What Kind of Mortgage Is Best for First-Time Buyers?
Buying your first home is one of life’s most exciting experiences. After all, you are grabbing your slice of “the American dream!” When you find and fall in love with a home, there is nothing better. You might think to yourself – everything is just perfect about the place.
But here’s something that nobody tells you – if you don’t choose the best mortgage product for you, that dream of owning your “perfect” first home could turn into a nightmare. Here is how to choose the best mortgage for you when buying your first home.
Step 1: Find Out How Much You Can Really Afford
When you are shopping for a mortgage, the lender will check your credit and review your financial history, and present you with an amount that you can get approved for. It is crucial for the first-time home buyer to understand that this number does not reflect what you can afford. It is merely an amount determined by the lender based on your income, credit score, financial obligations, and other data.
Remember, the lender’s job is to sell you a mortgage. It’s your job to be able to pay it. Before you start looking into mortgages, take the time to do a thorough review of your finances and credit report, so you can have a realistic idea of just how much home you can afford to buy.
Step 2: Determine the Desired Length of Your Mortgage Loan
For some first-time buyers, being sold a 30-year mortgage loan can be a little intimidating. After all, 30 years is long time! But while 30-years tends to be the most common term among American home buyers, it is not the only option.
For instance, there are loans available with 10- or 15-year terms, and some lenders even offer borrowers opportunities to create custom mortgages with terms landing anywhere between 10 and 30 years.
Step 3: Compare Mortgage Loan Types
There is no one-size-fits-all mortgage loan. That is why there are so many different types of mortgage products out there. But all those choices do not make it any easier to choose the right loan for you. Thus, comparing the different types of mortgage loans before settling on one is all-important. Some of the most common types of mortgage loans used today include:
- Conventional Mortgages (Think Fannie Mae or Freddie Mac. Typically reserved for those with very good credit)
- Government-Insured Federal Housing Administration (FHA) Loans (Insured by the FHA and better suited for low- to moderate-income first-time buyers)
- Government-Insured Veterans Affairs (VA) Loans (Guaranteed by the U.S. Department of Veterans Affairs and designed for qualified military service members, veterans, and their spouses)
- Government-Insured U.S. Department of Agriculture (USDA) Loans (Guaranteed by the U.S. Department of Agriculture and designed for low-income buyers in rural areas)
- Conforming Mortgages (Maximum loan limits are set by the government’s Federal Housing Finance Agency)
- Non-Conforming Mortgages (Typically Jumbo loans, which exceed conforming loan amounts)
Step 4: Choose the Interest Rate Type
A mortgage loan comes with either a fixed interest rate or an adjustable rate, and depending on which one you choose, it could have a big impact on how much you ultimately wind up paying for your home over the course of the loan.
A fixed-rate mortgage has the same interest rate over the life of the loan, which is ideal if you are looking to pay the same amount month after month, but this type of rate can be a little higher than the adjustable-rate mortgage, at least at the start.
While the ARM rate traditionally starts off lower for the initial term (usually three, five, seven or 10 years), it then resets once a year. Depending on the state of the market, it can go either up or down.
Step 5: Compare a Few Lenders Before Choosing One
Mortgage lenders are like home improvement contractors – they vary by products and services, as well as by quality and price. So, before you settle on a lender, make sure you shop around and compare a few different offers to help ensure you get the best mortgage loan offer from a lender you can trust.
Buying your first home can be one of the most rewarding experiences in your life. But for it to turn out as you expect, you will be required to put in some work. Don’t cut any corners on the above steps and you will find yourself on closing day in the best position possible with a mortgage that works for you.
