First-time homebuyers often have lots of financing questions. How do they apply for a mortgage loan? Which financing option is right for them?
Tammy Jo Budzynski from TJ Homes says it’s important to do it right because a bad mortgage is more than just expensive monthly payments and high interest rates. She says It’s a liability on a homeowner’s portfolio.
Budzynski shared six financing options to consider before buying a home:
Cash is King
Buying a house with a cash offer is best because there is no need for financing. That means there is less risk for the seller if they accept a cash offer. Typically a buyer should have already sold their home and has the proceeds available. Or they have access to additional funds.
FHA Loan (3.5% Down)
A Federal Housing Administration loan or FHA loan is designed for first-time home buyers. This is typically used when a buyer has a credit score between 580 to 680. It allows you to get an FHA insured loan for as little as 3.5% down. But not all lenders will extend financing below a 620. FHA is also used when employment or traditional credit history is soft. If there has been past bankruptcy, there’s a two-year waiting period from the discharge date and if there was a foreclosure the waiting period is three years from the date of the sheriff’s deed.
Conventional Mortgage Loan (3% Down)
A conventional mortgage loan is not backed by a government agency. It uses private lenders such as banks, credit unions and mortgage companies instead. This is the next most common financing option for first-time homebuyers. Typically used if you have a credit score of 690 or higher. You can get a conventional mortgage loan for as little as 3% down depending on your financial situation. However, there is a four-year waiting period from the discharge date if there has been a past bankruptcy. If there was a foreclosure, the waiting period is seven years from the date of the sheriff’s deed.
MSHDA Loan (1% Vested)
The MSHDA loan (Michigan State Housing Development Authority) is a state program that helps first-time homebuyers with “down payment assistance.” These loans require you to live in the home for a certain period of time. If you don’t, you will be required to pay back the money that was borrowed. MSHDA loans may be used in conjunction with other financing types. The guidelines for this program are more difficult and the buyer must agree to the interest rate offered by the department. If you get approved, you have 1% of your own funds vested into the transaction. There are income restrictions and there can be no outstanding collection balances.
USDA Loan (0% Down)
The USDA Loan, also known as a Rural Development loan, was designed to help you with properties outside the city boundaries. This mortgage program is one of the more unlikely financing options if you are a first-time homebuyer. It was established by the U.S. Department of Agriculture. With a USDA loan you can borrow up to 100% of purchase price, closing costs and prepaid expenses if the appraised value allows. There are household income restrictions that vary per county. If a borrower has more than 20% in assets, they may not be approved for Rural Development financing.
VA Loan (0% Down)
A VA loan is offered to past and present military members. This loan type will allow a veteran to finance 100% of the purchase price and not carry any monthly mortgage insurance. Disabled veterans do not have to pay a funding fee. VA financing can also be offered to reservists who already have put in six years of service.
Budzynski says figuring out which financing option is the best for each buyer depends on more than just their financial situation. She says it’s important to put together a strong homeowner’s strategy.
At TJ Homes, the team will walk buyers through the entire process so they know they’ve done it right. Give them a call. They’d be glad to help: 616-292-4400 or visit www.tjhomes.com.
Read Tammy Jo’s BLOG on first-time homebuying here: https://tjhomes.com/my-house-worth.