Best Type of Mortgage Loan for First Time Home Buyers
Picture this: after many years of renting, you’ve finally received the key to your first home. That’s right—now you can paint the walls, put up as many pictures as you want, refinish the hardwood floors, or just simply enjoy a space that actually belongs to you! Purchasing a new home is an exhilarating experience that marks a significant milestone in life, especially if it’s your first house. The process is filled with anticipation and dreams as you explore neighborhoods, imagine parties in your living room, and visualize a space that reflects your personality.
But purchasing your first home isn’t always an easy journey, especially when it comes to the financial side. There are many different types of mortgage loans, and it can be difficult to understand what your options are, how to qualify for them, and, ultimately, which one you should select.
Here at IMCU, we know how exciting and intimidating this process can be. That’s why we’re here to help. We’ve put together this resource to guide you as a first time home buyer.
What Type of Mortgage Is Best for First Time Buyers?
Favorable options for first time home buyers include conventional loans, fixed-rate and adjustable-rate mortgages (ARMs), and FHA loans. Let’s take a closer look at each of these options.
- Conventional loans are offered by private lenders, like credit unions. For first time home buyers with a strong credit score and an ample down payment saved up, this is often the best option.
- Fixed-rate mortgages provide a stable monthly payment with a consistent interest rate over the loan’s entire term, usually 15 to 30 years. These are the best loans for first time buyers who may be wary about adjustable rates or the impact market fluctuations could have on their mortgage over time.
- Adjustable-rate mortgages feature a lower initial interest rate that is adjusted after the initial period, often around 3 to 5 years (depending on the terms). Beyond that period, rates are adjusted based on market fluctuations—meaning rates could go down (in a decreasing rate market) or up. Even if rates go up, though, buyers are able to “lock in” their introductory rate for at least a few years (or they can always be refinanced). This may be the right choice for you—especially since you can move before the rate increases.
- FHA (Federal Housing Administration) loans are government-backed loans that offer lower down payment requirements and more lenient credit standards. If you’re a first time home buyer who doesn’t have much savings and/or a lower credit score, this may be best for you.
No matter which type of mortgage you’re considering, the fact is that there is no one-size-fits-all mortgage for first time buyers. The best choice depends on your unique financial situation—that is, your credit score, down payment, income, future plans, and other factors. At IMCU, you can choose your loan officer and find an experienced, empathetic advisor who can help you understand all of your options.
What Are the Best Loans for First Time Home Buyers With No Down Payment?
As mentioned above, FHA loans are typically a good option for first time buyers who have limited funds for a down payment. However, it’s important to note that you will most likely need a small down payment—as low as 3.5%—in order to take advantage of this program. Additionally, you will be required to have mortgage insurance. This is to make sure the lender is protected in case the borrower defaults on the loan.
How To Qualify for a Home Loan as a First Time Buyer
As a first time home buyer, requirements for a home loan can seem overwhelming. However, there are a few steps you can take to demonstrate your financial readiness to lenders.
- Assess your credit score and address any issues to ensure it is as high as possible.
- Figure out your budget to ensure that you’re looking at houses that are within your means.
- Save for a down payment, aiming for 20% of your total purchase price.
- Gather financial information like pay stubs, tax returns, and bank statements.
- Calculate your debt-to-income ratio (DTI) by dividing your monthly debt payments by your gross monthly income. Overall, a lower debt-to-income (DTI) ratio increases a buyer’s chances of getting approved for a mortgage with favorable rates, so a DTI that is under 36% is generally recommended.
When calculating proposed mortgage payments, lenders typically rely on information like how the buyer’s monthly housing expenses and total monthly debt relates to their monthly gross income. Ultimately, they use two different ratios to determine whether someone qualifies for a mortgage loan:
- Front-end ratio: The percentage of your monthly gross income that goes toward your housing expenses, including principal, interest, taxes, and insurance (PITI). Lenders typically require this ratio to be 25–28% or less.
- Back-end ratio: The percentage of your monthly gross income that goes toward your housing expenses plus long-term debt. Lenders typically require this ratio to be 33–36% or less.
However, at IMCU, we loan programs allowing a back-end ratio to be as much as 50% depending on the loan to value and credit score. Finally, be sure to consult with a mortgage professional, like the loan officers at IMCU, so you can receive personalized guidance through this process. There are additional benefits of working with a credit union rather than a more traditional lending institution, including a wide range of user-friendly online features that empower users to better understand and manage their loans. These resources include a comprehensive Home Loan Toolkit, as well as all of the benefits that come with becoming an IMCU customer.