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First time home buyer loan types

Young family standing in front of their new home.Most home buyers purchase a house with  a mortgage. But what is mortgage? The word mortgage is a French word for "death contract" (sounds appropriate). The mortgage (loan) ends (dies) when either the loan is paid off or the property is taken through foreclosure.

If you're a first time home buyer, purchasing a home might seem overwhelming.

You might be thinking, how do I buy a home", "what are the requirements for buying a house", "who has the lowest interest rate", how much can I afford", and last but not the least, you want the "best deal". Let's start with the different loan options.

There are different types of home loans

MazeHome buying seems like a maze. Each home loan program has it's own guidelines and relative merits. For example, an FHA loan only requires only a 3.5% down payment and you do NOT need to be a first time home buyer, however, the maximum lending limit is lower than a conventional mortgage.

The USDA home loan program does not require a down payment, however, the home must be located in a designated rural area and there are income limits.

The Veteran's mortgage (VA) does not require a down payment and the seller can pay all closing costs . . . but of course, you must me an eligible veteran to take advantage of the VA mortgage.

The first step in a home purchase or mortgage refinance is choosing the right mortgage.

Let's take a look at your loan options

FHA Home Loan - Number one choice for low cash and low credit score!

FHA logoBenefits of an FHA loan - The FHA loan is a government home loan program that offers a low down payment of 3.5%, there are no first time home buyer requirements, and the seller is permitted (not required) to pay up to 6% of the sales price toward closing, escrow and prepaid costs. The FHA permits qualified "donors" to gift the entire down payment to the home buyer(s). The FHA will permit a 500 credit score.

Disadvantages of an FHA loan -There are maximum mortgage amounts with an FHA mortgage. There is a funding fee and a monthly mortgage insurance (MIP)) cost, even if you make a down payment of 20%. Read more about FHA home loans

Veteran Home Loan - No down payment!

VA logoBenefits of an VA loan - VA home loans do not require a down payment requirement - "0"", and Veteran's Administration permits the home seller to pay all closing costs on behalf of the vet. Closing costs include title insurance, transfer taxes (if any), settlement fees, pest inspection. The is no monthly mortgage insurance premium (MIP/PMI)).

Disadvantages of a VA loan - There is a funding fee. The cost to "fund" the VA mortgage program is based on the down payment, if any, whether the veteran has ever used his or her entitlement and whether the veteran his or eligibility as active duty or reservist/national guard. Disabled veterans are exempt from the VA funding fee requirement. Read more about VA home loans

USDA Home Loan - No down payment!

USDA logoBenefits of a USDA loan - The USDA home loan is another government home loan program to help home buyers in rural areas of the county purchase a home. The USDA mortgage is a zero down mortgage. There is an upfront mortgage insurance cost, however, the USDA funding fee can be financed with the loan. There is a modest monthly mortgage insurance premium (pmi/mip).Thee home seller is permitted (not required) to pay up to 6% (and possibly more) of the sales price toward the buyer's closing costs. If the appraisal exceeds the purchase price, the difference may be used to finance the closing costs.

Disadvantages of a USDA loan - There is a funding fee. The cost to "fund" the USDA mortgage program is one percent of the mortgage amount. The funding fee cost is less than an FHA mortgage. And like the FHA loan, there is a monthly mortgage insurance premium; however, the monthly cost is less than the FHA mortgage insurance premium. Read more about the USDA loan program

Conventional Mortgage - Your grandfather's mortgage

Benefits of a conventional loan - The conventional loan is not associated with the federal government. The conventional mortgage meets the lending requirements of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Fannie/Freddie loans compete with the government backed home loans. The conventional mortgage does not have the upfront funding fee. There is a monthly mortgage insurance premium if the down payment is less than 20%. If the loan is made to refinance an existing loan, monthly pmi is not charged if the equity is 20% or more. This mortgage is often identified by down payments of 5, 10, 15 and 20 percent. The lending limits (the amount you can borrow) are greater than FHA. Read more about conventional mortgages

Disadvantages of a conventional loan - The interest rates tend to be higher with conventional loans than with the government backed mortgages. The reason is because lenders are on the hook for the entire loan amount with a foreclosure, however, the government absorbs some of the loss with the government backed loans. There is a limitation on lender paid closing costs (lender assist), however, Fannie Mae has loosen the closing cost limitation.

Which is better a fixed rate or adjustable rate mortgage?

Now that you have a general understanding of home mortgages, you have to decide whether you want a fixed rate mortgage or an adjustable rate mortgage. The FHA, VA and conventional mortgages offer both fixed and adjustable rate mortgages. The USDA is strictly a 30 year fixed rate home loan.

Benefits of a fixed rate loan - A fixed rate mortgage is a loan that has a "fixed" interest rate. The monthly payment will remain the same from the first payment to the last payment.

Benefits of an adjustable rate loan - The interest rate "adjusts" based on the type of adjustable rate mortgage. For example, the one year adjustable rate loan has an interest rate that can increase or decrease every 12 months. The 3, 5, 7 and 10 year rate adjustable rate mortgages are "fixed" for either 3, 5, 7 or ten years and convert to a one year adjustable rate mortgage after the fixed rate term. What is the benefit of the adjustable rate mortgage(s). The adjustable rate mortgages have a lower interest rate than the fixed rate mortgage. The lower interest rate  means the monthly payment will be less, or the borrower can obtain a larger loan, which means a more expensive house. Read more about adjustable rate mortgages

What is a jumbo loan?

A jumbo loan is a mortgage that exceeds the lending limits of the FHA, VA, USDA and conventional loans loan programs. The maximum loan amounts are established each year by the Federal Housing Finance Agency (FHFA). The conventional mortgages (Fannie Mae and Freddie Mac) have higher lending limits than the FHA mortgage. The VA limits are based on the conventional loan limits (one unit only). The USDA does not have loan limits, however, the USDA limits the loan amount based on the applicant's income. Read more about jumbo loans

Banks and mortgage brokers may not offer every loan program!!

Man holding a business cardBanks and mortgage brokers must be licensed or "approved" to offer FHA, VA and USDA financing. So if you seek out a lender for mortgage preapproval, and the mortgage company is not approved for say an FHA home loan, it's unlikely the lender will say, "you need to speak to the lender down the street, because he offers FHA financing, we don't".

Or let's say you're a vet and you want to use your eligibility and the mortgage company doesn't participate in the VA loan program, again, the lender will probably steer you into a program that his company offers.

The first step in the home buying process is to seek out a bank, mortgage broker or lender who can pre-approve you under different mortgage programs. Read more about lenders

Frequently Asked Questions About Home Buying

First time home buyer programs?

Most states (and some counties and cities) have first time home buyer programs for first time home buyers. The first time home buyer programs are usually driven by the "household" income. That means the total income of all people who will reside in the home after settlement. Even granma's social security is counted toward the household income; regardless of whether she is on the mortgage or deed of trust. The first time programs usually have exceptions for over income or non-first time home buyers if they purchase in targeted areas. The first time programs are typically offered by banks.

How much house can I afford?

You mortgage amount will be determined to a large extent by your debt to income ratio. Lenders use a simple formula to compare how much your monthly income is to the total monthly debt payments (i.e. car payment, school loans, credit cards, etc). The borrowing limit can be increased with a cosigner. Any lender will be happy to preapprove you for a mortgage loan. Read more about pre-approvals

What credit score do you need to buy a house?

The minimum credit scores vary between loan programs. The FHA allows for a 500 credit score with a 10% down payment. The minimum FHA credit score for the minimum down payment is 580. The VA does not have a minimum credit score, however, the lender may establish a minimum credit score. The conventional loans vary from lender to lender, although, most lenders desire a minimum credit score of 620. Read more about credit scores

What is pmi?

PMI is an abbreviation for private mortgage insurance. PMI is charged on conventional loans when the down payment (or equity) is less than 20%. Read more about pmi

What are closing costs?

Closing costs are fees charged for the purchase of a home or mortgage refinance. Closing costs are a necessary evil. For example, title insurance is usually charged. The title policy protects the buyer or homeowner against past ownership problems, property boundaries, forgery, etc. Appraisal fees, credit reports, settlement fees, transfer and mortgage taxes are all closing costs.

What are mortgage points?

Mortgage points are prepaid interest. For example, let's say you are offered an interest rate of 5% and no points for a 30 year loan of $100,000. The total interest paid will be $93,256 - ouch! But, the lender could offer you an interest rate of 4.75% + 1 point. A point is 1% of the loan amount (1% X 100,000 = $1,000). Two points are calculated as 2% X $100,000 = $2,000. The one point option means you would pay $1,000 at settlement in exchange for a lower interest rate. And how much interest would you pay? $87,793, you save $5,463 over the life of the mortgage by paying $1,000 at settlement. Read more about mortgage points

What is the APR rate?

APR is an abbreviation for Annual percentage rate. Lenders are required to provide borrowers with the APR rate in addition to the simple interest rate. Read more about APR

An annual percentage rate (APR) reflects the mortgage interest rate plus other charges.  There are many costs associated with taking out a mortgage. These include: The interest rate Points Fees Other charges The interest rate is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan. An annual percentage rate (APR) is a broader measure of the cost to you of borrowing money, also expressed as a percentage rate. In general, the APR reflects not only the interest rate but also any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate. If you have applied for a mortgage and received a Loan Estimate from one or more lenders, you can find the interest rate on page 1 under “Loan Terms,” and the APR on page 3 under “Comparisons.”  SOURCE: Consumer Financial Protection Bureau (CFPB)

What is an origination fee?

An origination fee can be a discount point (1% X loan amount) or it can be a percentage of the loan amount that pays for various lender fees, like underwriting, processing, etc.

What is a home inspection?

After you find a suitable home, you may want a professional to evaluate the overall condition of the house. A home inspector will use his or her knowledge and experience to determine whether the house has any serious problems. Home inspections are not required by the loan programs, however, FHA, VA, USDA and conventional programs strongly encourage a home buyer to obtain a home inspection. Read more about home inspections

Most Popular Pages About Home Buying

Who approves your mortgage?

Would you believe a computer program makes the approval decision? It's true, it's called automated underwriting. Read more

How do I make an offer on a house tips

Will the seller accept a lower offer? Should you even make an offer after asking the seller these questions? Read more

Did you know the home seller can pay your closing costs?

Did you ever hear about seller assistance (seller assist)? Read more