If you've recently decided to take the plunge into homeownership, you may already be overwhelmed with the array of mortgage and financing options available to you -- even before you've selected a house. How can you ensure you're able to afford your dream home without stretching your budget past the breaking point? Read on to learn more about some benefits and options specifically targeted for first-time home buyers.
What financing programs are available to you as a new homeowner?
There are several government programs that can provide competitive rates and terms for new homeowners. One of these is the FHA loan program, administered by the Federal Housing Administration. While the FHA itself doesn't make loans, it does guarantee them -- allowing whatever lender who chooses to extend credit to you to be assured that it will be fully repaid (by the FHA) in the event you default on your loan.
Because this guarantee significantly mitigates the lender's risk, you'll find it much easier to qualify for low (or no) down payment requirement or a low interest rate, even if your credit isn't the greatest. Other government agencies that can guarantee loans for qualified applicants and provide down payment assistance include the U.S. Department of Agriculture (USDA), U.S. Department of Housing and Urban Development (HUD), and the Veterans Administration (VA).
Because the process of applying for an FHA, USDA, HUD, or VA loan can sometimes be a bit more time-consuming than applying for a non-guaranteed mortgage, it's important to have your ducks in a row before you first apply. Pull a copy of your credit report to ensure it's up to date and any delinquent accounts are updated and closed to improve your credit score. You'll also want to get documentation of income, particularly if you're self-employed or work on commission, so the lender can get an accurate picture of the amount you can afford to borrow.
How can you ensure your mortgage is an affordable one?
Before signing on with a specific FHA-approved lender, you may want to do some shopping around and obtain quotes from several lenders. Different lenders under the same government program can offer dramatically varying terms, so comparison shopping can often be helpful in narrowing down the best loans for you -- whether those with the most down payment assistance, lowest interest rates, or minimal closing costs.
Once you've chosen a home to purchase, your lender will evaluate your income and assets, along with this home's value, to determine a maximum amount it is willing to lend to you. This amount should be an affordable one for you -- as the government has a vested interest in preventing you from defaulting on your loan (and therefore requiring it to pay off the loan), it will make concrete efforts to ensure that your loan remains well within your budget.