Different types of mortgage loans for first time buyers

If you’ve never bought a home before, you might be surprised to learn that there’s more than one kind of home loan available to finance your purchase. That’s good news because no matter who you are and what your situation is, you can probably find a mortgage that fits your needs.

While these choices may seem overwhelming at first, you don’t have to figure them out all by yourself. Your Amerifirst loan officer will be happy to sit down with you, explain the differences, and point you toward the options that make the most sense for you. In the meantime, let’s look at some of the most popular solutions.

Listed below are four common types of mortgage loans for homebuyers today: conventional, government-backed mortgages, fixed and adjustable, and interest-only loans.

1. Conventional Mortgages

   Unlike some of the loans we’ll talk about below, conventional mortgages are not backed by the government. You’ll need a higher income and credit score to qualify for them, but the interest rates are typically lower, which means your mortgage will cost less over the lifetime of your loan.

   Usually, these loans also require a down payment of at least 5% of the home’s purchase price. If your down payment is under 20%, you’ll also have to pay a fee for private mortgage insurance (PMI) on top of your monthly payments until you’ve paid for 20% of the selling price.

   Qualifying for these loans can be challenging, but the upside is, if you do qualify, the lower interest rate and larger down payment mean your mortgage payments will be lower every month. You may also be able choose whether to pay off your loan over 15, 20, 25, or 30 years. All of that can be very helpful for your budget.

   Conventional mortgages can be used for most kinds of property, including vacation homes, condos, and rental properties.

2. Government-Backed Mortgages

   Other types of loans are insured or guaranteed by the US government, which protects lenders against defaults on payments, making it easier for lenders to offer potential borrowers lower interest rates. They're also  much easier to qualify for.  These programs are ideal for first- time buyers and include FHA, USDA Rural Development, and VA home loans. 

   FHA

   Insured by the Federal Housing Administration,FHA loans make it simpler for first-time buyers, people with low to moderate incomes, or those with lower credit scores or higher debt-to-income ratios to own a home.

   These loans can be a more affordable choice since they usually have lower down payments, requiring as little as 3.5% down. While you still have to pay mortgage insurance until you’ve paid 20% of the home’s selling price (can be included in your monthly mortgage payment), it may be less costly than Private Mortgage Insurance (PMI). Closing costs for FHA loans are also lower. And, if you're struggling to scrape the down payment together, FHA allows your down payment to be a gift from a friend or family member. 
   

   FHA loans can be used to buy, build, or refinance houses, approved condos, modular homes, and manufactured homes with pre-approval.
   
   Read our blog: Using Gift Funds for Your Down Payment 
   

   USDA

   If you’re shopping for a home in the country or a more rural area, a loan guaranteed by the US Department of Agriculture may be a good choice.

   Designed to make it more affordable to buy property in rural neighborhoods, these mortgages usually have a zero-down payment! Closing costs are usually lower, but you do have to pay a USDA Guarantee Fee and monthly mortgage insurance (again, these costs can be financed into your loan). While the home needs to be located within certain geographical areas that are rural, or less-populated, you might be surprised to learn how many areas qualify, including villages, small towns and suburban areas near large cities.

   USDA Rural loans can be used for owner-occupied single-family housing. 

   VETERANS (VA)
   Offered as a benefit for active and retired US military, VA loans are guaranteed by the US Department of Veteran Affairs, making them easier to qualify for as long as your military service (or your spouse’s) meets the requirements.

   Another great feature of VA loans is that there’s no down payment required! Closing costs are also typically lower, interest rates may be negotiable, and you don't have to pay mortgage insurance. These are substantial benefits that can save you big bucks now and thousands of dollars over the life the loan.

   VA loans can be used to buy or construct a new home or for adding an energy-saving improvement to your existing home.

   FHA 203(k) renovation loan

   There’s still another category of government-backed loan designed specifically for home renovations. Insured by the Federal Housing Administration, FHA Standard 203(k) loans let you borrow up to 96.5% of the home’s projected value after improvements are done.

   The minimum down payment is just 3.5%, but you will have to pay mortgage insurance every month until you’ve paid 20% of the home’s selling price.

   These loans can be used to improve your current house or a fixer-upper that you buy. Qualified improvements include structural alterations and reconstruction, major landscaping, and site improvement, and the loan must be your primary residence.

3.  Fixed vs. Adjustable-Rate Mortgages
   
   When you’re comparing loans, you’ll also see different interest rates for fixed and adjustable-rate loans. With a fixed-rate loan, the interest rate you agree to at the beginning is the same one you’ll have for the life of your loan.

   For an adjustable-rate mortgage (ARM), the initial rate is usually lower than the market rate, but it adjusts up or down according to the market throughout the lifetime of your loan—potentially raising your monthly payment dramatically. While an ARM’s low rate may look attractive at first, a fixed-rate loan offers more stability and protection in the long run.
    

   And remember, if interest rates drop significantly after you’ve bought your home with a fixed-rate mortgage, you may be able to save money by refinancing to a fixed-rate mortgage with a lower rate down the road.

4. Interest Only Mortgages*An interest-only loan is a loan in which the borrower pays only the interest for some or all of the term, with the principal balance unchanged during the interest-only period. This could be an attractive option for people who are worried about their cash flow. 

   It's important to understand that the amount you owe on the loan does not go down with each payment. Once the interest-only period ends, you may have several options. These include paying off the loan balance all at once, refinancing the mortgage loan, if refinancing is available, and paying off the balance in monthly payments, which are higher than the interest-only payments (because they include the principal and interest together). 

   Interest-only mortgages can be challenging to understand, and your payments will increase substantially once the interest-only period ends. We recommend getting the advice of an experienced loan officer if you are considering this type of mortgage. 

   

   More ways to help with your down payment

   While some mortgages, such as VA and USDA Rural loans, do not require a down payment, every dollar you pay upfront helps to reduce your monthly payment and the lifetime costs of your loan. It can be a challenge to save up for your home, but there are many resources you can tap to help you pay for your down payment, and some can help you pay for closing costs as well.

   Still have questions? We’re always here to talk. You can also download "The Mortgage Loan Options Guide " to learn more. 

   
   
   

   *Amerifirst Home Mortgage does not offer an interest-only mortgage. This is simply an example of options available for home buyers. Interest only mortgages are risky and Amerifirst does not endorse them.

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