Key Decisions for First-Time Home Buyers
As a first-time home buyer, you face many important choices, from determining your budget to selecting the right neighborhood. One of the most significant decisions is selecting the appropriate mortgage.
Exploring Mortgage Options
First-time home buyer loans aren’t limited to a single type. Instead, you’ll likely compare several mortgage options, each with unique requirements, including the necessary down payment amount. Your task is to find the mortgage that aligns best with your financial circumstances.
Leveraging First-Time Home Buyer Benefits
Once you’ve selected a mortgage, you can explore combining it with first-time home buyer benefits, such as assistance with down payments or closing costs. Be sure to read the details carefully, as some programs may have specific income or purchase price restrictions. Thorough research can help you maximize the financial benefits available to you.
Comparing Financing Options
Here’s a guide to help you compare first-time home buyer financing options and choose the best one for your needs. These options include loans that require low (or no) down payments and financing for homes that need renovations.
Overview: Top Loans for First-Time Home Buyers
Here are six types of loans and programs that first-time home buyers should consider:
- FHA Loans: These government-insured mortgages require a down payment as low as 3.5%.
- VA Loans: Designed for qualified military borrowers, these loans require no down payment.
- USDA Loans: These loans offer financing with 0% down for rural and some suburban properties.
- Conventional Loans by Fannie Mae and Freddie Mac: These loans require a down payment of just 3%. Note that Fannie Mae and Freddie Mac do not lend money directly; you obtain the loan through a mortgage lender.
- State First-Time Home Buyer Programs: These include various loans and assistance programs, such as grants or tax credits, tailored to the borrower’s specific location.
- Fixer-Upper Mortgages (Renovation Loans): These loans enable you to purchase a home and include remodeling costs in your mortgage, resulting in a single convenient monthly payment.
Did you know…
You may qualify as a first-time home buyer if you haven’t owned your primary residence in the last three years?
FHA Loans
A Popular Choice for First-Time Home Buyers
Federal Housing Administration (FHA) loans are a favored option for first-time home buyers due to their low down payment requirement of just 3.5%. However, if your credit score is below 580, you’ll need to put down 10%. FHA loans generally offer more flexible qualifications compared to conventional loans.
Credit Score Considerations
Although you can technically qualify for an FHA loan with a credit score in the 500s, approved borrowers usually have much higher scores. As of February 2024, the average FICO score for FHA borrowers purchasing a home was 687, according to ICE Mortgage Technology.
FHA Mortgage Insurance
FHA loans require mortgage insurance to protect the lender’s interest in case of default. This insurance includes an upfront premium, payable at closing, and an ongoing premium included in the monthly mortgage payments.
VA Loans
Home Buying Assistance for Service Members and Veterans
The Department of Veterans Affairs (VA) supports eligible service members, veterans, and surviving spouses in purchasing homes. VA loans are notably generous, often requiring no down payment or mortgage insurance. However, borrowers must pay a one-time funding fee. VA loans also allow for higher debt-to-income ratios, enabling borrowers to qualify for larger mortgages compared to some other loan programs.
Lender Requirements
While the VA does not set specific credit or income requirements, individual VA lenders have their own criteria. According to ICE Mortgage Technology, the average FICO score of VA borrowers in February 2024 was 721.
USDA Loans
Supporting Home Buyers in Rural and Suburban Areas
The U.S. Department of Agriculture (USDA) provides loans directly to homebuyers and backs loans through private mortgage lenders. Contrary to popular belief, you don’t need to live on a farm to qualify for a USDA loan. This program is aimed at rural and some suburban areas, offering 100% financing, or zero down payment.
Income Limitations
USDA loans come with income limitations, which vary depending on the region and the specific type of loan you are applying for.
Conventional Loans (Fannie Mae and Freddie Mac)
The Backbone of the Home Loan Market
Fannie Mae and Freddie Mac play a crucial role in the mortgage industry by collaborating with lenders to offer a variety of conventional loan products, some of which require low down payments.
Fannie Mae’s HomeReady Loan
Fannie Mae’s HomeReady loan is tailored for low-income borrowers with credit scores of 620 or higher, requiring only a 3% down payment. A significant advantage of this loan is that borrowers may qualify to terminate their mortgage insurance once they have accumulated 20% equity in their home. This differs from FHA loans, where borrowers can only cancel their mortgage insurance after 11 years if they initially put down 10%.
Freddie Mac’s Home Possible Loan
Freddie Mac’s Home Possible loan is another option designed for low-income borrowers, also requiring just a 3% down payment. Borrowers can use sweat equity or funds from gifts, grants, or loans to cover the down payment.
State First-Time Home Buyer Programs
Exploring Local and National Assistance
In addition to national programs, many state and local governments offer assistance to home buyers. Investigating both local and national first-time home buyer assistance programs is a crucial step in your homeownership journey.
Combining Assistance with Favorable Mortgages
Many state housing authorities provide closing cost and down payment assistance programs alongside mortgages with favorable interest rates. Some states even offer tax credits that can be applied to your federal tax return. These first-time home buyer assistance programs enhance the chances of homeownership in specific geographic areas or support borrowers in certain professions, such as educators, first responders, or active-duty military and veterans.
Home Renovation Loan Options
Financing Your Home Renovations
If you’re planning home renovations, here are several mortgage options to help cover the costs:
- Energy-Efficient Mortgage (EEM): This mortgage helps finance energy-efficient homes or energy-saving upgrades, allowing you to enjoy lower energy bills and a more comfortable home sooner, rather than completing projects gradually.
- FHA 203(k) Loans: Ideal for buyers looking to renovate a fixer-upper, this special FHA-backed loan considers the property’s post-improvement value, allowing you to borrow funds for the renovation as part of your primary mortgage.
- CHOICERenovation Loan: Offered through Freddie Mac, this conventional loan program allows you to finance both the purchase of a home and the cost of improvements with low down payments.
- HomeStyle Loan: Provided by Fannie Mae, this conventional loan option supports purchase-and-remodel projects. First-time home buyers who qualify for the HomeReady program can benefit from a 3% down payment.
- VA Renovation Loans: Available to qualified military borrowers, these loans can be harder to find as fewer lenders offer them.
Tip: To qualify for certain grants, loans, or other assistance, you may need to complete a first-time home buyer class. These classes, often available online at your own pace, provide valuable insights into the homebuying process and can be beneficial even if not required.
Tailoring Your Home Buying Options
Assessing Your Needs as a First-Time Home Buyer
We’ve outlined six valuable resources for first-time home buyers. Now, consider your unique needs as a borrower. Some loans and programs are better suited for individuals with low credit scores, while others are designed specifically for buyers in particular areas.
Benefits of These Programs
If you qualify for one of these programs or products, they can help you purchase a home without depleting your savings for a down payment, assist with additional costs such as mortgage insurance, and keep your payments manageable.
Working with the Right Real Estate Agent
It’s important to have a real estate agent who understands your specific needs. Select an agent experienced with the loan product you’ve chosen; they can structure your offer and demonstrate to the seller that you are a well-qualified buyer.
