Financing a new home can seem overwhelming. For first-time homebuyers, the entire concept of obtaining a mortgage might seem especially daunting. There are many different lenders and many different types of mortgages available, so it's difficult to know which ones are best. Here we will go over the common mortgage types available to first-time homebuyers to help you better understand the basics.
Types of Mortgages
FHA stands for Federal Housing Administration. This body provides mortgage loan programs for Americans and can be a great option for first-time home buyers because it’s relatively easy to qualify. They also have low upfront costs and allow you to make very low down payments. FHA loans also include mortgage insurance added into the regular payments that protect the lender in case of default or other failure to pay back the loan.
USDA, the U.S. Department of Agriculture, offers mortgages specifically for rural homebuyers. Though these loans have a location-based requirement, they sometimes don’t require a down payment at all. First-time homebuyers in rural areas can definitely benefit from this type of mortgage.
VA loans are available to homebuyers who are current or prior military service members. This is another option that rarely requires a down payment but comes with more specific requirements. If a first-time homebuyer is a military service member or veteran, this is an excellent choice to consider.
The biggest difference between conventional mortgages and the above is that conventional mortgages are not insured by the government. Conventional mortgages have strict financial requirements for qualification but sometimes cost less than others overall. You’ll need to have a good credit score, a low income-to-debt ratio and will need to pay a higher down payment. Conventional loans come in two main types, conforming and nonconforming, which determine the limits set on the amount you can borrow.
Fixed-Rate vs. Floating-Rate Mortgages
Among the choices listed above, new homebuyers will also have to decide whether to choose a fixed-rate (same interest rate) or a floating-rate mortgage (the low rate that can increase over time). The obvious advantage of a fixed-rate mortgage is that you’ll always know how much your monthly payment is. However, because interest rates fluctuate, this kind of mortgage depends on your timing. Floating-rate mortgages also rely on timing but will always let you enter the loan at a lower rate. They’re designed to help buyers who believe their income will increase during the period of the loan in order to stay in sync with the increasing interest rate. However, you risk having a high-interest rate in the future regardless of your income situation.
What Type of Mortgage is Right for Me?
Unfortunately, the question of what type of mortgage to apply for is complex with lots of variables. There are many factors to take into account in order to determine what the best choice is for your situation. The best place to start is by deciding how much you can spend upfront as well as your ideal monthly payment. If you research your options thoroughly, you should be able to find the perfect fit for your first-time home purchase.