A buyer’s guide Key terms and concepts for first-time homebuyers

Financing a home can be a daunting process riddled with unfamiliar terminology and extra costs. Aspiring homeowners who don't take the time to understand the language of home finance could end up paying more than they expected, and far more than they should. Shopping around for the lowest interest rates and the least amount of fees could save you thousands of dollars in the long run.

Here are a few basic tips and terms you should know about before you start talking with loan officers.

Lenders Lenders come in different forms, including banks, savings and loans, credit unions, mortgage companies and public agencies. Their job is to help you get a loan through an application process, which includes credit checks, property appraisals and inspections.

What type of loan you end up with depends on your financial history as well as your current and future finances. A decent credit history and a steady income should make it relatively easy for you to qualify for a loan. Even if you have a rocky financial history, there are options out there.

How big a loan you will get also depends on the size of your down payment and your income minus expenses. The loan repayment time could last between 10 to 30 years.

Loan options There are options beyond the conventional (standard) loan.

  • Federal Housing Administration loan So you don't have a lot of money to buy your home. Well, you're not alone. The most popular loan for first-time homebuyers in Minnesota is the FHA loan, which caters specifically to people with low to moderate incomes. The maximum loan amount varies from county to county. But don't plan on buying a mansion: these loans are for low- to moderately priced homes.

    Two extra costs that accompany the FHA loan you should know about: 1) you have to pay for an appraiser to determine your home's value, and 2) you have to pay mortgage insurance.

    The advantages? FHA loan down payments can often be less than 3 percent. Plus, even people with long-term debt can qualify. The FHA will allow you to pay 41 percent of your income toward long-term debt, which includes home payments.

    The disadvantages? In order to get the loan, you have to pay a special fee called a mortgage insurance premium. The fee costs 2.25 percent of a 30-year loan amount and 2 percent for a 15-year loan amount. First-time buyers could have the fee reduced to 1.75 percent if they attend an approved home-buying course. The fee can be tacked onto your loan amount as part of your monthly payments. FHA mortgage insurance also entails an annual fee of 0.5 percent of the current loan that can be paid monthly.

  • Veteran's Administration loan (for U.S. veterans) If you're a military veteran or a surviving spouse of one, you may qualify for loans that require no down payment. You can borrow the entire cost of your home.

    Call 800-827-1000 to check your eligibility.

    The disadvantages? You have to pay a funding fee of 2 to 2.75 percent if you make no down payment. The fee is reduced if you make a down payment higher than 5 percent.

  • Loans for people with low incomes or rocky credit history Low-income homebuyers may encounter more difficulty than people with higher incomes in getting approved for loans. Bad credit history and the occasional late payment can damage your ability to stick with a mortgage program, and some lenders are less lenient with lower income homebuyers than with higher income homebuyers. Help is available, however. Check into these local resources for assistance:

    Minneapolis Community Development Agency provides information about housing and low-interest mortgages. Call 673-5095.

    Minneapolis Public Housing Authority offers information, referrals and direct assistance for people seeking low-income home loans. Call 342-1999.

    The Association of Community Organizations for Reform Now (ACORN) has information on funding help and loans. Call 642-9639.

    Source: the Minnesota Attorney General Office's Home Buyer's Handbook.