For most of us, obtaining a mortgage is a crucial step in purchasing a first home. There are a variety of financing options available to first-time homebuyers—including conventional mortgages and government-backed loans from the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA). Understanding how they work can point you in the right direction, help you find the best lender for you, and save you a significant amount of time and money. Here is what you need to know.
U.S. Department of Veterans Affairs (VA) Loans
The U.S. Department of Veterans Affairs (VA) guarantees VA loans. As with FHA loans, the VA does not make loans itself but guarantees mortgages made by qualified lenders. These guarantees allow veterans and service members to obtain home loans with favorable terms and usually without a down payment.6
In most cases, VA loans are easier to qualify for than conventional loans. Lenders generally limit the maximum VA loan to conventional mortgage loan limits. Before applying for a loan, you’ll need to obtain a certificate of eligibility from the VA.7
In addition to these federal loan types and programs, some state and local governments and their agencies sponsor assistance programs intended to increase homeownership in certain areas.
How Lenders Decide What to Charge You
Lenders look at a number of factors in deciding how much money they might be willing to lend you and on what terms. Your creditworthiness plays a major role, so you can expect that they will review your credit reports and check your credit score.
They will also calculate a loan-to-value (LTV) ratio, comparing the amount you want to borrow against the value of the home. LTV is determined by dividing the loan amount by the purchase price of the home.