Choosing a lender and mortgage is as important as selecting the ideal home.
A mortgage should be the right fit in comfort, costs and longevity. While the loan process can be daunting, having the right information will help ensure your first home-buying experience is positive.
Mortgage experts recommend buyers understand the different loan options, including conventional and government mortgages.
Some loans are ideal for first-time buyers with a limited budget and little money to put down on a home, while others work better for buyers who have more established credit, disposable income and a hefty down payment.
When choosing a lender, John Stevens, board chair of the National Association of Mortgage Brokers (NAMB) recommends going to NAMB.org for a list of certified mortgage specialists by state. Look for the Mortgage Bankers Association’s Certified Mortgage Banker (CMB) designation next to a lender’s name.
Stevens said that first-time buyers often overlook taxes, insurance and homeowners association fees, all of which add to their monthly costs.
“Don’t become house poor,” he said. “Consider mortgage payments that allow you the flexibility to still make memories with your family.
Fixed vs. adjustable
The most popular loan is the fixed-rate mortgage, which offers terms of 30, 20, 15 and 10 years. The major differences in the length of the loan comes down to how much the buyer can afford in monthly payments and how quickly they want the loan paid off.
It’s called fixed because the interest rate is guaranteed to remain the same for the life of the mortgage.
An adjustable-rate mortgage (ARM) is less predictable. It starts with one payment but then rises or lowers to a different rate after a set period of time. While it’s helpful for those buyers needing an initial low payment, ARMs can cause problems if the rate change catches buyers off guard and they can no longer afford the new rate.
An ARM can be a better fit for buyers who plan to move in less than 10 years, because they can take advantage of the initial low rates. But buyers must be aware of how high and how frequently the interest rate and monthly payment can adjust.
Conventional loans account for more than half of all new mortgage loans. Many of these loans require a 20 percent down payment, but some programs require less.
The minimum credit score is typically between 620 and 640. Lenders prefer a 36 percent debt-to-income ratio. The maximum DTI for a conventional loan is 43 percent.
Experts say some exceptions can be made for DTIs as high as 50 percent with strong compensating factors such as a high credit score or a lot of cash on hand. If you have dings on your credit or don’t have a lot of cash reserves, your maximum DTI will probably be much lower.
Since the housing meltdown, it has been more challenging for buyers to qualify for conventional loans. However, some lenders have eased their requirements to help more first-time buyers.
A popular choice for first-time buyers is the Federal Housing Administration mortgage because qualifying for it is easier. These loans are designed to help buyers with credit issues or little savings to use for the down payment — in this program, qualified buyers can put down 3 .5 percent.
The downside is buyers must pay for mortgage insurance, which adds to the monthly payment. Typical cost is around 1 percent of the payment amount. Mortgage insurance is standard for buyers whose down payment is less than 20 percent.
The credit score needed for an FHA loans tends to be more lenient than conventional loans. The typical credit score is 580. Buyers with credit scores between 500 to 579 must have a higher down payment (at least 10 percent). Most conventional loans require a credit score between 650 to 700.
FHA loans allow a higher debt-to-income ratio of 43 percent of gross income.
Veterans Affairs loans benefit military buyers. Key features of these loans are no down payment (if a buyer stays below the loan limit) and one of the lowest interest rates on the market.
VA loans do not require mortgage insurance, but borrowers pay a VA funding fee, typically 2.15 percent of the loan amount. Many borrowers finance the fee.
The requirements for a VA loan are more lenient. Credit scores can be around 620, and the debt-to-income ratio is looser. The maximum DTI is 41 percent, however, VA will consider residual income and make loans to borrowers with a DTI above that number.
VA has strict requirements on the type of home that buyers can purchase. It must be a primary residence, and it must meet minimum property requirements, which means buying a fixer-upper is almost impossible. VA loans can’t be used for co-ops, and condos must have VA approval.
The United States Department of Agriculture loan program, managed by the Rural Housing Service, is designed for rural borrowers with low or modest income.
To be eligible, borrowers can’t earn more than 115 percent of the median family income for the area. The USDA program doesn’t require a down payment and offers flexible credit criteria. The minimum score to be approved is 640.
USDA loans promote housing opportunities in less popular communities, making it ideal for residents who struggle to obtain conventional financing. The USDA website can help buyers determine if their prospective property is located in an eligible rural area by entering the home’s address.