For someone looking to acquire their first home. It can be exhausting trying to learn the many facets of the real estate market; the cost of buying a house, the cost of selling a house, property tax laws, market fluctuations, etc. It can all seem daunting and unwieldy.
Fortunately, not everyone really needs to know the ins and outs of real estate. If all you’re worried about at the moment is getting a house. All those other factors can take a backseat, at least for the time being. Taking things one step at a time is key to managing your expectations and maintaining your sanity.
So, then, what is the first step towards homeownership? Well, for many, it’s applying for a loan. Believe it or not, getting approved is a surprisingly fast and easy process. You’ll have to provide your last two years of tax returns, W2 forms and paycheck stubs, two to three months of bank statements, and a credit report.
With a decent credit score, you shouldn’t have any trouble finding a lender. There are numerous types of loans to consider, each with its own advantages and disadvantages. Below are some of the most popular for first-time buyers:
A conventional loan is a mortgage not backed by a government agency. But instead issued by a private lender (either a commercial bank or a thrift bank). Who then sells that mortgage to either the Federal National Mortgage Association. (aka Fannie Mae) or the Federal Home Loan Mortgage Corporation (AKA Freddie Mac).
A conventional loan typically requires a credit score between 620 and 640 and a down payment between 5% and 20%. However, conventional loan benefits from having higher lending limits than other loan types.
First-time buyers, a Federal Housing Administration loan is often the most attractive option for both lenders and borrowers. For borrowers, FHA loans are good because they require a minimum credit score of just 580 and a small 3.5% down payment (plus 0.085% mortgage insurance).
For lenders, FHA loans are good because should a borrower default, the lender is reimbursed by the government’s Department of Housing and Urban Development.
A VA home loan is a mortgage that is guaranteed by the U.S. Department of Veterans Affairs. These are loans issued by private lenders who have been approved by the VA. They require no down payment or mortgage insurance whatsoever.
To be eligible for a VA loan, the borrower or borrower’s spouse must have been a member of the U.S. Military, Navy, Air Force, Coast Guard, National Guard, or Public Health Service and must have completed either 90 days of consecutive active duty service or 180+ days of active duty service during peacetime.
One type of loan that is sometimes overlooked is one offered by the U.S. Department of Agriculture. Like FHA and VA loans, this type of loan is issued by a private lender but with a USDA guarantee ensuring payment in the event of borrower default.
A USDA loan requires no down payment, but it does require mortgage insurance at a rate of 0.30% (lower than that required by an FHA loan). Though the purpose of a USDA loan is ostensibly to encourage “rural” development, approximately 97% of the United States is eligible, including areas right outside many major cities.