Financing Basics for First-Time Homebuyers
Most of the first-time homebuyers face a dilemma on how to finance their debut property acquisition. Some make avoidable mistakes, which end up costing them time and money.
If you are a first-time homebuyer, you should do a little bit of research to be aware of the workings of the property market. For instance, do you know that the location of your would-be property would earn you some benefits from your financier?
According to The Cool Roofing Company, the best residential roofing contractor in Atlanta, GA, the most important thing to note is that whatever financing option you go for, it must meet your investment needs and friendly to your pocket.
Loan types
You have a broad range of mortgage loans from which you can sign for the most favorable to your financial plans. Before you sign for one, however, you must carefully scrutinize the loan structure: interest rate, prior-charges, grace period, repayment period, etc. and the financial institution lending you.
Some of the mortgage loans available include:
Conventional loans
They are mortgage loans offered at fixed interest rates and are not insured or guaranteed by the federal government. Though much cheaper than guaranteed mortgages, they are harder to access. This is because you must meet a set of stringent requirement to qualify. These include, you must place a down payment, have a good credit score, and income to service it and meet certain costs such as insurance. They come in different structures and brand names, which you can get by consulting individual financiers.
Federal Housing Administration (FHA) loans
The Federal Housing Administration (FHA), which is a section of the US Department of Housing and Urban Development, offers mortgage loans with friendly terms. They are easier to access than conventional loans. They are ideal for you as a first-time home buyer since you will pay fewer upfront charges and their interest rates are as low as 3.5%. But the maximum amount you can borrow is limited by the federal government limits.
Veterans Affairs (VA) loans
The US Government’s Department of Veterans Affairs (VA) does not offer the loans but rather guarantees them. A select of qualified lenders offer the home loans to veterans and service people at favorable terms because of the government guarantee. They require no down payment, and in most cases, they are easier to qualify for than conventional loans. They have limits, and you must get an eligibility certificate from the VA before you can apply for a loan.
Sponsored programs
You also have the option of securing financing from anyone among the many state and local governments and agencies sponsored programs.
These programs seek to facilitate growth in investment in home ownership in specific regions.
Equity and income requirements
Your financiers will determine the interest rate of your mortgage by evaluating your creditworthiness. They will consult three major credit bureaus to check on your Fair Isaac Corporation (FICO) score. This will help them to calculate two official statistics, which they will apply to set the rate charged on your loan.
First, they will calculate your loan-to-value (LTV) by dividing the amount you are borrowing by the price of the home you are buying. The higher the ratio (LTV), the higher your interest rate will be on your mortgage. This is because you have a higher chance of failing to service your mortgage.
Secondly, they will calculate the debt service coverage ratio (DSCR), which is your ability to service your mortgage. They will divide your monthly net income by the mortgage costs. If your ratio (DSCR), is higher, the abler you will be to service the mortgage. This is why it is advisable to include either your sources of income, including a part-time job or business you have to leverage and negotiate a better mortgage deal.
Fixed vs. floating rate mortgages
You need to decide whether your mortgage loan will have a fixed- or floating-rate.
A fixed-rate mortgage: The rate will not change for the entire period of the loan. It allows you to know your monthly payment for the whole period.
A floating-rate mortgage: The rate can change – upwards or downwards – during the loan period. According to The Cool Roofing Company, a company in Atlanta, Georgia, they are ideal for first-time home buyers who expect a pay rise over the loan period.
