There’s nothing more exciting than searching for and closing on your first home. Not only is this a new experience, but it’s sure to change your life for the better in many ways.
However, before you begin the home search, there are financial-related questions to answer.
One of the most important early steps is getting pre-qualified for a mortgage. This shows you how much money you can afford to borrow, while also showing sellers that you’re a serious buyer.
As a first-time home buyer, it’s good practice to learn about the different types of loans. And with that, you’ll soon realize that a conventional loan should be at the top of your list.
What is a conventional loan?
A conventional loan is a mortgage that is not backed by a government agency such as the Federal Housing Administration (FHA), United States Department of Veterans Affairs (VA), or United States Department of Veterans Affairs (USDA).
In most cases, conventional loans have stricter credit requirements than government-backed loans.
What are the benefits of a conventional loan for a first-time buyer?
Understanding the benefits of a conventional loan will allow you to make an informed and confident decision as a first-time home buyer. Some of the top benefits include the following.
Small down payment
Depending on the lender, you may qualify for a conventional loan with as little as three percent down. This will, however, depend on your own financial status.
Plenty of lenders to choose from
Most lenders offer conventional loans, which makes it easier to quickly and efficiently compare several options.
Many types of conventional loans
For example, 10, 15, and 30-year fixed-rate mortgages are available. There are also several types of adjustable rate loans to consider.
The more you learn about the benefits of conventional loans, the easier it becomes to decide if it’s right for you.
What are the requirements of a conventional loan?
The requirements of a conventional loan will vary by lender, but some hold true across the board.
Down payment requirements vary by lender, the type of property, and your financial circumstances. First-time home buyers can sometimes secure a conventional mortgage with a down payment as low as three percent.
Use a mortgage calculator to see how a down payment of varying amounts will impact your monthly payment.
Generally, the more money you put down the more affordable your monthly payment will be. It also increases your equity in the home from day one.
Private mortgage insurance
If you put down less than 20 percent on a conventional loan, you’re required to carry private mortgage insurance (PMI). This protects the lender if you default on the loan.
PMI won’t remain part of your loan forever. Once you reach 20 percent equity in your home, you can request your lender to remove the payment.
Your lender will check both your credit history and credit score.
Again, lenders will have different requirements but generally, a minimum score of 620 is required to qualify for a conventional loan.
If you have concerns about your credit score, get a copy of your credit report and work to improve your score in the months leading up to applying for a mortgage.
This ratio shows how much of your monthly income goes toward debt payments. Calculate your debt-to-income ratio (DTI) by adding up the minimum monthly payments of all your debts and dividing it by your gross monthly income.
The magic number to qualify for a conventional loan is typically lower than 50 percent.
How do I know which loan is best for my first mortgage?
Every first-time home buyer has questions and concerns regarding the type of mortgage they should apply for.
Set yourself up for success upfront. If you refinance down the road, you want it to be your choice and not a last resort to lower your payment.
There’s no right or wrong way to know which loan is best when buying your first home. But there are some steps you can take to help.
Make a list of your options
This is always the first step. You can’t make a confident decision until you know what’s available to you. Are you interested in a fixed-rate mortgage? What term? Does it make sense to consider an adjustable rate loan?
You can do this with lenders, as well. Shop around for the one that will offer you the best rates and terms.
Compare the pros and cons
There are pros and cons associated with each type of mortgage. Once you have a list of loan options, you can then assign pros and cons to each type. For example, an FHA loan doesn’t require PMI, but it does have its own upfront mortgage insurance payment as well as a monthly fee.
You’ve narrowed your options and have a good understanding of what loan is best and how you want to proceed. Now, apply for pre-qualification through your preferred lender. This tells you how much money you can borrow, which will guide your search.
Pre-qualification is different from pre-approval, which you should also complete. Pre-qualification will give you an idea of how much you can afford when you’re house hunting. But pre-approval is a more involved process and gives you documentation to show sellers.
There may be other steps on your journey, and that’s okay. At the very least, these will point you in the right direction.
AAA Banking is here to help
You need as much help as you can get when buying your first home. And not just any help.
Get the assistance of a qualified, experienced, and knowledgeable loan officer.
At AAA Banking, we’re in the business of helping first-time buyers secure loans that fits their lifestyle and finances.
Contact us online or via phone at (844) 897-2265 to connect with a loan officer. From there, you’re in good hands until the day you close on your loan.
Photo by Ketut Subiyanto