most people focus on how nice it will be to have their place. But knowing what lenders look at to determine if you qualify and how much money you qualify for, is important.

  • Good credit: Lenders view people with credit scores below 580 (FICO Score) as high risk. Your credit score can determine if you will make a down payment of 3% or 10%.
  • Sizable savings: Before applying for a home loan, you should have enough money for the down payment. The standard down payment is usually between 10% and 20% of the mortgage.
  • Steady income: Do you have a steady income that can generate enough cash to cover monthly loan payments, home maintenance costs, and living expenses?

Financing options

There are varieties of financing options open to first-time homebuyers.

Conventional mortgages : These follow the lending rules set by the government. Loans in this category are not backed by government guarantees and are offered by private lenders. The loan amounts are often limited to the statutory maximum loan amount and borrowers must have a high credit score. Interest rates are determined by the down payment and borrower’s credit score.

Conventional mortgages

Freddie and Fannie : These loans are made by Fannie Mae and Freddie Mac (Government Sponsored Enterprises – GSEs). They allow low-/moderate-income borrowers, millennials, and underserved communities to purchase a first home with relative ease. Down payments may be as low as 3%, and mortgage insurance is required.

FHA loans : Are issued by private lenders but insured by the Federal Housing Administration (FHA). They are designed to help people with low credits scores and small savings. The loans require borrowers to buy mortgage insurance and they are subject to the statutory limit.

State and local government programs : Several cities and state housing authorities offer grants and low-interest loans to first-time home buyers. Some jurisdictions use these programs to attract new residents.

USDA loans : The U.S. Department of Agriculture has designated rural areas for which it guarantees home loans. Borrowers can get up to 100% financing, but they must be within the low-/moderate-income brackets and have a credit score of at least 640.

VA Loans : The United States Department of Veterans Affairs (VA) guarantees loans to its members. These loans have lower interest rates and do not require a down payment. They are easier to get than conventional loans.

Mortgage down payment

The standard down payment for a home loan is 20%, but it is not always required. However, even though it is possible to make down payments as low as 3%, you should note that lower down payments attract higher interest rates. A small down payment, in the beginning, means you will end up paying more over the lifetime of the loan. Conversely, if you make a large down payment, you will be rewarded with lower monthly payments. You will also pay less in the total loan repayment amount over time.

Fixed versus floating rate mortgages

A mortgage can either have a fixed interest rate or a variable interest rate. Understanding the difference is critical.

  • A fixed-rate mortgage has an interest rate that stays constant throughout the loan. The advantage is that if the loan was obtained in a season of low-interest rates, the lender will continue to pay that rate regardless of what happens in the future. But these loans are more expensive.
  • A variable rate mortgage has an interest rate that changes with prevailing market conditions. This kind of loan is useful when trying to qualify for a higher loan amount. The risk is that if the interest increases above a certain threshold the borrower may be unable to keep up with the payments.

How much should you borrow?

Most first-time homebuyers assume they have to accept whatever loan amount the lender offers, even when it is above what they need. This is not true; accepting a loan amount above what you need is not always a good thing. To ensure you do not acquire a loan that you will subsequently be unable to manage, do this.

  • Firstly, determine how much house space you need.
  • Secondly, research how much borrowers in your economic strata are typically offered
  • Thirdly, calculate how much you can comfortably make in monthly payments.
  • Finally, stick to the amount you calculated even if your lender offers you more.

If you follow these simple rules, you will come out better than the majority of first-time homebuyers.