If you are a first-time homebuyer, it can be very overwhelming, especially when it comes to finances. Fortunately, I will share some information about the most basic things about property financing. This information will help you save a huge amount of money and time.
This is important to the market of the property since the market will always depend on the area where it’s located. Continue reading below so you can get to know all the basic financing tips that you should know as a first-time homebuyer.
Types Of Loans
VA loans or US Department of Veterans Affairs loans is not a loan itself but one that can help you get a guaranteed mortgage from qualified lenders. These will help guarantee the service people and veterans to get the home loans that have favorable terms for them, and also ones without requiring any down payment.
One of the best things about VA loans is that qualifying for one is easy. You can start a request for an eligibility from the VA, and once accepted, you will be issued a certificate of eligibility, which you can use to apply for that home loan.
The FHA or the Federal Housing Administration is part of the US Department Of Housing and Urban Development. This will help provide you with different mortgage loan programs. One of the best things about this type of loan is that they only require a low down payment. Also, qualifying for this loan is easier compared to conventional loans.
FHA loans are ideal for first-time homebuyers because besides the fact that they will let you pay a lower down payment, they are also not that strict with credit scores. FHA loans may even offer you a down payment for as low as 3.5%.
Conventional loans are home mortgages that are not guaranteed or insured by the federal government. These mortgages are fixed and have requirements that are stricter. They also require high credit score, bigger down payment, and a low income to debt ratio. All these mean that the conventional loans are the most difficult loan to qualify in. But the good thing about conventional loans is that they are less costly compared to guaranteed mortgages.
The conventional loans are either defined by non-conforming or conforming loans. The non-conforming loans are where the guidelines are set by the lender itself. This type of loan already has a set of guidelines from the GSEs or the government-sponsored enterprises. The reason behind this is that lenders usually package these loans and sell them with securities in the secondary market.
Income And Equity Requirements
The pricing of the home mortgage loan is usually determined by the company in two ways. One would be the creditworthiness of the person and the credit score. But remember that the companies will check all three major credit bureaus. They will calculate your debt-service coverage ratio and the loan to value ratio, for them to be able to set the price of the loan.
The loan to value ratio is usually the amount of implied equity that’s available in the collateral that’s being borrowed against. This is usually determined by dividing the amount of the loan by the home’s purchasing price. Lending companies will usually assume that the higher the money you are putting at risk, like a down payment, the less likely you will go on default on your borrowed loan. The higher your loan to value ratio, the higher the lender will charge more.
Also, the loan to value ratio will help the lender know if they will require purchasing you a PMI or private mortgage insurance. If your LTV is higher than 80%, then the lender will require you for a PMI. Also, usually, the insurance premiums are collected together monthly with the property insurance and tax.
Floating And Fixed Rate Mortgages
Floating rate mortgages will let you get introductory rates that are lower, especially during the first few years of your loan. This will let you qualify for a bigger loan, especially if you have already tried applying for expensive fixed mortgages. This type of mortgage may be helpful, but it can also be risky if it won’t start growing along with the increase in the interest rate.
The fixed rate mortgage is where your entire loan will be the same for the entire contract. This will help you know how much your monthly payment will be so you can allot a budget for it monthly.
These are all the basic financing tips for first-time homebuyers that you should know about. Knowing the above information will help you to know what type of loan to have and the income and equity requirements that you need to prepare before going to a lending company.
Based on Materials from Investopedia
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