Navigating mortgage options for first-time homebuyers

Buying — and financing — as a first-time homebuyer can be overwhelming. There are many tips for buying a home the first time, from friends and relatives, agents and lenders, and troves of content on the internet. It can be confusing to find your way through it all.

Generally speaking, there are some clear-cut mortgage options for buyers as they take steps to buy a home for the first time.

What you’ll learn

• Tips and tricks for first time home buyers
• Mortgage options 101
• What to look for in a mortgage

Tips and tricks for first time home buyers

First, some first-time home buyer tips:

• Engage a lender early. This will help you get a clear picture of how much house you can afford. A lender can walk you through the mortgage process, get you pre-qualified and help you understand your best options.
• Base your home price on the monthly payment you can afford. The home price you are pre-qualified for may break down to a monthly payment you can’t really afford based on your financial obligations and lifestyle. So work backward from the monthly payment you desire to determine the home price range you can afford — don’t forget about insurance, taxes, interest rate fluctuations and primary mortgage insurance (PMI).
• Don’t assume you have to put 20% down. In fact, the average down payment is 12%, according to the National Association of Realtors. For first-timers, it can be even lower. The Alliant Advantage Mortgage Program offers loans with as little as 0% down.
• Get to know your credit. If you’re not already familiar with your credit report and scores, now is the time to get familiar. You can download a free report from all three credit bureaus once a year. Many credit card issuers also offer a free credit score as part of their service, so check into that option as well. Use your score when talking to a lender, who can tell you how your score may impact your interest rate — you may find it prudent to wait until your score improves through positive credit behavior or attempt to improve your score by negotiating with lenders.

Mortgage options 101

While there is a slightly longer list of mortgage options available, most first-time homebuyers will be looking at a conventional loan, either a fixed-rate or an adjustable-rate mortgage.

Fixed-rate:

• The interest rate is fixed for the entire term of the mortgage
• Terms are typically 30 years, though there are 15- and 20-year options
• Popular with buyers who plan on staying in their home for 10+ years or want the predictability of a fixed monthly payment

Adjustable-rate:

• A lower initial interest rate that is subject to adjustment after fixed-term
• Initial fixed terms can be 5, 7 and 10 years
• Popular with buyers who know they will stay a shorter time in their homes or want to enjoy a lower initial rate
• Interest rates may increase after the fixed term but are often capped at a certain amount in your loan terms

While most loans qualify as either fixed or adjustable-rate mortgages, there are specific programs that offer these mortgages with certain qualifications. The FHA loan, which is backed by the Federal Housing Authority, offers loans with as little as 3.5% down and helps first-time buyers who may have lower credit scores. Other programs include a VA loan, specifically for service members, veterans and surviving spouses.

The Alliant Advantage Mortgage Program helps qualified first-time homebuyers overcome some common barriers to homeownership, like down payment and high monthly payments, by offering 0% down, no-PMI loans for qualifying buyers up to $ $650,000.

What to look for in a mortgage

While a loan officer can help you answer any of your questions, there are a few things to really pay attention to:

• Term: How long does the loan last?
• Down payment: What is required for this loan?
• Interest rate: Is it fixed or variable? How is my credit score impacted? How does my down payment affect it? How are interest rates trending?
• Primary mortgage insurance: Unless you put 20% down or qualify for a unique program, you may have to pay mortgage insurance, which protects lenders against buyer defaults. How much is the monthly mortgage insurance, and when and how does it get removed from your payment?
• Points: Unless you put 20% down or qualify for a unique program, you may have to pay mortgage insurance, which protects lenders against buyer defaults. How much is the monthly mortgage insurance, and when and how does it get removed from your payment?

Talking with a loan officer will allow you to explore all these options. Don’t be afraid to talk to several lenders and ask as many questions as possible until you understand your mortgage options.

Learn more about Alliant mortgages.