In the last two years, mortgage lenders have finally started to seriously ease lending restrictions for first time home buyers. After the last recession, it became very difficult to get a home mortgage unless you had 20% down and 740 credit.
Both the Bush and Obama Administration did a commendable job in keeping interest rates low for Americans looking to buy or refinance their home. However, in a matter of 10 years, we went from the highest to the lowest home ownership rates in over 50 years.
How does the Trump Administration reverse course and stimulate the housing sector starting making things more attractive first time home buyers?
We have seen there are many new mortgage choices available. But if you are a new home buyer, how do you know which is the best deal for you?
Below is a basic buyer’s guide to the first time home buyer mortgage products available as of 2017, and how to choose the best one for you.
The 30 year fixed rate mortgage constitutes the majority of the mortgage loans done in the United States. The rate is fixed for 30 years, and the monthly principal and interest payments do not change.
If you get a fixed rate mortgage, what you are getting is consistency and a guarantee: Your payment is not ever going to change in that 30 year period. This is a good choice for people who like less risk and want consistency.
The price for consistency is that you will pay a slightly higher rate. As of 2017, the rate for a 30 year mortgage for someone with 700 credit is about .75% higher than a comparable adjustable rate mortgage.
Even though the rate is higher, the fixed rate loan accounts for 90% of mortgage loans in the US since 2010.
The 30 year loan has become even more popular after the financial crash; many people with adjustable, five year loans ended up in foreclosure when their monthly payments went up 30% or more and the economy was bleeding jobs.
An adjustable rate mortgage can be a good choice for certain types of buyers. ARM loans typically have a five year or seven year fixed period, and then the rate can re-adjust. While most of these loans can only increase so much in interest at one time, it is possible for the rate to increase by four or five points in some cases. This is enough of a payment shock that it could make the loan unaffordable for many people.
But the ARM loan can be a good choice in some cases. Are you thinking about moving in three years? You may then decide to opt for a lower payment before the home sells.
Do you anticipate that you will be making more money in three or four years when you get your master’s degree? Or will your child graduate from college and you will have fewer financial obligations? Then an ARM could work well for you.
If you are considering an ARM loan, look for a loan that cannot increase the rate by more than two points the first time the loan resets.
Another viable option is to get a 15 year mortgage instead of a 30 year. The big plus here is that you will pay a fraction of the interest that you pay on a 30 year loan. Naturally, your payment will be at least 25% higher, but you will save often hundreds of thousands in interest.
A 15 year mortgage is a more serious financial commitment. You really need to be sure that you can handle the higher payment.
Another factor – you have to be able to qualify in underwriting for the 15 year payment. Not everyone will be able to do this.
These are not as common as a decade ago. The initial payment period of up to 10 years is only interest payments, so the initial payment is low. But when the rate resets, you can get a payment shock.
Many people who had interest only loans in the market crash lost their home. Today, interest only loans are usually for more wealthy buyers, such as those who get compensation through year-end bonuses.
You also need to consider the exact type of lender that you are going to select. The most common are FHA and conventional lenders.
FHA lenders have a guarantee from the FHA that the federal government will pay back the lender if you fail to make payments.
This guarantee allows the lender to offer you low interest rates and low down payments. You may be able to get into a loan with an interest rate under conventional rates. Also, you may be able to put down just 3.5%, and have a credit score in the low 600’s to qualify. If you have average to poor credit, an FHA 1st time home loan could be the best for first time home buyers.
Conventional lenders typically have higher down payment requirements, although you can find conventional loans with a 5% down payment. You will also need to have a better credit score to qualify.
If you have credit above 700, many experts advise looking towards conventional loans. Many new buyers are attracted to the no-money down mortgage loans, but make sure you factor in the monthly mortgage insurance payment, unless you are getting VA financing.
Something to Consider before Buying Your First Home
Today there are more mortgage loans available, and the lending criteria is less strict. You need to look closely at your finances and your needs to determine which kind of loan is the best choice for you. For most Americans, the 30 year fixed loan is the most popular, and FHA first time home loans allow many millions more Americans to become homeowners.
How to Get a First Time Home Buyer Loan with Low Credit Scores
Your credit score is one of the most important factors that lenders consider when you apply for a first-time home mortgage. If you find that you are on the lower end of the credit scale, do not worry too much. It is still possible to get a first-time home buyer loan.
And 2017 is a great time to buy your first home! Rents are going up, home values are up, and mortgage rates are going down. If you are a first time home buyer with bad credit, do not let a low credit score dissuade you from applying from a mortgage, as there are several programs available if you speak with right lenders.
Know the Score You Need for 1st Time Home Buyer Programs
Your credit score with the three major credit bureaus will give you an idea of how likely you are to be approved for a loan, and what your rate will be. Generally, the higher your score, the more home loan options you have.
For a conventional loan, you will want to have a credit score of 660 or higher. This score will give you the greatest number of loan options as a first-time home buyer.
But there are other options for you if your score is not that high. The most popular first time home buyer program for people with low credit scores is the FHA loan. These loans are backed by the Federal Housing Administration. This means that FHA mortgage lenders are able to provide you with a lower rate than you could otherwise expect.
For a bad credit first time home-buyer loan, you only need to have a credit score of 580 to get a down payment of 3.5%.
As always, the higher your credit score, the better. But don’t think that you have to have a high score to get a home loan. Programs for first time home buyers with bad credit are often insured insured by the Federal Housing Administration and widely considered to be a great option that you should ask about if you have credit below 660.
Make Payments on Time
For loan programs such as FHA, your credit score is not as critical as you think. What IS important is that you have a steady payment history for your debt obligations for at least the past year.
FHA and other lenders want to see that you are on your feet financially and are making payments on time.
We recommend that you have a good payment history going back at least a year, and two is better.
Put More Money Down to Qualify for First Time Home Buyer Loans with Poor Credit
If your credit is really poor, you will have a better chance of approval if you put more money down. FHA requires a 580 score for a 3.5% down payment. If you are lower than that, you can still get approved if you put down 10%.
So, save up more money for your down payment and your credit score can be lower.
Don’t Be Afraid to Wait
It is true that 2017 is a great time to get a mortgage. Rates are dropping and home prices are appreciating. But if your score is too low, you certainly should consider continuing to rent and increase your credit score.
Make all of your debt payments on time, and you can pay a credit repair company to help to increase your score. In a year’s time, you may be ready to buy your first home.
Talk to mortgage lenders about first time home buyer programs. See Rent to Own Home Loans.
Take a Higher Rate on a Bad Credit First Time Home Buyer Loan
If your credit score is too low to get the best rates, there is nothing wrong with taking a higher interest rate. You may have to pay that higher rate for a year or two until your credit is improved. Then, once your score is higher, you can refinance and get a lower interest rate.
Many mortgage experts expect the interest rates to stay quite low for the foreseeable future. Even though the Fed has raised rates three times in the last 18 months, first time home buyer mortgage rates have not changed a great deal.
Talk to Your Mortgage Lender
If you have a lower score than you want, be up front with your lender about it. Some people have a low score because they had a negative credit event in the last few years. Perhaps you had a bankruptcy or foreclosure.
The good news is that negative event does not necessarily prevent you from getting a home loan. You just need to show the lender that you have a good enough income to pay your bills now. You also should show that you have been making on time debt payments for the last 12 months to 24 months.
Interest rates are low. Home prices are higher. And lending is much loose than it was five or seven years ago. Even if you have a credit score as low as the high 500s, you still may be able to buy a home. Sure, you might have to pay a higher rate or put more money down, but you still are usually better off than paying rent.