Beginner’s Guide to Homebuyer Loans: Unique Programs and Qualification Tips

Homebuyer Loans: When people want to buy their first home, they often need to get something called a mortgage, which is like a loan to help pay for the house. There are different ways to get this money, like regular loans or special loans from the government for certain people, like veterans or first-time buyers. Knowing how these loans work can help you choose the best one for you, find a good bank or lender, and save you time and money. Here’s what you should learn about it

Key Takeaways

• You will have to decide things like whether you want a fixed interest rate (where the payment stays the same) or an adjustable rate (where the payment can change)
• how long you want the loan to last, and how much money you can pay upfront for the house.
• Depending on your situation, you might be able to get special loans from the government, like an FHA loan or a VA loan. These can help people buy homes.
• If it’s your first time buying a home, there are also special programs that might let you buy a house for less money or with little to no money down.

These steps will help you buy your first home!

To get a mortgage, which is money to help buy a house, you have to show that you can pay it back. Different lenders have different rules, but usually, you need to show that you earn enough money each month to make the payments. You also need to have some money saved up for a down payment, which is like a first payment on the house. Lastly, you need to have a good credit score, which is a number that shows how good you are at paying back money you’ve borrowed before.

To be allowed to get certain types of loans for buying your first home, you have to meet the rules for what a first-time homebuyer is. And guess what? That’s more flexible than you might think! You don’t have to be super young, like in your 20s, to be called a first-time buyer.

According to the U.S. Department of Housing and Urban Development, a first-time homebuyer is someone who meets one of the following criteria:

Have not owned a primary residence for three years; Are a single parent who owned property exclusively with their ex-spouse during their marriage; Are a homeless housewife who has owned property exclusively with their spouse; Have owned only a dwelling that is not permanently attached to a foundation; Are an individual who has owned only property that does not comply with building codes

• Here’s a simple way to think about it: When people want to buy a house but don’t have all the money right away, they can get something called a home loan, or mortgage.
• There are different types of these loans, kind of like how there are different flavors of ice cream! Some loans might have a fixed payment every month, while others might change. Each type helps people buy homes in their own special way.

Common Types of Mortgages

Conventional Loans

Conventional loans are types of home loans that the government doesn’t help with. Because of this, it can be a little harder to get one. You usually need to save up more money for the first payment, have a better credit score, and not owe too much money compared to what you earn. But if you can get a conventional loan, it might end up being cheaper than a loan that the government helps with.

Conventional loans are like two types of games: one is called “conforming” and the other is called “nonconforming.” Conforming loans follow the rules set by some big helpers named Fannie Mae and Freddie Mac, who make sure everything is fair and safe.

They often get money from banks or lenders and then put those loans together in a group. After that, they sell that group to other people who want to invest.

In 2024, the most money you can borrow for a regular home loan is $766,550. But if you live in a really expensive place, you might be able to borrow even more.

When someone borrows a lot of money for a house, and it’s more than a certain amount, it’s called a jumbo loan. These loans often have a higher cost to borrow because they are riskier for the bank. This makes them less appealing to other investors who might want to buy these loans.

For nonconforming loans, the lending institution underwriting the loan, usually a portfolio lender, sets its own guidelines.2 Due to regulations, nonconforming loans cannot be sold on the secondary market.

Federal Housing Administration (FHA) Loans

The Federal Housing Administration (FHA) is a part of the U.S. government that helps people buy homes by offering special loan programs. An FHA loan is a type of loan that needs less money upfront to start, making it easier for people to get compared to regular loans. The FHA doesn’t give out the money for the loans directly; instead, it helps private banks and lenders by promising to pay them back if the borrower can’t. This makes the lenders feel safer when they give out loans.

FHA loans are a great option for people buying their first home. They are easier to get because you don’t need perfect credit, and you can pay just a little bit of money upfront—sometimes only 3.5% or 10% of the home’s price!

Loans have certain rules about how much money you can borrow. In 2024, if you want to buy a house for one family, you can borrow between $498,257 and $1,149,825. The exact amount you can borrow depends on how much houses cost where you live.

The U.S. Department of Housing and Urban Development tells us how much money people can borrow to buy a house in 2024.

U.S. Department of Veterans Affairs (VA) Loans

The U.S. Department of Veterans Affairs, or VA, helps veterans and people in the military get loans to buy homes. They don’t give the loans themselves, but they promise to help pay them back if needed. Because of this promise, banks are more willing to give these loans to veterans, often letting them buy a house without needing to save up a lot of money first.

Getting a VA loan is usually simpler than getting a regular loan. The money you can borrow with a VA loan is often the same as what you can borrow with a regular loan. Before you can ask for a loan, you need to get a special paper called a certificate of eligibility from the VA, which is the group that helps veterans.

Some states and local governments have special programs to help people buy homes. These programs are meant to make it easier for more people to own their own houses.

How Lenders Decide What to Charge You

When someone wants to borrow money, the people who lend the money look at different things to decide how much they can borrow and how they need to pay it back. One of the most important things they check is how good you are at paying back money in the past. They will look at your credit reports and see your credit score to help them make their decision.

When someone wants to buy a house and needs to borrow money, the bank will look at how much money they want to borrow compared to how much the house is worth. This is called the loan-to-value (LTV) ratio. To find the LTV, they take the amount of money being borrowed and divide it by the house’s price. If the person puts more money down at the start (called a down payment), the bank thinks they are less likely to not pay back the loan. If the LTV is high, it means there’s more risk for the bank, so they might charge more money for the loan.

When you ask for money to buy a house, it’s important to tell them all the money you make, even from little jobs or businesses you do on the side. Sometimes, having extra money can help you get the loan you want or get a better deal. You can also use a special tool called a mortgage calculator to see how different loan amounts change how much you have to pay every month.

Private Mortgage Insurance (PMI)

If you’re buying a house and don’t have enough money to pay 20% of the price upfront, the bank might ask you to buy something called private mortgage insurance, or PMI. This insurance helps protect the bank in case you can’t pay back the money you borrowed. The cost of this insurance can be different depending on how much money you borrowed and what kind of loan you have.

When you own a big part of your house, like 78%, the bank should stop making you pay for extra insurance called PMI. If they don’t stop it by themselves, you can ask them to remove it.

Fixed-Rate Mortgages vs. Variable-Rate Mortgages

When you borrow money to buy a house, you can choose between two types of loans: a fixed-rate mortgage and an adjustable-rate mortgage. With a fixed-rate mortgage, the interest rate stays the same for the whole time you are paying it back. This is nice because you always know how much you need to pay each month, and if the interest rates are low when you get the loan, you can keep that good rate for a long time.

An adjustable-rate mortgage (ARM) is a type of loan that can change over time, which makes it a bit harder to guess how much you’ll pay later. At first, it usually starts with a lower payment, so it can feel easier to manage your money in the beginning. This lower payment might even help you borrow more money than if you had a loan with a fixed payment that stays the same.

Sometimes, picking this choice can be a little dangerous because if the price goes up a lot after the special deal ends, you might not have enough money to pay what you owe each month. But don’t worry! These loans usually have limits on how much and how quickly the prices can go up.

When the allowance changes, it’s based on something called an “index,” which is like a scorecard that shows how money is doing in the world. The person who gives you the allowance also adds a little extra on top of that score. So, every time it changes, it’s a mix of the score and a bit more that they decide to add.