If you are a first-time home buyer, there is a lot to learn about buying a home. The most misunderstood part about home buying is — home financing. We are going to help shed some light on this topic. We are going to go over the top first-time home buyer loan options. You will learn about specific pros and cons of each program to give you more direction on which program may be best for you.
What Is First Time Home Buyer Financing?
There are many loan programs available to those who qualify as first-time home buyers. These programs are meant to provide a little extra help to those looking to enter the market for the first time. In some cases, these programs are available to those coming back to homeownership after a period of time.
Government agencies have encouraged, and in some cases required, mortgage lenders to contribute to increased homeownership rates. Lenders such as Federal banks and Government Sponsored Entities are required to have a certain percentage of their loans issued to low and moderate-income members of the communities they serve. These programs primarily serve those looking to buy their first home.
Who Qualifies for First Time Home Buyer Financing?
Applicants who have never owned a home as their primary residence are the largest group of applicants that qualify for these programs.
It is important to note that for many programs, you can actually have in the past or currently own investment Real Estate and still qualify for a First Time Home Buyer program. As long as you did not occupy the property as your primary residence, you still qualify.
There are also programs that only require that you have not owned a primary residence for a number of years. Typically those who have not owned a home for 3-5 years would qualify as first-time home buyers. Requirements vary by state and program.
First Time Home Buyer Loan Programs
Fortunately, there are quite a few financing options that anyone can use to buy their first home. These programs typically finance over 90% of first-time home purchases.
Federal Housing Administration (FHA) Loans
FHA loans are by far the most popular program for those buying their first home. These mortgages are insured by the Federal government. Knowing the loan is insured allows lenders to be much more flexible in their underwriting requirements.
One of the biggest pros of FHA financing is flexible credit requirements. There are lenders that will approve loans with FICO scores as low as 500. Conventional loans would be out of the question at that credit level.
Applicants who may have had to file for bankruptcy in the past can qualify for an FHA loan two years after the date of discharge. Conventional loans require a waiting period of four years.
The second biggest pro of FHA loans is the low downpayment required, only 3.5%, WITH flexible underwriting and credit requirements.
United States Department of Agriculture (USDA) Loans
These loans are a bit unknown to most people. There are fewer lenders who offer these loan programs than the other government and conventional loans.
USDA loans issued by mortgage lending institutions are guaranteed by the US Department of Agriculture, unlike FHA loans that are only insured by the Federal Housing Administration.
The best feature of USDA loans is that they require zero downpayment. This is perfect for first-time home buyers. They will not have to apply and qualify for a separate down payment assistance program.
There are some requirements for these loans, though. The first qualifier is location. The property must be located in a USDA-approved location. These areas tend to exclude most large metropolitan areas. Rural areas, where the need may be greater for special programs like this, have a lot of availability across the nation.
The second qualifier is income. The maximum allowed income is 115% of the median income of the area.
Veterans Administration (VA) Loans
Those who have served in the military and qualify for the agency’s benefits can take advantage of one of the best loan programs for first-time home buyers — VA loans.
VA loans do not require any down payment. They are also quite flexible in the underwriting guidelines. This could be because VA loans are guaranteed by the veterans administration. If the borrower defaults, the bank will be made whole by the VA agency. This gives lenders a great deal of peace of mind when making these loans.
There are no income limitations for VA loans, and it is not necessary to be a first-time home buyer.
The only downside that is perceived of these loans is the upfront VA loan guaranty fee. This fee is 2.3% of the total loan amount for first-time use. The fee increases to 3.6% for subsequent uses such as refinancing down the road.
Although the VA Guaranty fee can add up upfront, there are some benefits. First, the fee is added on to the loan so the veteran does not have to pay it out of pocket. Secondly, rates on VA loans tend to be as much as ½% lower than conventional loans. If you crunch numbers over a 5 or 10-year period, that VA Guaranty fee will pay for itself by the interest savings.
Conventional Agency Programs
The Federal National Mortgage Agency (FNMA) and Federal Home Loan Mortgage Corporation (FHLC) or Fannie Mae and Freddie Mac respectively, also have special programs for those buying a home for the first time.
Fannie Mae’s Home Ready program is geared toward first-time home buyers. The program only requires a 3% minimum for the downpayment, which is great for those buying their first home.
Underwriting guidelines for these loans are a bit broader than their standard loans. For example, they do not require a minimum investment from the buyer. The home buyer can get the 3% downpayment as a gift, a grant, or a community 2nd mortgage.
Freddie Mac’s “Home Possible” program is specifically designed to help overcome many of the challenges faced by First Time Homebuyers.
One of the leading benefits is the low downpayment requirement of only 3%, which is even lower than that required by FHA loans.
The agency also offers a program, Affordable Seconds, which can provide the downpayment and even cover some closing costs.
One very attractive feature of both the Fannie Mae and Freddie Mac programs is the terms of their mortgage insurance. To begin with, there is no upfront MI fee, it can all be a monthly fee. FHA and VA both require an upfront amount of 1.75% and 2.3%, respectively. Not so with conventional financing.
Secondly, the mortgage insurance is cancellable at some point. Many homeowners have been able to request that the MI be dropped since their homes have appreciated quite a bit. Borrowers can request that mortgage insurance removal without having to refinance. This can save thousands of dollars in refinancing costs and by eliminating the monthly MI fee.
The caveat here is that in order to be approved for these conventional loans, your credit has to be up to snuff. Underwriting guidelines for conventional loans are not as forgiving as FHA and VA when it comes to credit.
Next Steps
With so many great loan options for buying your first home, homeownership may very well be within your reach. If you are tired of paying rent and having that rent increase year after year, it may be time for you to become a homeowner.
Get in touch with a qualified mortgage professional who is familiar with these loan programs. They will be able to guide you through the necessary steps so you can be “home purchase ready” this year.