Financing Programs For Home Buyers

Are you wondering what the best mortgage loan programs will be for your needs? The financing part of buying a home can feel pretty overwhelming at first. Fortunately, mortgages are not actually rocket science – you can figure out the basics and make an informed decision based on your understanding without risking disaster.

It would be best if you did a little research, figure out your budget, and decide on your down payment. The rest is relatively straightforward, especially when you have a mortgage company taking you through the steps.

A first time home buyers program will often be one of the better financing solutions. Maximum Real Estate Exposure has reviewed eleven loan programs available to first-time home buyers. Please make sure you thoroughly research them to see which could be best for your financial circumstances.

We will also take a deep dive into some of the distinguishing factors separating one mortgage program from another. There are many questions first-time buyers should be asking, and financing options should certainly be at the top of the list.

Let’s take a look.

5 Types of Mortgages – What You Need to Know

While there is a seemingly endless variety of loans out there, the reality for most homebuyers is that you will only need to choose from around five different categories to purchase a home. Here is a general review of those five mortgage types.

1. Government-insured mortgages

The government is interested in increasing homeownership because it is good for the economy. To facilitate more homeownership, there are a variety of programs in place that buyers take advantage of – and you may be able to take advantage of one or more of them, too.

Three different government agencies back home loans, and each agency requires that borrowers meet certain requirements. Your government-backed mortgage options include:

FHA Loans

The Federal Housing Administration backs home loans for borrowers who may not be able to get conventional loans. Even if you don’t have a big down payment or great credit, you still may be able to qualify for an FHA loan. FHA loans are one of the most popular mortgage loan programs among first-time home buyers.

There are two main options from the FHA, including loans for those with a FICO of 580 or better that require 3.5 percent down, and loans for those with a credit score of 500 with at least 20 percent down.

The opportunity offered by FHA loans is great for many, but it does come at a cost – you will need to pay two different mortgage insurance premiums if you get an FHA loan, which can increase the cost of the mortgage over the long-term.

FHA loan limits have risen from $331,760 to $356,362 in most housing markets in the past year. They are set at 65 percent of the national conforming mortgage limit.

VA Loans

Members of the U.S. military, including active duty and veterans, can qualify for VA loans that offer low-interest rates, no down payment, and no private mortgage insurance requirement. These loans include a funding fee designed to help offset the cost to taxpayers, but the fee can usually be rolled into the loan if you do not want to pay it upfront at closing.

Veterans loans are one of the true no down payment loan programs available. If you are or have served in the military, a VA loan is a great mortgage option for a first-time homebuyer.

USDA Loans

Low-income and moderate-income borrowers buying homes in rural areas may be able to qualify for a USDA loan. The home must be in a USDA-eligible area, and you have to meet certain income limits to get the loan. You may not even need to have a down payment depending on your income.

Other than VA loan, a USDA loan is the only other no down payment loan product. The home you are purchasing, however, must be located in what is considered a rural area. You can speak to your lender, and they will be able to tell you if the area you’re looking in will qualify.

Pros and Cons

Government-insured loans are helpful when you can’t qualify for a conventional loan since the credit requirements are laxer and the down payment requirements are minimal. However, you may have higher costs for borrowing overall and will need to do much paperwork to qualify.

2. Conventional Loans

There are two basic types of conventional loans, conforming and non-conforming. Loans that are conforming fit within the max limits set by Fannie Mae or Freddie Mac. These agencies back most mortgages in the U.S., so they have a big say in how loans are configured. Non-conforming loans are loans that do not fit within these guidelines. The most common type of non-conforming loan is a jumbo loan.

Conventional loans usually require you to pay private mortgage insurance (PMI) if you do not put 20 percent down on the home.

Pros and Cons

Conventional mortgages are very flexible since you can use them to buy any type of home, including a primary, secondary, and investment home. While interest rates may be slightly higher, conventional loans usually have lower borrowing costs than government-backed loans. You can also ask to have your PMI canceled after you reach 20 percent equity in the home.

The challenge with conventional loans for many is qualifying for them in the first place. It would be best if you usually had a FICO score of 620 or higher and a debt-to-income ratio of 45 to 50 percent. You will need to provide a lot of documentation to verify that you can qualify for the loan.

When you are purchasing a home, it is vital to improve your credit score as it can have such a dramatic impact on the loan terms you receive from the lender. Take a look at a rundown of the credit scoring ranges, so you see where you fall. You’ll know how much you need to improve your score to get into the highest category of credit.

3. Jumbo Loans

Jumbo loans are one of the most common types of non-conforming loans. The loan is jumbo and non-conforming because the price of the home you want to buy exceeds the limits set by the federal government for conforming loans.

In 2021, the maximum limit for a single-family home is $548,250 in most areas of the country. If you want to buy a single-family home that costs more than the limit for 2021,  you will need to get a jumbo loan. The max limits can vary by region. In some more expensive areas of the country, the limit was set at $822,375.

These loan limits are set relative to housing price increases. The FHFA’s House Price Index showed that house prices increased an average of 7.42 percent from the third quarter of 2019 and 2020. What this means is that the baseline conforming loan limit will increase by that same amount.

Pros and Cons

The interest rate for a jumbo loan tends to be comparable to many other conventional loan products, so you will likely not pay more for the loan than you would for a smaller loan. The most obvious benefit of a jumbo loan is that it allows you to purchase a more expensive home. Depending on where you are buying, you may need a jumbo loan to get the home you want.

There are more challenges require to get a jumbo loan, however. You will need a down payment of around 10 to 20 percent and a FICO score of 700 or better, as well as a debt-to-income ratio of less than 45 percent. It would help if you also had significant assets, usually 10 percent of the loan amount in cash or savings.

4. Fixed-Rate Loans

A fixed-rate loan will have an interest rate that remains fixed throughout the life of the loan. Government-backed loans always have fixed rates, while conventional loans may or may not have a fixed-rate. These loans usually have terms of 15-years, 20-years, and 30-years. Fixed-rate loans are the most popular loan product by far.

Of all the mortgage loan programs, conventional is the most common.

Pros and Cons

These loans are desirable because you don’t have to worry about your interest rate or payments changing over the life of the loan. Having a fixed-rate means, you can easily budget your finances to ensure you can pay your mortgage.

There are some drawbacks, however. You will often pay more interest for the loan when you have a longer-term loan, and it will take longer to build equity in your home. The interest rate will likely be higher than an adjustable-rate mortgage, at least at the beginning of the loan term.

Although in recent years, this has not been the case, which has made fixed-rate loans even more attractive, especially to first-time buyers.

5. Adjustable-Rate Loans

Adjustable-rate mortgages (ARMs) have a fluctuating interest rate, which means the rate can go up or down depending on what happens with the market. Most of these loans start with a fixed interest rate and convert into a variable interest rate in a few years. You can often get an ARM that has a cap on how much interest will go up so that you can plan better for the future.

Pros and Cons

The biggest benefit of an ARM is that you get a low-interest rate at first and can save a lot of interest. However, once the interest rate goes up, it could become more difficult to afford the mortgage. And if home values fall, the home will be harder to sell or refinance. Adjustable-rate mortgages are certainly riskier, especially among marginal borrowers. A sharp increase in the rate could make it more difficult to remain in a home.

In fact, it could be a recipe for disaster that leads to potential home foreclosure—something nobody ever wants to think about.

An adjustable-rate loan is one of the least favorite mortgage programs at the moment.

Final Thoughts on Getting a Mortgage

Choosing the right mortgage is an essential consideration when buying a home, especially when it is for the first time. It is vital to shop the rates. Make sure you speak to more than just a couple of lenders. Remember, the loan terms you receive will make a big difference in what you are ultimately paying for the house.

Make sure you get preapproved for a mortgage before you start looking at properties. The better educated you can be regarding your finances will go along way toward making your purchase a smooth one.

Hopefully, you now have a better understanding of all of the mortgage loan programs available to you.