Buying a home is a dream for most of us, and it is hard to get one. From the tedious paperwork to the people and fees involved, there are tons of important things that go into buying a home. Additionally, if you’re a first-time home buyer, there is a whole list of queries. But before you jump to conclusions, here are four of the loan programs that can benefit first-time home buyers. Read on!

First-time home buyers’ loan programs

FHA

The Federal Housing Administration (FHA) is one of the agencies within the U.S. Department of Housing and Urban Development. This is a good loan option for first-time home buyers. Moreover, the FHA program is also beneficial for those who have a shaky credit history.

The FHA assures a portion of home loans that broadens the acceptance standards of the lenders. By applying for FHA, borrowers can qualify with as low as 3.5% down payment.

USDA

The U.S. Department of Agriculture has a home buyers assistance program. To be eligible for this program, you don’t have to live on a farm. The USDA program for home buyers’ assistance specifically targets rural areas and provides for 100% financing. The program also offers lender mortgage guarantee.

Moreover, there are income limitations that vary as per the region.

VA loans

The active-duty military members, veterans, and surviving spouses are offered home loans by the U.S. Department of Veterans Affairs. These loans offer viable interest rates, and you won’t even need down payment for buying the home. The VA loans guarantee part of the loan, which helps lenders provide special loan features.

In order to be eligible for the VA loan, one does not need a minimum credit score or is not required to pay for private mortgage insurance. If in any case there is difficulty in making mortgage payments, the VA negotiates with the lender on your behalf.

Native American Direct Loan

The Native American Direct Loan program has been helping the Native American veterans and their spouses buy homes on federal trust lands. Once an individual is eligible for the Native American Direct Loan, there is no need of a down payment or private mortgage insurance. In this case, the VA serves as the lender. If you choose the first-time home buyer loan, you get a fixed-rate mortgage for 30 years and low closing costs. So, if you’re eligible, this is one of the preferred first-time home buyer loan program options you can choose.

If you are new to home loans or if you have just started your preparation to apply, there are some basic terms and concepts you need to be familiar with.

Collateral: It is a security or asset provided to the lender by the borrower in lieu of the loan amount. Upon failure of repayment, the lender can seize the asset (usually property or real estate).

Down payment: The total cost of the house is almost always never financed. The partial value of the house needs to be paid to the seller of the house as down payment. Tip: the more your down payment amount, the lesser the loan amount and thus you might get better terms on your loan.

Loan term Loan: This is the length of the loan repayment period. It can be a flexible span of time depending on your income – higher the income, a longer term can be chosen, your age – the younger you are, as you have most of your working life ahead of you to enable repayment, you are more likely to get a long-term loan.

Equity: The difference between the current market value of your house and the current liability on the property. Over time, as the value of the home increases and the amount of loan decreases, the equity of the home generally increases.

Refinancing: The process of paying off an existing loan and establishing a new loan.

Title: The evidence of the right to or ownership of property.

Annual percentage rate: It is the rate of interest that will be paid back to the lender. The rate can a fixed rate or variable.

Principal: This is the amount of money borrowed for the mortgage. The principal amount keeps decreasing as the borrower makes steady repayments.

Foreclosure: In the unfortunate event of the inability of loan repayment, the lender takes back the balance of the property by forced selling.

Monthly amortization: This is the process of paying monthly installments of the principal amount and the interest rate. Consistent payments will ensure that the loan is repaid on time.

Loan to value ratio: LVR refers to the amount of financing you are getting in relation to the house’s value. LVR of more than 80% requires the borrower to purchase private mortgage insurance (PMI).

PMI: This protects the lender against loss if the loan has defaulted. The monthly PMI payment is added to the mortgage repayment installment amount.

Get a good hold of all these basic terminologies before getting into talks and negotiation with the Bankers.

Finding a new home is an exciting experience for all. Whether the process is overwhelming or pleasant simply rests on getting things in order to ensure a smooth transition. One of the main steps in that process is being aware of the factors which makes you eligible for a home loan.

Your income and the pay back capacity are central to making you eligible for availing a home loan. Basic criteria which leading financial institutions look for are:

Repayment ability: Your income should be sufficient enough to cover the monthly payments of mortgage and should also cover your other monthly expenses. Financial institutions use debt-to-income ratio (DTI) to figure if you qualify. The thumb rule is, DTI to be 36% or less.

Likelihood of loan repayment: The underwriter in charge looks into your credit score history and your payment history and arrive at your likelihood of payments in the future. It always pays to have a good credit score.

Value of the house: The lender, based on professional appraisal, looks at the value of the house you are intending to buy and checks if it meets or exceeds the purchase price. They check if this fits in their loan-to-value (LTV) guideline. Most institutions prefer to have this ratio be 80-95%. Note that higher the value of the house and lesser the loan amount, your LTV ratio is less.

Down payment: The source and the amount of money allocated for down payment is an important eligibility criteria. If the down payment amount is lesser than 20%, the financial institution might need you to take take up private mortgage insurance (PMI), you might also be required to set aside a few month’s repayment as reserve payments. These reserve payments are in case of emergencies or unforeseen events. Qualifying for PMI increases your monthly mortgage amount.

Your home loan’s approval rests on having healthy credit history, sufficient income and repayment ability and a comfortable down payment amount. External factors like the value of the house also pays a role in getting your home loan approved.

You can enhance your home loan eligibility by adding an earning member as a co-applicant, availing a structured repayment plan, ensuring a steady income flow, regular savings and investment, repaying ongoing loans and short term debts, furnishing details of your additional income sources, keeping a record of your variable salary component and taking actions to rectify errors (if any) on your credit score.