Buying your first home is one of the best experiences of your life, but it can also be one of the most challenging. There are so many loan options, it is hard to know which one is best for your needs. First time home buyer tips can help you secure the right loan at the right price to ensure your long-term financial health.

Shop for Your Loan First

Perhaps the most important first time home buyer tip is this one. Before you start looking for a home to buy, you should focus instead on finding the right loan and lender. You do not want to find a home, fall in love with it, and then learn it is out of your price range. The better option, then, is to work with your lender to determine what you can afford.
Having a good relationship with your lender means you’ll gain key access to the variety of loan options available to you as well as different tips on how to qualify for better rates. You also will learn how much of a loan the lender is willing to offer. That can then give you the ability to start shopping for a home.

Compare the Different Loan Types Available

How much you can afford depends, in part, on the type of loan you select. Every loan will have unique features. These vary from one lender to the next. However, there are various specific types of loans to take into consideration if you qualify. As a first time home buyer, you may want to consider the following types of loans.

FHA Loans

An FHA loan is often one of the go-to options for first time home buyers. These loans are designed to provide you with some financial backing under the federal government. In short, they work as a type of insurance policy for the lender. Because the government offers to cover some costs should you default, lenders can offer lower interest rates and better terms for those who qualify for FHA loans. There are advantages to FHA loans for first time home buyers. Those include:

  • Lower credit score requirements, often as low as 580 to qualify
  • Lower down payment requirements of around 3.5 percent of the amount you hope to borrow
  • Lower closing costs

Perhaps most importantly, FHA loans tend to have lower interest rates. You may qualify for a lower rate, for example, because there is less risk than if you were to apply for another type of loan.
FHA loans are best for people who have not had ownership in a home for some time. There are additional costs, including mortgage insurance premiums. These are payments you will make during your loan. They help to keep that insurance policy protecting the lender against your default in place. These costs range from 0.45 percent to as much as 1.05 percent of the base loan amount.

VA Loans

Veterans Affairs (VA) loans are much like FHA loans, but they are available to fewer people. These loans are available to men and women who have served or are serving in the U.S. Armed Forces. To qualify, you will need to receive approval from the VA Department itself. It does take some time to qualify depending on if you served during wartime or standard time, what type of work you did, and whether or not you are active duty or retired in an honorable manner. For first time home buyers, VA loans can offer some nice benefits. This may include:

  • No down payment requirements (you can finance the full amount of the home purchase)
  • Low credit score requirements, much like that associated with FHA loans
  • Low-interest loans, often competitively low like FHA loans
  • Lower closing costs (sometimes no closing costs)
  • No requirement to pay mortgage insurance

If you are a veteran, it is important to talk to your lender about qualifying for a VA loan. Most FHA lenders are also approved to offer VA loans to qualified borrowers.

Conventional Loans

It’s also important to consider conventional loans. These are typical mortgage loans. For first time home buyers, they are worth a look. Conventional loans are available through most lenders. These loans have very specific requirements, but it is up to the lender to determine what to charge you. Some key details about conventional loans include:

  • Down payment requirements range from 10 percent up to 20 percent of the home’s sale price
  • Credit score requirements range widely, but most lenders will offer a loan if you have fair credit or better
  • Interest rates depend on many factors but are not discounted for first time home buyers over other loans
  • You may need to pay mortgage insurance, depending on the amount of a down payment you make
  • Closing costs are generally about 5 percent of the value of the loan

Because lenders set terms for conventional loans, they often range widely. You should look at all types of loans before you make any buying decision.

A Closer Look at Interest Rates

Another important first time home buyer tip is that interest rates really should be your focus. Interest is the amount of money you will pay to borrow the funds to buy the home. It is the cost or price tag of the loan. The lower the interest rate is, the less you will spend to purchase the loan. Keeping that in mind, it is quite important to compare interest rates of various types of loans to determine which one offers the best features for you.

Interest rates are very impactful. If a rate is even just slightly higher with one type of loan over the other, it could mean paying thousands of dollars more for the home purchase. On the other hand, lower rates can make your monthly payment lower or help you to buy a bigger home.

One key area to focus on is whether the interest rates are fixed or adjustable. Here’s a key difference to take note of as you compare loan options.

Fixed-Rate Loans: With a fixed rate, the loan’s interest rate remains the same throughout the entire loan period. That means you have the same interest rate on day one of your loan that you have at the time of your last payment. Fixed rates are beneficial, if lower because you have consistency. You know what your monthly payment is going to be every month.

Adjustable-Rate Loans: By contrast, adjustable-rate loans have flexible interest rates. Many start with a very low rate. That makes it attractive because your interest rate and monthly payment are typically lower. As the Federal Reserve and lenders increase interest rates, your rate on your loan can go up, too. Most loans have limitations on how much they can improve year-to-year, but this nearly always means your monthly payment is likely to change during the lifetime of your loan.

It is worthwhile to talk to your lender about both options. Get quotes for both, too. Then, look at the amortization schedule. This will break down the actual cost of the loan to you factoring in time and interest payments. It gives you a clear look at what you can expect.

First Time Home Buyer Tips: How to Get the Best Rate and Features

With that basic information, you can begin to determine which loan is right for your needs. However, as a first time home buyer, you should not feel rushed to make any decision. Instead, work with your lender to learn about all of your options. Here are some tips to help make the entire process a bit easier to manage.

#1: Pay Down Debt
Perhaps the most important step you can take before you apply for a home loan is to pay down any debt you can. The lower your debt is, the more likely you are to have a high credit score. You also are freeing up income that can be applied to your mortgage loan. Lenders often want to know how much debt you have compared to how much income you have. The bigger this gap is, the more of a home you may qualify to buy.

#2: Always Make on Time Payments

In the months leading up to your application for a home loan, make sure you are staying on top of any debt you have. This includes making on-time monthly payments to each of your credit lenders and on your utilities. On-time payments are very important to most lenders. It shows that you are a responsible borrower. Good payment history like this makes you less of a risk to borrowers, drives up your credit score, and can help you to qualify for better terms.

#3: Have a Good Down Payment

As noted, FHA and VA loans require lower, if any, down payment. However, down payments are powerful. A person with a down payment is more attractive to a lender than a person without one. They are more likely to approve you for a loan and offer a lower interest rate if you have one. The more you put down, the safer the transaction is for the lender. They are happy to keep your interest rate lower for you to be a secure buyer like this. Work to build up a down payment that is separate from an emergency fund or your savings. It should not be a part of your retirement account either (though some retirement accounts allow you to borrow from them for a down payment on a home). Talk to your tax professional about the implications of this before making that decision.

#4: Buy a Home You Can Afford

If you hope to secure a very valuable home, be sure you have the income to justify it. Here’s why this matters. Your lender wants you to have a low debt to income ratio. That means less of the income you make each month is going to be used to pay for the debt. When you have a low debt to income ratio, your lender is likely to offer a lower interest rate to you.
However, if your debt to income ratio is higher, then they will increase the rate charged to you because you are more of a risk. That means buying a home that is out of your comfort zone for your budget could make it very expensive because of the higher interest rates. You also want to know that your monthly payments are easy to make. You do not want to struggle each month to make them.

#5: Ask Your Lender About Assistance Programs

Both federal and state assistance programs may be available to help you with your down payment. The good news is that your lender likely has all of this information. You may also want to talk to your lender about opportunities nearby. For example, there are lower interest rate loans and better financing options available to those who live in rural areas. Finding what these options are can help to make your loan even more affordable.

#6: Make Sure You Can Pay It Off Early

You may not be thinking about an early payoff, but make sure your loan terms include this option. That means you can refinance the loan early. It can also mean that you add more to each payment to pay down your loan sooner, reducing the cost to you.

#7: Save Up for Closing Costs

Though some loans allow you to wrap closing costs into the loan, that means interest will apply to them during the lifetime of your loan. The better option is to save up for them over time, much like you would for a down payment. That reduces their overall impact on your funds.
First time home buyers have numerous key opportunities available to them. As you take into consideration the wide range of options for you to buy a home, always seek out opportunities to lower interest rates, and improve terms.