If you are a first time home buyer, it may be quite overwhelming to understand the basics financing options right away. But taking time for some research on your own and thinking about property financing options will help you save a lot of time and money later. Understanding the property market and knowing where you can get incentives will provide many financial perks to you. Make sure you have the knowledge of your finances so that you can get the mortgage that suits your specific needs best. “Sitting down and creating a budget can be a daunting task but will help put your money into perspective. Very helpful.” (Claim Quote)
Here are some financing factors to consider:
- Loan Types
- Income and equity requirements
- Private Mortgage insurance
- Floating vs fixed mortgages
Loan Types
Conventional loans are not guaranteed or insured by the federal government. Commonly, they are fixed-rate mortgages. Higher credit score, big down payment, debt ratio to lower-income, and private mortgage insurance make them quite difficult to qualify for. Also, conventional mortgages are less expensive as compared to guaranteed mortgages. There are two types of loan types- FHA Loans and VA Loans.
Income and Equity Requirements
The price of the home mortgage loan is determined by the borrower in two types, both based on the creditworthiness of the lender. Apart from checking your credit score, borrowers need to calculate the LTV (loan-to-value ratio) and DSCR (debt-service coverage ratio). The higher the LTV, the higher the risk of default and that is the reason borrowers will charge more.
Private Mortgage Insurance
With the help of LTV, it is easy to determine if you need to purchase PMI (private mortgage insurance). It helps the borrower from default by shifting the loan risk to the mortgage insurer. In most cases, lenders need PMI for any loan with the LTV which is more than 80%.
Floating vs. Fixed Mortgages
In a fixed-rate mortgage, the cost does not change for the whole loan period. And for a floating-rate mortgage, such as an adjustable-rate mortgage (ARM) and interest-only mortgage, is designed for first-time homebuyers who expect their income to rise over the loan period. “Knowing the difference between mortgages can really help solidify your final decision when buying a house. Very informative” (Claim Quote)
