Your first home purchase is a very big step. Not only does a home probably represent the largest purchase you’ll ever make, as a first time home buyer you’ll face a sea of options on how to finance your home. Selecting a house can be the easiest part of the process!
Why Are First Time Buyers Singled Out?
As with any other product or service, lenders want to get you as a customer for the first purchase. They know you may be likely to stay with them and even make them a first choice for other loan purchases (a car, boat, college).
The government also has an interest in seeing people in homes. It drives the economy. It’s the American Dream.
As a result, some of the options you may experience as a first time home buyer include:
- The government may offer first time buyers a tax credit
- You lender may pay all or part of your closing costs
- You may be able to buy a home with a small down payment
First Time Buyer Restrictions
Some lenders may place a dollar limit on the property you can purchase. You may also have to live in the home as a primary residence. You may also be limited to the type of loan you can select.
However, these may be a small price to pay to be able to get into a home for the first time.
Four First Time Buyer Home Loans
Following are the four most common types of loans available to the first time home buyer:
Conventional or “fixed rate” loans- If you’re seeking stability in your house note, this may be the best option. For a fixed amount of time (usually either 15 or 30 years), you can buy a home at a fixed interest rate. This means your house payment will stay the same for the life of the loan.
So, let’s say you get a loan at 5.25% for a 30 year loan and your principle and interest payment come to $748 per month. That would be your mortgage payment each month. It doesn’t matter if interest rates in general rise or fall, your 5.25% would stay the same.
Federal Housing Authority (FHA) Loans- These are fixed and adjustable rate loans. The difference is that they’re backed by the Federal Housing Authority (FHA) in the Department of Housing and Urban Development (HUD). This is good for the lender because the government insures the loan.
It also can be good for you. The lender may be willing to allow less down and even a less than perfect credit score for first time borrowers. You’ll want to see if you qualify for an FHA loan as a first time buyer.
Adjustable Rate Loans- These loans set a low initial fixed interest rate, usually for the first 3 to 5 years. This means the initial house payment is lower so that it can be easier to quality for a loan.
After that time period, the interest rate would turn into market value (maybe the prime rate + plus 4 points as an example).
Another variation of this is to have a low variable interest rate for the first 3 to 5 years. Then the rate turns fixed after that time period.
Veteran’s Administration (VA Loans) – Similar to FHA loans, these are backed by the Veteran’s Administration department in the federal government. VA loans are for qualifying veterans and military personnel. These can have very attractive features such as no down payment required. The current limit on these loans is $417,000.
As a first time home buyer, it’s easy to forget there are other fees involved with purchasing a home. For example, there are loan origination fees, appraisal costs, title transfer fees, transaction settlement fees, etc.
The lender is required to provide you with a good faith estimate of all of these costs plus your estimated house payment within three days after you complete the loan application.
More information on Home Loans for First Time Buyers
Excellent sources of government information on first time buyer home loans are:
The Department of Urban Housing Development: http://www.hud.com
The Federal Housing Authority Page: http://portal.hud.gov/portal/page?_pageid=73,1&_dad=portal&_schema=PORTAL
The Department of Veteran Affairs: http://www.homeloans.va.gov/