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 approved 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 600s to qualify. If you have average to poor credit, an FHA 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.
The Bottom Line
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.