Understanding the Basics of Home Financing For First-Time Home Buyers

By Riley Southwick  |   Submitted On May 13, 2010

  

People who are just starting out to build equity by buying their very first real estate property will probably be surprised to find out that there are many different kinds of financing to choose from. Having a basic idea of the different types of loans will help you match it up better with your personal needs.

On one hand, it's good to know the different types of loans and where you can get them, but on the other hand it's also essential to understand how they can be a good fit for you and your financial situation. Not all loans are made equal, so to speak, and while some may be a great fit for you, others may make it a huge financial burden that you have to live with for several years to come.

Here are just a few of the different types of loans that you can avail of if you qualify for them:

1. Conventional Loans - This, by far, is the hardest loan to qualify for because of its stringent requirements on credit score, income, debt to income ratio, downpayment and more. These are fixed-rate mortgages that are not insured by the federal government.

2. FHA Loans - This loan is one of the easiest to qualify for because it's managed by the FHA (Federal Housing Administration), which is part of the U.S. Department of Housing and Urban Development. This is a great option for first time buyers because the upfront cost could be lower. In fact, it could be as low as 3%. There is, however a statutory limit which varies in different parts of the country.

3. Equity and Income Loans - This is a type of loan where the amount of home mortgage loan is determined through two ways, the LTV (Loan to Value ratio) and the DSCR (debt-service coverage ratio). The LTV for home purchases can be determined by dividing the amount being borrowed from the lender by the purchase price of the home you want to buy. For example you are keen on Raleigh real estate and you want to buy one of the Raleigh homes for sale that you looked at. If the property is worth $300,000 and the loan amount is $270,000, the formula will determine how expensive the loan will be. The higher the LTV, the more expensive your loan becomes. The DSCR on the other hand, will determine a borrow's ability to pay off the mortgage. The formula is to divide the borrower's net income available for mortgage payment by the mortgage cost. A DSCR of greater than 1 will be more likely to get approved. Increasing your productivity will help increase your DSCR score to qualify for this type of loan.

4. Fixed and Floating-rate loans - Fixed rate loans have interest rates that don't change during the duration of the loan. Obviously this is lesser risk for the borrower because they know the rates won't fluctuate. Floating-rate allows borrowers to qualify for lower introductory rates during the early years of the loan, but the downside is that the rate increase in the later years of the loan is not definite and if the borrower does not earn more money to cover the possible rate of increase, this may make it harder to pay off the loan later.

Riley Southwick is a writer who writes about real estate properties and a variety of other related topics. Visit our website for more information about Raleigh homes for sale [http://www.searchingraleighhomes.com] and to look at Raleigh real estate [http://www.searchingraleighhomes.com/raleigh-real-estate] listings.

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