Navigating mortgage options for first-time homebuyers

Buying — and financing — as a first-time homebuyer can be overwhelming. There’s a lot of 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 for buying a home for the first time. So we will focus on standard mortgage options that first-time buyers should consider.

First, some buying a home for the first time tips:

• Engage a lender early in the process so you can get a clear picture of how much house you can afford. A lender can walk you through the mortgage process, get you pre-approved and help you understand the best options for you.
• Base your home price on the monthly payment you can afford. The home price you are approved 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 your desire to figure out 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, and for first-timers 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 interest rate may be impacted by your score — 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 out there, most first-time homebuyers will be looking at a conventional loan, either a fixed-rate mortgage or an adjustable-rate mortgage.

Fixed-rate:

• 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 that plan on staying in their home 10+ years or want the predictability of a fixed monthly payment

Adjustable-rate:

• Lower initial interest rate is subject to adjustment after fixed term
• Initial fixed terms can be 3, 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 a fixed or adjustable-rate mortgage, there are specific programs that offer these mortgages with certain qualifications. A popular option for first-timers is the FHA loan. Backed by the Federal Housing Authority, this program offers loans with as little as 3.5% down, and helps buyers that may have lower credit scores. Other programs include a VA loan, specifically for service members, veterans and surviving spouses, USDA loan for rural properties, or specific state or local programs.

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 $500,000.

What to look out 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 it impacted by my credit score? How is it impacted by my down payment? 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 fall off your payment?
• Points: Some lenders offer points, which allow you to pre-pay some interest in order to secure a lower rate. If points are offered and you can afford to purchase them, work with your lender to determine how long it will take for the interest rate savings to pay for the point. It could be a great way to save money over the life of the loan.

Talking with a loan officer will allow you to explore all of 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.

Check out these other mortgage tips:

• 10/1 ARM vs. 30-year fixed mortgage
• 6 first-time homebuyer tips for freelancers
• The best way to pay for a home remodel