Buying your first time is a challenge and a half on its own, and 2024 didn’t help in that regard. Alongside the typical challenges homebuyers face, there is now a rise in mortgage rates and home prices. The statistics play a sad tune – first-time buyers made up just 26% of all homebuyers in 2023 which was a notable decline from 34% in 2022.
This drop in first-time home sales is mainly due to affordability becoming a real problem. The price for an average home is now five times the typical first-time buyer’s income. Mortgage rates are also rising, with around 7% in early 2024. Just for the sake of comparison, they were around 3% during the pandemic.
We are sure you know how many financial hurdles you need to jump over to get your first much better than we do, but still it really can be a demanding process. But, how long are you willing to wait? The housing climate might not improve for a very long time.
Mortgage seems to be the most straightforward way to go – but you shouldn’t try it without consideration. It is never a bad idea to be informed about your options, so let’s get into the mortgage options out there.
Mortgage Options for First-Time Home Buyers
Before we jump into examples and specific loans there is one thing of importance we would like to impress you, the reader.
It is absolutely vital that you ask all of your mortgage questions. Leave no stone unturned, bore your bank of choice to tears with questions if need be, and ask questions you’ve asked twice already – just make sure you are well-informed about what you’re getting yourself into.
Each type of mortgage comes with distinct benefits, requirements, and downsides, depending on your financial situation, future plans, and bank of choice. We’ll give a quick overview of six key options to get a home -Mortgage, ARMs, FHA loans, VA loans, USDA loans, and Conventional loans. Please bear in mind this will be just a quick overview and more research will be necessary for each one once you get to actually making that step.
Mortgage
A mortgage basically means that you agree on a fixed interest rate with your bank and it stays that way until the term of the loan ends. This will usually last 15 or 30 years, which means you can plan your life around a fixed interest rate.
- Benefits: Your fixed interest rate is FIXED. Come hell or high water, your interest rate cannot go up and you will be able to plan your life around it.
- Considerations: Basically, you’ll be paying more for the security they offer. A mortgage may be costly so if you don’t have the funds upfront your application may be denied.
Mortgage with adjustable rate (ARM)
Mortgages with adjustable rates offer a lower initial interest rate, but the rate changes after an initial fixed period. The adjustment might come after 5, 7, or 10 years – this depends on the bank.
Now comes the second part of the process, after the adjustment happens your interest rate changes year to year depending on market conditions – which means there’s really no telling how high it could end up being.
- Benefits: If you’re planning to move or refinance in a couple of years, ARMs might just do the trick. You may benefit from lower payments during the initial period.
- Considerations: The interest rate can increase dramatically after the adjustment. Frankly, this is rarely good news for your budget. The fact of the matter is you will be taking a risk with no way of predicting the outcome with interest rates. If that’s something you’re comfortable with, we don’t want to dissuade you.
FHA Loan
These loans are approved by the Federal Housing Administration (FHA) – basically you get government backing. The point of these loans is that they are aimed at helping people with lower credit scores and savings get into their first home
- Benefits: FHA loans come with lower down payments — around 3.5% of the purchase price of the property. Because of their aim for the low to mid-income, they are more forgiving when it comes to credit score requirements.
- Considerations: You’ll have to pay mortgage insurance premiums. Since you will have to pay these premiums through the loan the total cost of the mortgage will be higher.
VA Loan
This loan depends on the vetting process conducted by the Department of Veterans Affairs. They are available only for people who are currently employed or have been employed as military personnel.
- Benefits: You don’t need a down payment and the interest rates are lower compared to conventional loans.
- Considerations: Requirements exist related to service in the military, to simplify things – if you get a good grade from the military you might be eligible for a loan. Some lenders may have stricter credit standards despite the VA’s backing.
USDA Loan
This is another government-backed option but there are requirements to meet. Applicants for the loan need to be in the low to mid-income range and want to live in a more rural area.
- Benefits: No down payment is necessary and the loan is more accessible. The interest rates are lower.
- Considerations: USDA loans have strict locations, so basically they will be telling you where your home will be. There are income requirements as well, so you’ll need to fulfill those too.
Conventional Loan
And last but not least we have the Conventional loan. They are not backed by the government which means they are more common but have stricter credit requirements compared to FHA or VA loans.
- Benefits: They usually have flexible terms. If your credit score is good you are very likely to get better terms and maybe even evade PMI.
- Considerations: To qualify, you need a higher credit score and a more substantial down payment. The main downside of conventional loans is that if you’re financially doing well you’ll have no problem getting it – but if you aren’t it’s not likely to happen.
Endnote
We hope we’ve given a good overview of the options for loans out there. Naturally, we have given a quick overview of the options. There is much more nuance to everyone we’ve listed here.
Whichever option you choose, one piece of advice will serve you well – make sure that you research any option well so that you know what you’re getting into.
Lastly, if the timing just isn’t right don’t force a bad option just because you want to resolve your home situation.
