Financing Options For Your First Home Purchase

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Financing Options For Your First Home Purchase

Advertiser Disclaimer - Some links on this page may pay us advertising fees.

The homeownership rate among Millennials is around 8 percentage points lower than it was for Baby Boomers and Generation Xers when they were in the same age group, according to  research conducted by the Urban Institute.

There's a whole host of reasons why this is the case, but the main one is that many Millennials simply cannot afford it.

The rising home values continue to act as a major deterrent for Millennials interested in owning a home especially with many of them still struggling to finish  paying off their student loans.

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But, since Millennials are in the 24-40 age group where many of them have young families or are at least thinking about starting families, now is the time that they must start exploring options of how to buy their first home.

This is where financing comes in. There are various financing options available today that enable Millennials without a lot of money saved up to have a crack at homeownership.

But, with so many options available with different implications, it is vital to do thorough research to know what you're getting yourself into before committing.

Key Considerations Before You Seek Financing

Buying a home is the largest financial decision most people make in their lives, so it is vital for you to seriously consider it before you seek financing. You need to think about what your long-term goals in life are and how buying a home fits in with them.

First of all, you must do a thorough audit of your finances to know what your limits are, starting with a look at your savings. Do not even consider buying a home if you don't have an emergency savings account with at least three months of living expenses.

When buying a home, there are considerable upfront costs such as the down-payment and closing costs, and you'll need some savings put away not only to cover those costs but also other emergency costs that may arise. Most lenders will require you to have such savings.

Another key thing to consider when doing your financial audit is your credit score. Different lenders have different credit score requirements, but the general rule is the better your credit score is the higher the number of financing options you have, and the lower your rate is likely to be.

If your credit score is not good, you can look into various ways of improving it such as working with a credit repair company. Don't forget to review your spending every month to know how much you can allocate to mortgage payments.

The outcome of your financial audit will tell you whether you're ready to own your first home or if you need to do more to be ready. 

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Accommodating Your Needs

After reviewing your finances, the next consideration to make is which type of home will suit your needs best. There are various options when buying your first residential property; a traditional single-family home, a townhouse, a condo, a duplex, or a multifamily building with up to four units.

Depending on your goals, each of these options will have its pros and cons, so you must decide the option that helps you achieve those goals. You must also think about which specific features you want to have in your ideal home.

While it's good to keep this list flexible, you deserve a home that fits your needs as closely as possible. Think about big picture details like the neighborhood and size of the home as well as smaller details like the kitchen or bathroom layout. 

Another key consideration is how much mortgage you actually qualify for. Before you start calling realtors to help you find a home, you must have an idea of how much lenders are willing to give you. You may think that you can afford a $500,000 home, but lenders may tell you you're only good for $300,000 based on factors like your monthly income, how much debt you have, and how long you've been working.

However, keep in mind that sometimes financial institutions may offer you a loan for more house than you can afford. Just because a financial institution says it will lend you $500,000 doesn't mean that you should borrow that much. A lot of first time home buyers make this mistake and end up in a financial hole that they can't climb out of for decades due to mortgage payments being too costly.

Choosing A Loan Type

When  shopping for your first home, you'll be faced with a dizzying array of mortgage types to choose from, and not every one of them is right for you.

Mortgage providers vary based on many factors including where the home is located, how long you plan to stay there, your credit score, and your budget.

Make sure you have a good understanding of the different types of mortgages since choosing the right one could end up saving you a bundle on the down payment, fees, and interest.

Conventional/Non-Government Insured Mortgages

The most common type of mortgage you can get is a conventional mortgage. Conventional mortgages are those that are not backed by the government and can come in 10, 15, 20, and 30-year terms. A conventional mortgage is a great option if you have good credit, stable employment and income history, and the ability to make at least a 3 percent down-payment.

There are two main types of conventional mortgages: Fixed-rate and adjustable-rate mortgages.  

Fixed-rate mortgages are those that have the same interest rate throughout the life of the mortgage, which is usually 25 or 30 years. A fixed-rate mortgage is ideal if you plan to live in your home for a long time and you want to be sure of the amount you pay every month for the life of the loan. 30 years is the longest term you can get for a fixed loan, and it's the best option if you need some wiggle room to pay for other financial needs after paying monthly mortgage payments.

But, if you're looking to build equity in your home more quickly and you have the discipline and resources to pay your loan off faster, you can opt for a 15-year fixed mortgage and shave off both time and interest payments. 

Adjustable-rate mortgages are those that have a fixed rate for an initial period, usually three to 10 years, after which the rate fluctuates based on market conditions until the end of the loan period. The reason why people opt for adjustable-rate mortgages is that their interest rates are usually lower than fixed-rate mortgages during the early years of repayment.

However, they tend to be risky since the rate can shoot up making it impossible for homeowners to cover the monthly mortgage payments. Some adjustable-rate mortgages come with interest rate caps specifying that your mortgage payments cannot exceed a certain amount. If that's the case, do the math to ensure that you can handle any repayment amount increases up to that point.

An adjustable-rate mortgage is a solid option if you don't plan to stay in the home beyond the fixed-rate period or if you're planning to refinance before the mortgage resets.

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Government Insured Mortgages

Government-insured mortgages are special types of mortgages that are backed by the government, meaning that the government guarantees repayment to the lender should you default on mortgage payments. As a result, the qualifying criteria for government-insured mortgages is usually more lenient compared to conventional mortgages.

However, you must meet certain special conditions to qualify for these types of mortgages. For instance, if you don't have a large down-payment saved up or your credit is not strong enough to qualify for a conventional mortgage, your may qualify for an FHA loan.

FHA loans are backed by the Federal Housing Administration and can be administered by various FHA-approved lenders including local banks, online lenders, and credit unions. FHA loans typically come in 15 and 30-year fixed-rate terms and require only a 3.5 percent down payment.

You need a 580 credit score to qualify for an FHA loan but you can still qualify with a 500 score if you put down at least a 10 percent down-payment. If your down payment is less than 20 percent, you'll be required to have private mortgage insurance to protect the lender in case you default on the loan. 

Other  types of government-backed mortgages you may qualify for include USDA and VA loans. USDA loans are guaranteed by the US Department of Agriculture and are offered to homeowners who meet certain requirements, the main one being that the home must be a primary residence located in a rural area. Fortunately, the USDA's definition of a rural area is generous and makes approximately 97 percent of the country's land eligible for a loan.

The USDA also sets income limits to ensure that only those in the low to moderate-income group can qualify. USDA loans do not require a down payment and have discounted interest rates.

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On the other hand, VA loans are backed by Veterans Affairs and are meant for veterans who've served six years in the reserves, 180 days consecutively during peacetime, or 90 days during wartime. In some cases, the spouse of a deceased veteran may also qualify. VA loans have no down-payment or mortgage insurance requirements and are typically cheaper than conventional loans. 

Buying a home is probably the largest financial transaction you'll ever make in your life, and there's no problem if you need a little help to make it happen. As you shop around for your first home, explore various loan options and their implications to find the ones that best fit your financial situation.

To put you in a better position to secure the home of your dreams, pursue financing long before you get serious about looking for a home and making an offer.

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