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Mortgages for Beginners: A Guide

As mortgage rates hit record lows in 2020, the rate of first-time homebuyers rose to 35%. With the uncertainty of the coronavirus, many people were driven to find a home that suited their needs in an ever-changing world.

If you’re a first time buyer, however, the world of mortgages can seem like a completely different language.

Are you wondering what you need to know about getting your first mortgage? The first thing you will want to do is learn about the different types of loans that are available, along with the benefits and drawbacks of each.

Let’s take a look at what you need to know about getting a new mortgage as a home buyer.

Types of Loans

For first-time buyers, there are a number of different loan types available. It’s worth learning about the different options before applying because certain loans might be more beneficial to your needs than others.

Conventional Loans

Conventional loans are typically fixed-rate mortgages. Unlike other loans in this section, they are not guaranteed or insured by the federal government.

These are some of the hardest mortgage types to qualify for. This is because the requirements are stricter. They typically require a higher credit score, a bigger can payment, and lower debt to income ratios.

On top of that, conventional loans can also have private mortgage insurance requirements. However, conventional loans are typically less expensive in the long run than loans that are insured by the government.

In 2021, the maximum conforming loan limit for conventional mortgages is a little over $548,000. In high cost areas, however, this limit can be higher. If you are interested in receiving a loan for a larger amount of money than that you have to apply for a jumbo loan.

Jumbo loans typically come along with an interest rate that is slightly higher.

The terms of mortgages tend to be a bit different if you are purchasing rental property rather than a permanent residence. Follow this link to learn more about first time real estate investment.

FHA Loans

There are various mortgage loan programs that are available for Americans through the Federal Housing Administration. These are easier to qualify for than conventional loans and also require a lower down payment. For this reason, many first time buyers find FHA loans to be an attractive option.

The downside of FHA loans is that all borrowers are required to pay a mortgage insurance premium. This is rolled into their mortgage payments and exists in order to protect the titleholder or lender if the borrower ends up defaulting, passing away, or otherwise being unable to meet the obligation of the mortgage.

VA Loans

VA loans are guaranteed by the U.S. Department of Veterans Affairs. These loans are actually given by qualified lenders rather than the VA itself, but they guarantee the loan for veterans.

It is typically easier to qualify for VA loans than for conventional loans.

Before you apply for a loan, you have to contact the VA to request your eligibility. They will then issue a certificate of eligibility if you are accepted which you can then use in your loan application.

There are also additional local and state government and agency assistance programs available in various locations. These exist to help increase homeownership and investment in particular areas.

Equity and Income Requirements

The creditworthiness of the borrower is an important aspect of how home mortgage loan pricing is determined. Lenders will check your FICO score from the major credit bureaus in addition to calculating the debt-service coverage ratio and the loan-to-value ratio. This helps them to determine the interest rate they will offer you as well as the amount that they are willing to give you in the form of a loan.

The debt-service coverage ratio (DSCR) is a ratio that helps to determine your ability to pay for your mortgage payments. The loan-to-value ratio (LTV) is a way that lenders assess risk before giving out loans.

Private Mortgage Insurance (PMI)

The LTV is also how lenders determine whether you are required to purchase PMI (private mortgage insurance). This is a way that lenders insulate themselves from default.

While lenders can differ, most of them require that you pay PMI for any loan with more than 80% LTV.

Types of Interest Rates

There are both fixed-rate and variable-rate mortgages. Variable-rate mortgages are also referred to as floating-rate mortgages.

When you have a fixed-rate mortgage, your interest rate remains steady at the agreed-upon rate for the length of the loan. The benefit of this is that you won’t ever be surprised by how much your monthly loan costs. It also allows you to lock in a good interest rate if interest rates are low.

On the other hand, a variable-rate mortgage usually has a low introductory rate for the first few years before varying with current interest rates. The benefit of this is that people getting their first mortgage can qualify for a more expensive loan with the anticipation that their income will increase over time.

Variable-rate mortgages can be a risky option, however. This is because your loan’s terms will rise with interest rates if market interest rates rise. It can also be risky if your income doesn’t end up growing as much as you expect.

Knowledge Is Power When You’re a First Time Buyer

As a first time buyer, the whole world of the real estate market, financing, and lenders can seem overwhelming. Learning as much as you can about different types of mortgages and what it takes to qualify can help you understand what type of loan is within reach for you.

Did you find this article on getting a mortgage interesting? If so, be sure to check out the rest of our blog for more fascinating and informative content!

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