Buying a new home is incredibly exciting. It’s also a significant financial investment. The National Association of Realtors (NAR) says the average home price in the second quarter of 2023 was $402,600.
Of course, the price varies by type of home and location. So you wouldn’t need that much if you aim to live, for instance, in Decatur, Illinois—the country’s least expensive housing market. You can find a great place that costs less than $100K in this area. Still, it’s not easy to save that much money.
Here’s the good news: You don’t need the full amount or even a 20 percent down payment. Many mortgage or assistance programs can help you qualify to buy a house. This guide will explore available home loan options to help you find the right one, making your dream home a reality.
Home Loan Types
A mortgage is a loan you take out to buy a house. As the borrower, you’re committing to repay the loan amount to the lender, with interest, over a set period.
There are several different types of mortgage loans available to first-time home buyers. These loan types have varying down payments, interest rates, and credit requirements.
1. Conventional mortgage
A conventional mortgage is available to anyone with a good credit score, proof of stable employment, and the ability to make a down payment. Note that a down payment of less than 20 percent may incur private mortgage insurance.
Two types of conventional home loans exist:
- Conforming loan: This type of loan “conforms” to the Federal Housing Finance Agency’s (FHFA) standards. These standards provide guidelines for credit, loan size, and debt. Fannie Mae and Freddie Mac purchase these loans. These government-sponsored enterprises (GSEs) buy loans from lenders. As a result, lenders have more money to extend mortgages to borrowers.
- Non-conforming loan: This loan type does not meet the FHFA standards. One example of such a loan is a jumbo loan. It is a loan that exceeds the loan limit of the FHFA. GSEs cannot purchase non-conforming loans.
2. Government-backed loan
The U.S. government is not a lender. However, they can attempt to make homeownership more accessible.
There are three types of government-backed mortgage loans:
- FHA loan: The Federal Housing Administration (FHA) issues an FHA loan. Individuals who can apply for FHA loans have credit scores ranging from 580 (with a 3.5 percent down payment) to 500 (with a 10 percent down payment). This loan type requires the borrower to pay an insurance premium to protect the lender should the borrower default.
- VA loan: The loan is available to members of the U.S. military (whether a veteran, on active duty, Reservists, or a member of the National Guard). It is also available to their surviving spouses. There’s no insurance premium or minimum credit score requirement, but a funding fee of 1.23 to 3.3 percent will apply when closing the loan.
- USDA loan: The Department of Agriculture (USDA) guarantees these loans. It helps mid- to low-income earners buy homes in rural, eligible areas.
3. Fixed-rate mortgage
This option is great for first-time buyers since the interest rate remains the same throughout the loan repayment period. That means monthly payments will always be the same. The loan term usually varies between 15 and 30 years, depending on the lender.
4. Adjustable-rate mortgage
This mortgage differs from a fixed-rate mortgage, as interest rates can change over time.
Usually, there is a lower interest rate for a fixed period when you take out the loan. Subsequently, the rate may increase or decrease for the remainder of the loan period, depending on economic conditions.
5. First-time assistance programs
Several sponsored programs aim to assist first-time home buyers. These programs, provided by state or local governments, are based on the financial need of the borrower.
These programs don’t offer loans but can assist with down payments, saving first-time buyers money on closing costs.
Getting the Right Home Loan for You
There is no one “best” mortgage. The right loan depends on your financial situation. That entails factoring in your credit score, employment status, current income, and the home you wish to buy.
Lenders are often willing to work with borrowers to assess their options and find the best loan products. Sometimes, the application requirements can be complex. Lenders can help you navigate through them.
In some cases, you might first be asked by a lender or broker to improve certain aspects of your finances. This move will help you get the mortgage you desire to buy your first home.
You need to find a home loan that suits your current financial situation and one you can repay without going into further debt.
Fortunately, navigating the world of home loans as a first-time buyer doesn’t have to be overwhelming. Explore your options, make sure you understand your finances and get expert advice.