When it comes to purchasing a new home, the process can be complex and seem a little confusing since it is your first time. In particular, you might be unsure of how to secure the much-needed financing to bring your dream to reality. If you have a steady income, to begin with, you will have several options to explore. Here are five viable options to help you get started with your first home:
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Government Loans
For first time buyers, government loans are a viable source of financing for a new home. These loans typically tend to have lax down payment requirements and are therefore suitable for younger, low-income earners. You will need to have a decent credit score of above 500 to qualify, and the vetting process is typically stricter than it is with conventional lenders. The primary source of a government-backed loan will be the Federal Housing Administration (FHA). Still, some loans are available from the Department of Agriculture, Department of Veteran Affairs, and other state and local government level bodies.
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Seller financing
Seller financing is when the seller of the house loans you the money to buy the house themselves. This is a convenient arrangement for sellers who might be desperate to sell, and for homebuyers who have a good credit record but very little in savings—or who for some other reason can afford monthly payments but do not qualify for conventional loans. The drawback here is that seller financing will usually come with significantly higher-than-average interest payments. The penalties for defaulting on payments will usually be quite steep so tread carefully if and when you try seller financing.
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Apply for a Mortgage
Mortgages are tailor-made home-buying instruments that allow people with a steady income and a good amount of savings to get on the property ladder with little hindrance. The major requirement is that you have a strong credit score of 620 or above, and can make a down-payment of 5%-20% at the least. Note that if your down payment falls within this minimum range, then you will be required to get private mortgage insurance as well. To learn more about your mortgage financing options, talk to a homeowner-friendly mortgage provider like Mortgage Goat.
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Rent-to-Buy
If you're looking to buy a home, renting is possibly the last thing you want to hear, but the rent-to-buy option is a viable route to homeownership for people who do not qualify for conventional mortgages.
When renting-to-buy, you rent a property with the understanding that after an agreed period, you will take ownership. The periods will usually be long and may involve higher-than-usual rent payments, but they are still a viable route to homeownership.
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Leverage your Retirement Funds
This option should probably be considered only as a final resort, as financial experts do not generally recommend that you withdraw from your retirement savings at any point prior to your retirement.
That said, with most IRAs and 401(k)s, you will be able to withdraw or borrow some money to finance, or support the financing of your home without facing penalties—with IRAs you can withdraw up to $10, 000. Still, you will be required to pay a tax on this money as you would your regular income. With the requirement will be that you repay your loan within five years when you borrow from a 401(k) plan.
If you're seriously thinking about investing in a home, consider each of these options carefully, to see which is best for you. Often the conventional mortgage, being designed specifically for this purpose, is a wise choice, but variances in personal circumstances might make some other options more suitable. Consider the best one for your situation and act right away!
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