Two Unbeatable Financial Tips for First Time Home Buyers
June 18, 2021
‘How to qualify for first-time home buyer?’
This is one of the many questions that a first time home buyer has to find an answer to before buying their dream home. With the myriad of financing options available, it can become quite overwhelming for you to decide which is the best option for you.
In this post, we will share two important first-time home buyer tips that will save you time and effort in buying your first home. Let’s take a look.
1) Understand Loan Types
There are different types of housing loan options that first time home buyers have, which are discussed below:
Federal Housing Administration or FHA Loans
Offered by the federal government to American Citizens, FHA Loans are a great option for first-time homebuyers thanks to their less strict credit requirements. Some of the benefits of FHA loans include:
- Lower down payment (as low as 3.5% in some cases)
- Low upfront costs
- Easier to qualify
However, they come with an added cost of mortgage insurance premium (that we will discuss in detail in the latter part of this article). You can find all of these details here.
Conventional loans are more difficult to get than FHA loans. They have strict eligibility that makes it harder to qualify for them. For instance, you need to:
- Make a bigger down payment
- Have a higher credit score
- Low income-to-debt ratio
The good thing is that generally, these conventional loans don’t always require you to have insurance.
Conventional loans further fall into two categories:
- Conforming loans, which comply with guidelines and limits set forth by Government-sponsored enterprises such as Fannie Mae
- Non-conforming loans, where the guidelines are set by the lending institution itself
It’s always a good idea to buy a home that puts you under the conforming loan since non-conforming loans mean higher interest rates and more down payments.
An important fact that’s worth mentioning here is that the Federal Housing Finance Agency has set a limit for conforming loans, which $548,250 for the year 2021.
The third type of loan are the ones that are guaranteed by the U.S. Department of Veterans Affairs. VA loans are aimed to allow veterans to get a home loan at favorable terms, usually without having to make a down payment as well.
However, to qualify for a VA loan you must meet the eligibility criteria. You can check your eligibility for VA Loans here.
Besides loans, you can always check first-time home buyer grants and state and local government assistance programs offered to increase homeownership in particular areas.
2) Understand The Requirements For Getting A Loan
Now that you have a clear idea of the type of home loans that you can avail of, let’s switch to another important aspect – the requirements you need to fulfill to get a loan.
Apart from your credit score, two important factors will play a major role in deciding the amount of a loan that you can get. These are:
Loan-To-Value Ratio (LTV)
LTV is the amount of equity available in the property against which you are borrowing. To calculate it, simply divide the loan amount by the purchase price.
The higher the LTV, the greater the risk involved. You can expect the interest rate to go higher in those cases. The best way to keep LTV down is to put a higher initial down payment.
Debt-Service Coverage Ratio (DSCR)
DSCR is calculated by the monthly net income of the borrower by the mortgage costs. Based on this, the lender can assess the probability of borrowers defaulting on the loan.
Most lenders require you to have a DSCR of greater than one to give you a loan.
The greater the ratio, the greater are the chances of you getting a loan at a lower rate. You can even negotiate more effectively with the lender since there is a lower risk involved.
It is recommended that you include every type of qualifying income when negotiating with the lender. Even a side-hustle that brings regular income could help you qualify for a loan that you would not have qualified for otherwise.
On A Concluding Note
The information mentioned in this post gives you a clear idea of the basic things you need to know to understand the various financing options available and how to make the most of them. We also recommend you to check one of our recent posts on common mortgage mistakes that first-time homebuyers must avoid at all costs.
Once you are finished financially planning, you can always get in touch with a Negotiator Recognized Partner and they will help you get the best deal for your chosen home by negotiating on your behalf.
All the best!