Home Finance 101 for First-Time Home Buyers

FHA loan application on desk
Loans backed by the U.S. Department of Housing and Urban Development are attractive to lower-income households. (DepositPhotos)

FHA Loans

As a subsidiary of the U.S. Department of Housing and Urban Development, or HUD, the Federal Housing Administration, or FHA, provides different home finance packages. When compared to conventional loans, an FHA loan comes with favorable down payment conditions and it’s easier to get approved.

These loans are popular among people who are buying for the first time because apart from lower upfront loan prices and more relaxed credit requirements, the minimal down payment can be 3.5 percent.

However, there’s a catch: Homebuyers borrowing from the FHA are required to pay a mortgage insurance premium along with their loan payments.


VA loan application for home finance
VA members may be eligible for home loans that require no down payment. (DepositPhotos)

VA Loans

Homebuyers who qualify can also apply for loans guaranteed by the U.S. Department of Veterans Affairs.

While the VA itself doesn’t offer home finance programs, it stands behind mortgages offered by qualified lenders. Using these guarantees, military personnel and veterans can apply for home loans with more agreeable terms — typically with no down payment.

For most buyers who qualify, VA loans can be obtained more easily than conventional loans, as the maximum VA loan is usually limited to conventional mortgage limits.

When submitting an application, a buyer needs to request qualification from the VA. If approved, the VA issues an eligibility certificate that allows the buyer to proceed with the application.


Private mortgage insurance folder for home finance
Depending on your loan, you may have to pay private mortgage insurance — another monthly amount to tack on to your mortgage payment. (DepositPhotos)

Private Mortgage Insurance

The prices of home mortgage loans are determined by the lender, who investigates your FICO score with three main credit bureaus. Then, they calculate your loan-to-value ratio — this is the amount of the requested loan compared to the home’s appraised value.

Lenders also use this ratio to decide whether you need to pay for private mortgage insurance. PMI protects the lender by sharing a part of the risk with a mortgage insurer. If an LTV is higher than 80 percent, meaning that you own less than 20 percent equity in the home, most lenders will require a PMI for the loan.

For many people, a home loan is the biggest financial commitment they’ll ever make, so it’s important to learn and understand all the options before making decisions.

First-time buyers are at a slight advantage, as the federal government often offers incentives such as reduced deposit requirements.

What was your first home-buying experience like? Share it in the comments below!

Mike Johnston is an avid blogger and content writer with a focus in real estate, home improvement, and the construction industry.

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