With house prices and the cost of new builds still rising, many consumers are watching on as the financing gap grows wider by the day. Many people agree: buying a home can be a stressful process. For some Americans, it can take them up to 10 years to save a downpayment for their first home. While there are great ways to kick start saving for your first home, the reality for many potential homeowners today is that they will need to seek financing to pay for their first home. The good news is there are now more home financing options available to first-time buyers than there ever were. Once you are ready to take the leap into homeownership and are armed with the right downpayment, here are your options for financing your first home.
Use One Of The Conventional Mortgage Loans Available On The Market
Mortgage interest rates are still low which makes it a great time to apply for a conventional mortgage. However, recently mortgage rates have inched over 3 percent. For most first-time homebuyers, conventional mortgage loans ask for a credit score of at least 620 and a debt to income ratio (DTI) of 50 percent or less. You can also secure a conventional home loan with as little as a 3 percent downpayment. But as a general rule, if your income is not more than 80 percent of the median income in your area the downpayment requirement increases to 5 percent. Finally, keep an eye on the overall costs when choosing a lender for your conventional loan, including the APR charges versus the borrowing charges, which do not include the additional fees that come with the mortgage.
Find Out Whether A Government-Backed First Time Homebuyer Loan Is Right For You
First-time homebuyers can also apply for a government-backed home loan to help them get on the property ladder. Currently, there are 3 government-backed home loan programs available: the Federal Housing Administration (FHA) Home Loan, the U.S. Department of Agriculture (USDA) Loan, and the Department of Veterans Affairs (VA) Home Loan. These loans differ from conventional mortgage loans since they often have very specific application eligibility requirements. For instance, applicants for a VA Home Loan need to be a member of the military.
With an FHA Loan, the minimum credit score required is 580. You are also required to put down a 3.5 percent deposit. If your credit score is lower than 580 (but above 500) a 10 percent downpayment may be required instead. This is also the only option where the mortgage insurance element can be removed. On the other hand, if you are buying a home in a rural or suburban area you may qualify for a USDA Home Loan, which is aimed at consumers with low to moderate household income.
Tap Into Your IRA
Another way to finance your first home is to use part of your contributions in your IRA. While generally advised against, most IRAs allow you to withdraw up to $10,000 for the purchase of a primary home. First-time homebuyers are also able to access withdrawals from their IRA penalty-free. However, before you choose to go down this route it only allows you to withdraw up to $10,000 (or $20,000 for a married couple). This can help you with your downpayment or additional costs of buying a home but often still means you need to apply for a mortgage.
Finding the right financing mix to purchase your first home takes time. Feel free to spend time researching your options and explore the right fit for your home dreams, financial situation, and budget. Nailing down your finance options can be a surefire way to reduce the stress involved in buying a home.