An estimated 93% of current homeowners say that owning a home is worth the challenges they faced during the homebuying process. Indeed, buying a house or apartment is not an easy thing to do, but is considered one of the most important dreams for the average American. For 71% of millennials, home ownership is part of the American dream.
One of the major challenges of purchasing property is to find the money to pay for it. Financing a home is a primary concern when buying a home whether using cash or applying for a mortgage.
Study Your Options
For first-time homebuyers, financing is a vital step in the purchase process. The multitude of options can be overwhelming, it will become a tough decision to choose the most appropriate one that will be advantageous to your situation. For example, you might be torn between an FHA loan vs VA loan.
Although the Federal Housing Administration (FHA) and Veterans Affairs (VA) loans are both government-issued, VA loans are offered to eligible veterans, surviving spouses, and military service personnel. FHA loans, on the other hand, are accessible to anyone who qualifies based on their lending requirements.
In addition, VA loans do not have mortgage insurance requirements, but FHA loans have lifetime mortgage insurance. Hence, if you are a veteran, you will want to compare the advantages and benefits to ensure that you snag the lowest possible rate.
Another type of mortgage that you will consider is a conventional loan which is not guaranteed by the federal government. Unfortunately, these types of loans are fixed-rate mortgages and are quite difficult to qualify for. They require a bigger down payment, better than average credit scores, and private mortgage insurance. On the bright side, conventional loans will cost you less than those backed by the fed government.
What to Consider When Deciding on a Loan
On top of looking at the different types of loans that you might qualify for, it is critical that you examine the characteristics of each mortgage. The price of the loan is determined by the lender based on several factors such as creditworthiness, Fair Isaac Corporation (FICO), and credit score, and loan-to-value-ratio (LTV). Lenders will also look at the debt-service coverage ratio (DSCR) which defines your ability to pay back the loan.
The higher the ratio, the higher the probability of your ability to cover the cost of borrowing which means less risk for the lender. Thus, when negotiating for your loan, include any kind of qualifying income to get the best possible rate.
Another factor to consider is whether to go for a fixed-rate or floating or variable rate. Know that in the former, the rate is not going to change for the duration of the loan. A floating-rate mortgage, on the other hand, is meant to help first-time homebuyers by offering lower introductory rates during the first few years of the loan. The downside to this rate is that it is risky if your income does not grow proportionally with the increase in interest rate.
At the end of the day, if you have enough cash to put as a down payment for your property, do it so that you can negotiate better terms with lenders. If you’re considering a home mortgage for the first time, be sure how much you can actually afford and look for the corresponding financing.