First-Time Buyer? A Guide to Mortgages

Mortgages

Did you know 64 percent of millennials regret buying their current home? Avoid making home buyer mistakes, and learn how to get a mortgage.

If you’re a first-time buyer, we can help. In this guide, we’ll go over different mortgage options.

Want to learn more? Keep reading.

Federal Housing Administration Loans

The US Department of Housing and Urban Development (HUD) provides mortgage loan programs.

The Federal Housing Administration (FHA) is part of this department. An FHA loan will have a lower down payment requirement. Also, an FHA loan tends to be easier to qualify for compared to conventional loans.

For a first-time buyer, an FHA loan is an excellent option. With a lower upfront loan cost and reduced credit rules, you can make a down payment of as little as 3.5 percent.

An FHA borrower will have to pay a mortgage insurance premium. The insurance cost will get added to the mortgage payment.

Mortgage insurance protects the titleholder or mortgage lender if the borrower ends up defaulting on payments, dies, or can’t meet the obligations.

Consider Conventional Loans

A conventional loan is a mortgage that the federal government doesn’t insure. Most of the time, conventional loans are fixed-rate mortgages.

Fixed-rate mortgages are trickier to qualify for since they have strict rules. You’ll need a higher credit score, more significant down payment, and a lower income-to-debt ratio.

If you qualify, you’ll pay less compared to a loan guaranteed by the federal government.

What About VA Loans?

The US Department of Veterans Affairs (VA) guarantees VA loans. The VA won’t make the loan, but it will guarantee mortgages made by qualified lenders.

The guarantees let veterans get home loans with favorable terms. Sometimes veterans won’t need a down payment.

VA loans are a lot easier to qualify for compared to conventional loans. Lenders will limit the maximum VA loan to traditional mortgage loan limits.

Before you apply for a loan, you will need to request your eligibility first from the VA. If accepted, you will get a certificate of eligibility from the VA. Use the certificate when applying for a loan.

Income and Equity Requirements

Home mortgage loan pricing gets determined in two ways. Both methods focus on the creditworthiness of the borrower. Along with checking your FICO score, the lenders will calculate the loan-to-value ratio (LTV).

Also, they will calculate the debt-service coverage ratio (DSCR). The lenders calculate it to figure out the amount they will loan you, along with the interest rate.

LTV gets determined by halving the loan amount by the purchase cost of the home. The more money in your down payment, the less likely you will default on your loan.

The greater the LTV, the greater the risk of potential default. Lenders will charge more. The DSCR will determine the buyer’s ability to pay for the mortgage.

Lenders divide the monthly net income by the mortgage costs. This will help the lender figure out the probability you will default on your mortgage.

With DSCR, the higher the ratio, the higher the chances you can cover borrowing costs. The lender will assume less risk.

When the DSCR is greater, the more likely a lender will negotiate the loan rate. The lender will receive a better risk-adjusted return.

Include types of qualifying income when negotiating with a mortgage lender. An extra job will make the difference between not qualifying or qualifying for a loan.

What About Private Mortgage Insurance?

LTV determines if you will need to buy private mortgage insurance (PMI).

PMI protects the lender from default by transferring part of the loan risk to a mortgage insurer. Most lenders will ask for PMI for loans with an LTV greater than 80 percent.

The amount insured and the mortgage program decide the cost of mortgage insurance. Premiums get collected every month, along with property insurance escrows and tax.

If you can, try to avoid PMI. Don’t borrow over 80 percent of the property value when buying a home. You could also use home equity financing.

Make Sure You Compare Mortgage Fees and Rates

You should request loan estimates for the same kind of mortgage from different lenders. This way, you can compare the costs, origination fees, and interest rates.

Lenders also might offer the chance to buy discount points. Discount points are fees that the borrower will pay upfront to lower the interest rate.

Buying points make sense if you have the money and want to stay in the house for a long period.

Work with a reputable mortgage broker. Learn more about the best mortgage broker if you’re shopping in Brisbane.

What’s Your Budget?

Lenders might end up offering to loan you more money than is affordable. You might also feel pressured to spend outside of your comfort zone so you can beat another buyer’s offer.

You want to avoid financial stress later. Make sure you set a price range that’s based on your overall budget.

Make sure you look at properties a bit below your budget. This way, you’ll have some room for when it comes time to bid in a competitive housing market.

Now You Know More About Mortgages as a First Time Buyer

We hope this guide on mortgages was helpful. A first-time buyer will need to consider different mortgage options. 

Start gathering the paperwork you will need to present to lenders. Try to pay off debt before buying a home and save up a down payment.

Are you looking for more home or real estate tips? Check out our resources on the blog.