Mortgages

Buying your first home can be an exciting journey, but it's important to understand the key terms and concepts involved.

​

1. Who Qualifies as a First-Time Homebuyer?

• Generally, a first-time homebuyer is someone buying their principal residence for the first time. However, the definition can be broader. For example, some programs consider you a first-time buyer if you haven't owned a home in the last three years. Other circumstances that might qualify you include being a single parent or displaced homemaker who previously owned a home with a spouse, or if you only owned property that didn't comply with building codes.​

​

2. Understand Your Mortgage Rate

• Think of a mortgage rate as the cost of borrowing money to buy your home. It's the percentage a lender charges you on the principal amount of your mortgage loan. Here's how it works:

  • You're borrowing money: When you get a mortgage, you're essentially borrowing a large sum of money from a bank or lender to purchase a house.

  • The interest rate is the "price tag" for using that money: The mortgage rate determines how much you'll pay in interest on that borrowed amount over the life of your loan. A lower interest rate means you'll pay less in interest overall and have lower monthly payments.

  • It affects your monthly payments: The interest rate is a significant factor in calculating your monthly mortgage payment. A higher rate means higher monthly payments, while a lower rate makes homeownership more affordable.

  • Depending on the type of mortgage can have an effect on your interest rate. So continue reading to learn about the different mortgages available.

​​

3. Types of Mortgages:​​

• Conventional Loan: These are mortgages offered by private banks and lenders, without government backing. Conventional loans require meeting stricter credit and income requirements compared to government-backed loans.

• Requirements: Minimum credit score: Generally 620, though some lenders may require a higher score. Typically a down payment minimum of 3% to 5% for qualifying loans, but 20% is required to avoid private mortgage insurance (PMI). Debt-to-income (DTI) ratio: Lenders generally prefer a DTI ratio below 36%, although it can be up to 45% to 50% in certain circumstances.

  • Pros: Lower overall borrowing cost compared to other loan types after fees and interest. Down payment can be as low as 3% to 5% for qualifying loans.

  • Cons: Stricter credit requirements. Private mortgage insurance (PMI) required for down payments less than 20%, which can be canceled once 20% equity is reached.

• Government Backed Loans: These loans are insured or guaranteed by government agencies, making them more accessible to borrowers with lower credit scores or limited down payments.

  • FHA Loan: Often favored by first time home buyers. Insured by the Federal Housing Administration, suitable for borrowers with lower credit scores. You may qualify with a credit score as low as 580 with a 3.5% down payment, or a score as low as 500 with a 10% down payment. However, you'll need to pay mortgage insurance premiums (MIP).

  • VA Loan: Guaranteed by the Department of Veterans Affairs, for eligible members of the U.S. military, veterans, and surviving spouses. They typically require no down payment.

  • USDA Loan: Guaranteed by the United States Department of Agriculture, for borrowers in eligible rural and some suburban areas. They offer zero down payment with low interest rates. Income limits apply.

• Fixed-Rate Mortgage: Your interest rate remains the same for the entire loan term, providing stable monthly payments.

  • Pros: Predictable monthly payments, making budgeting easier. Ideal for those planning to stay in the home long-term.

  • Cons: May have higher initial interest rates compared to adjustable-rate mortgages. Borrowers are locked into the initial rate, even if interest rates fall.

• Adjustable-Rate Mortgage (ARM): The interest rate is fixed for an initial period (e.g., 5, 7, or 10 years), and then adjusts at predetermined intervals based on a market index.

  • Pros: Often offer lower interest rates during the initial fixed period. Beneficial if you plan to move or refinance before the rate adjusts.

  • Cons: Monthly payments can increase when the rate adjusts. Less predictable than fixed-rate mortgages.​​​

​

​