Owning a home can be a great way to build wealth because you are putting relatively little down upfront. Meanwhile, you’re leveraging your investment and reaping the benefit of building equity as you pay down your loan. Of course, the real estate market doesn’t always go up, as we learned during the housing crisis. So it’s important to consider your budget and lifestyle in your buying decision.
Mortgage rates remain attractively low on a historical basis. If you choose a 15- or 30-year fixed-rate mortgage, your monthly payment will be predictable for the duration of the term, whereas rental prices tend to rise each year. Even if you get an adjustable-rate mortgage, the cap is fixed so you know what to expect in the future.
Buying in a nice neighborhood in a good school district tends to hold up the value of a home, and a homeowner can develop good friendships and strong bonds in the community. Owning a home also affords autonomy – you can make improvements as you see fit without having to answer to a landlord.
Best for: Ideal for borrowers with good or excellent credit
Conventional mortgages are "plain vanilla" home loans. They follow fairly conservative guidelines for: borrower credit scores, minimum down payments and debt-to-income ratios - the percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
Best for: Buyers with low credit and smaller down payments.
Not having enough money for a 20 percent down payment may deter you from buying a home, but it shouldn’t. Insured by the Federal Housing Administration, FHA loans typically come with smaller down payments and lower credit score requirements than most conventional loans. First-time homebuyers can buy a home with a minimum credit score of 580 and as little as 3.5 percent down or a credit score of 500 to 579 with at least 10 percent down.
FHA loans have one big catch called mortgage insurance. You’ll pay an upfront premium and annual premiums, driving up your overall borrowing costs. Unlike homeowners insurance, this coverage doesn’t protect you; it protects the lender in case you default on the loan.
Best for: Active-duty military members, veterans, and their spouses.
Many U.S. military members (active duty and veterans) are eligible for loans backed by the U.S. Department of Veterans Affairs, or VA. VA loans are a sweet deal for eligible borrowers because they come with lower interest rates than most other loan types and require no down payment. A funding fee is required on VA loans, but that fee can be rolled into your loan costs and some service members may be exempt from paying it altogether.
Other VA loan perks include no PMI or minimum credit score. If you struggle to make payments on the mortgage, the VA can negotiate with the lender on your behalf to take some stress from the equation.
Best for: Borrowers with lower or moderate incomes purchasing a home in a USDA-eligible rural area.
The U.S. Department of Agriculture, or USDA, guarantees loans for some rural homes and you can get 100 percent financing. This doesn’t mean you have to buy a farm or shack up with livestock, but you do have to buy a home in a USDA-eligible area.
USDA loans also have income limits based on where you live, meaning they’re geared toward folks who earn lower to moderate incomes. Typically, you need a credit score of 640 or higher to qualify for a streamlined USDA loan. If your score falls short, you’ll have to provide extra documentation on your payment history to get a stamp of approval.
There are many national programs, grants, and loans for first-time homebuyers that can get you into a place of your own without a 20 percent down payment or sterling credit. Contact a lender today to find out more.