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5 Proven Paths for People to Stop Paying Rent and Become a 1st Time Homebuyer

It can be intimidating when you buy your first home. That is why some people simply go with one of the first houses that they see or they even just continue to pay rent. However, approved for your first home loan does not have to be that difficult and there are a few proven paths that can work well:

1) Get Pre-Approved for an FHA Home Loan

The Federal Housing Authority (FHA) is one of the best paths to home ownership in America today. The FHA does not create mortgages; it actually guarantees the loan for the lender who issues it. This means that in cause you default, the federal government will reimburse the lender. This makes it much more likely that lending companies will extend mortgages to people with lower credit scores and limited down payments. In the past, you might have needed a credit score well above 700 and a down payment of 20% to get a mortgage.

With an FHA-backed mortgage, you may be able to pay as little as 3.5% down and you can have a credit score as low as 620 and still qualify. You also may be able to get help with closing costs. Further, interest rates on FHA mortgages are very low. The FHA home loan is an excellent choice for people to stop paying rent and get into their own home.

Considerations:

  • Getting an FHA loan means that you will have to pay private mortgage insurance premiums, which often add up to $150 to $200 per month.
  • You must have full documentation of your income with W-2s, pay stubs and tax returns.
  • Not every lender offers first time homebuyer mortgages insured by FHA, so you need to check with your lender to see if they offer them.
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2) Consider an Adjustable Rate Mortgage

If you are buying your first home and are sensitive to monthly payments, you should consider an adjustable rate mortgage, or ARM. These mortgages have a set rate and payment for the first five years usually and then will adjust to a new rate when the term is up. A 5/1 ARM is a great safe choice if you are going to stay in your home for up to five years. This will keep your payment low, and hopefully, in five years you will be earning more money. (Also consider a 3/1, 7/1 and 10/1 mortgage)

Considerations:

  • Your interest rate could go up substantially in five years. If you are not selling by that time, be ready financially for higher payments.
  • If you intend to stay in your home for longer than five years, you may want to consider a fixed rate mortgage.

3) Military Home Loan Guaranteed by the VA

If you or your spouse ever served in the military, you can get a good deal on a Veterans Affairs or VA loan. This type of loan offers 100% financing, so you need little money up front. Interest rates for these 1st time home loans are also very competitive. Another major advantage is that you do not need to pay monthly mortgage insurance if you put less than 20% down.

4) USDA Loan

If you are a first time home buyer and want to live in the country, a USDA loan could be a good move. This is a rural housing loan and often you can put no money down. There also are options for different types of mortgage insurance so you can keep the payments low. The interest rate on a USDA loan is usually similar to first home loan backed by FHA, making it very affordable for first time house buyers.

5) Conventional Home Loan

If you are able to save a bit more for a down payment, consider getting a conventional fixed rate loan with a 5% down payment. While you will have to pay a bit more up front, FHA loans do now charge higher upfront fees and note that you cannot drop your private mortgage insurance when you reach 20% equity. If you want to drop that insurance, you will need to refinance into another mortgage. Another thing to consider is that Fannie Mae and Freddie Mac both introduced new programs that only require 3%. It may not be quite as seamless to qualify for this option as the %5 down loan, but it requires less money up-front.

Considerations:

  • If you have never bought a home before, make sure your credit situation is in good shape before you start applying for loans. Get a copy of your credit report and check for any inaccuracies.
  • Get your mortgage preapproval before you start shopping for a house. Many people go house shopping first and then worry about a loan later. This is doing things backwards. You want to know how much home you qualify for before you shop around.
  • Remember that being able to afford the mortgage is only part of owning a home. You also will need to be able to afford all of the maintenance costs of home ownership.

Bottom Line

Buying a home for the first time is easier than ever. The above mortgage loan products have eased the home buying process for many Americans with limited down payments and average credit scores. Written by James Swift

         
 

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