Mortgage Options for First-Time Home Buyers

Even after the recession, owning a home is still a major part of the American dream for millions of people. With rents on the rise in many parts of the country, more and more people are considering buying a home as a way to beat the high cost of renting. In February 2016, it was reported that rising rent was the second most frequently cited reason for wanting to buy a home, ranking just behind a major life event like marriage or the birth of a child.

Buying a new home can be an overwhelming process, even if you’ve been through the process before. For first-time home buyers, it can be hard to even know where to begin. Before you start looking for the home of your dreams on Zillow, the best place to start is by figuring out how expensive of a home you can afford to buy.

While there are many different online calculators that will give you an idea of how much you can afford to spend on a home, it’s important to understand the sorts of things lenders consider when approving mortgage applications. Genisys Credit Union and many other mortgage lenders advise that no more than than 25% of your monthly income before taxes should be spent on housing expenses. Lenders also look at your debt-to-income ratio, which includes things like outstanding credit card debt, student loan payments, and car payments. Of course, you’ll also want to make sure you leave yourself enough money to be able to handle any of the unexpected expenses that commonly come with being a homeowner.

Now that you have an idea of how much you can afford, what financing options are available to you?

Traditional Mortgage

One of the most common beliefs people have about buying a home is that a 20% down payment is required. Unfortunately, for many people who are interested in buying their first home, saving that 20% can take years, especially when a person has things like student loan payments to make. While 20% is certainly considered an ideal down payment, it’s hardly the only option. A 20% down payment is preferred since it means that private mortgage insurance (PMI) isn’t necessary and you won’t have to pay as many rates and fees.

If you’re able to put down a 20% down payment and have good credit, getting a traditional mortgage shouldn’t be too difficult, even for a first-time home buyer. But if you can’t wait to save up a 20% down payment, PMI makes it possible to obtain a mortgage with down payments as low as 3%-5%. While PMI means you’ll have to pay more every month, you only have to pay for it until you’ve paid off at least 20% of your home’s value.

First-time home buyers should check with their bank or credit union to see if they have any special mortgages designed for first-time home buyers. Many banks, credit unions, and other lenders have mortgage programs designed to be more accommodating to the needs of first-time buyers.

FHA Loans

One problem many first-time home buyers face is their credit score. Most lenders require you to have a credit score of at least 640 to qualify for a mortgage and a credit score of 740 or higher will help you get the best mortgage rates. If you don’t have such a good credit score, you may be able to obtain a FHA loan.

FHA loans aren’t directly given by the Federal Housing Administration. Instead, the FHA guarantees mortgages so that lenders are more willing to offer loans to people who might not qualify otherwise. FHA loans are popular with many people who may have a hard time getting other types of mortgages because of their credit scores or income levels. With FHA loans, down payments can be as low as 3.5%, there are no prepayment penalties, debt-to-income ratio rules aren’t as strict, and there are no income requirements to meet.

The main downside to FHA loans is that your monthly mortgage payments also come along with mortgage insurance premiums and additional fees. These can be more expensive than PMI and unlike PMI, the extra costs can’t be cancelled once you’ve paid off 20% of your home’s value.

VA Loans

If you’ve served in the military, you may be able to finance your home without any down payment at all through a VA loan. If you make a down payment of less than 5%, VA loans come with a funding fee of 2.15% whereas down payments of 5%-10% come with a 1.5% funding fee. However, PMI is not required and there are no prepayment penalties if you’re able to make payments early.

Even without a 20% down payment, buying a home could still be an option for you. By taking the time to investigate your potential financing options, you may find you're closer than you realize to becoming a homeowner.