The American dream of home ownership can become a nightmare with the wrong loan. First-time buyers must proceed with caution and have a thorough understanding of a mortgage program's terms and costs to ensure long-term sustainability. Several loan programs suit first-time buyers, but choosing the best mortgage for you involves analyzing your finances and plans for the home.
Although the definition of a first-time buyer may vary by lender, the term typically describes a mortgage borrower who has not owned a primary residence for the past three years. Lenders scrutinize first-time buyers more closely than repeat mortgage borrowers because they lack a track record of keeping up with a mortgage, property taxes, homeowner's insurance, homeowners association dues and other related housing costs. First-time buyers have many programs at their disposal, intended to help them meet the costs of home ownership; however, these loans tend to have restrictions that help protect the lender's interests and minimize risk.
The down payment is often the biggest obstacle for first-time buyers. The best mortgages require a 20-percent down payment. A low-down-payment loan requires less than 20 percent and sometimes no down payment under certain programs. The loans often carry higher interest rates and additional stipulations, such as mortgage insurance coverage to protect the lender against default. Conventional loans typically require at least 5 percent down and government-backed loans, such as Federal Housing Administration-backed loans, require 3.5 percent down. The Department of Veterans Affairs and the Department of Agriculture offer no-down-payment loans.
Mortgages with Impounds
Lenders often require first-time buyers to impound, or escrow, property taxes and homeowners insurance -- that is, pay the annual costs in monthly installments along with the mortgage. Mortgages with escrow impounds make sense for first-time buyers because they have limited experience with budgeting multiple housing costs. Taxes are usually due once or twice annually in lump sums and homeowners insurance is due once a year. By dividing the estimated amounts due into 12 payments and requiring payment each month, lenders save borrowers the trouble of budgeting and saving for these costs. Additionally, lenders include escrowed costs when calculating the maximum monthly payment you can afford. This ensures you can keep up with both the loan and escrow payments.
Your mortgage must match your personal and financial goals. For example, if you have no plans to move or refinance for five years, a mortgage with a fixed payment and no prepayment penalty for at least five years makes the most sense. A 30-year fixed-rate loan offers the most payment stability and is the safest bet if you have no plans to sell or refinance. Making payments over 30 years, rather than 15 years, gives you a lower monthly payment, while a 15-year mortgage allows you to pay the home off sooner and pay minimal interest over time in exchange for a higher monthly payment.
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